Fintech: So much more than Bitcoin

Bitcoin and other cryptocurrencies have received significant media attention in recent months. We believe this attention obscures a broader set of opportunities occurring throughout financial services, in an area known as financial technology, or fintech. Fintech is a catchall term, and it encompasses everything from digital banking to online lending to blockchain (the technology behind Bitcoin and other cryptocurrencies).

Fintech is part of a broader trend — one that’s still in the early stages. We believe fintech offers significant potential for growth equity investors. In our view, the trend has clearly seen acceleration, due to the growth of ecommerce, a shift to mobile, a ramp up in use of peer-to-peer (P2P) technologies, and innovation by companies at the point of sale. Below we look at several of these areas, each ultimately driven by technology.

The power of low-friction payments

Cash once ruled everything, but our world is going digital and money is no exception. Today, consumers are swapping cash and checks for credit cards, mobile, and digital wallets. With this development, friction is coming out of the system. The evolving global payments infrastructure is driving innovation that benefits both businesses and consumers. Consumers benefit from less friction in the purchasing process, and also by having more choice. An improving global economy and an easing regulatory environment should generally provide nice tailwinds for investment.

Mobile payments

Today, mobile phones are becoming our digital wallets, and apps are developing into payment platforms. The number of users is significant, as seen in the table below, and yet in 2015 less than 2% of total retail sales were conducted via mobile ecommerce. As our mobile phones become a hub for personal payments, P2P remittances are on the rise. Zelle, a P2P network partnered with major US banks, reported third-quarter 2017 transaction volume of $17.5 billion and 60 million transactions. Compared with the billions in transactions mentioned above, P2P is only in the first inning of the ballgame.

Number of users on mobile applications and payment networks

App Users (millions) Network Users (millions) App Users (millions)
Apple iCloud 780 Visa 680 Tencent WeChat Pay 400
PayPal 200 MasterCard 380 Alibaba Alipay 520

Sources: J.P. Morgan, Royal Bank of Canada, company estimates.

Point-of-sale innovations

Greater security and new types of payments have enabled ongoing innovation at the point of sale, creating another area of opportunity. Consumers now can “tap” to pay for their purchases thanks to the emergence of contactless payment. Retailers, including small and medium-sized businesses, are upgrading their terminals with more software-enabled solutions. They can leverage additional services, including analytics, digital marketing, and human resources software. Moreover, banks can use a business’s point-of-sale data to determine whether or not to offer growth capital to the business in the form of a loan.

Yes, cryptocurrencies, too

Lastly, as payments and assets go digital, distributed ledgers such as blockchain and cryptocurrencies such as Bitcoin likely have a role to play. This segment of the industry is still in its infancy. Cryptocurrencies have significant volatility, and there have been instances of Bitcoin exchange bankruptcies and initial coin offering frauds. But there are also advantages including immutability, efficiency, and transparency. The move to blockchain technology can benefit businesses. These types of transactions improve workflow and eliminate inefficient, paper-based processes.

As seasoned growth investors, we target companies leveraging this exciting opportunity across the fintech landscape. We see payment technology leaders, such as Global Payments and Square, out-innovating their peers. We see banking and brokerage companies turning to services companies such as EPAM for digital transformation initiatives and Broadridge for operational efficiency. All told, these are huge markets that are undergoing generational changes, and they can be expected to provide many investment opportunities. We intend to seek out the companies that will benefit from these secular shifts for years to come.

As of Dec. 29, 2017, certain stocks discussed were held in portfolios managed by the team as follows (in amounts up to): Global Payments, Mid-Cap Growth Equity, 3.5%; Square, Small/Mid-Cap Growth Equity, 1.5%, and Mid-Cap Growth Equity, 2.3%; Broadridge, Small/Mid-Cap Growth Equity, 1.3; EPAM, Small/Mid-Cap Growth Equity, 3.6%, and Small-Cap Growth Equity, 3.0%. Amounts shown are for informational purposes only, and subject to change at any time. They are not a recommendation to buy, sell, or hold any security.


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Past performance does not guarantee future results.

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