Growth and innovation in fintech

While fintech equities have weakened this year, the sector’s long-term prospects still look robust. We believe investors should consider adding exposure to this unstoppable trend.

Alongside many other growth-oriented sectors, fintech equities have struggled in 2022 amid rising rates and geopolitical uncertainty. Fintech as a sector is down 46% year-to-date, while the payments sub-sector has shed 31% – figure 1.

 

Figure 1. Fintech and payments’ recent struggle

 

Chart shows the price of the Indxx Global Fintech Thematic Index and the Prime Mobile Payments Index from the start of 2017 to May 2022. Source: Haver Analytics and Bloomberg as of 12 May 2022. Past performance is no guarantee of future returns. Real results may vary. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only. See Glossary for definitions.

 

Fintech private equity

In our view, fintech equities are now factoring in a very weak macroeconomic outlook. Slower GDP growth does indeed impact fintech companies in two main ways. For fintech services providers, lower corporate spending on upgrading financial infrastructure reduces expansion possibilities. For payments providers, the dominant driver is consumer health. This impacts areas such as payment amounts, transaction volumes and new account activations.

While pressing macroeconomic and geopolitical challenges are unlikely to be fully resolved any time soon, we believe fintech’s longer-term underpinnings are robust. The pandemic has accelerated the already-powerful shift toward digital payments, online wealth management and digital lending, with user trust growing further.

The state of innovation also bodes well. Large amounts of new capital are flowing to firms at the cutting-edge of fintech development. Global investment reached $210bn in 2021, $115bn of which via venture capital, according to a report by KPMG.¹ We believe this may prove especially supportive for areas such as data analytics within fintech, payments and accounts, and crypto and blockchain technologies.

Even amid slowing economic conditions, we believe fintech companies can continue to drive important process improvements for consumers and businesses, leading to benefits such as greater convenience, lower costs and better profit margins. This is happening in diverse sectors including retail, restaurants, e-commerce and financial services, with fintechs also gaining market share from traditional players in these sectors.

How to invest in the fintech industry?

We maintain our strong conviction that fintech remains an unstoppable trend – see Fintech is redefining financial services in Outlook 2022. The large drawdown from 2021’s peak has led to a meaningful reset in valuations, which have retreated from their 2020 apex to pre-pandemic levels. Particularly for investors who are underweight or have no fintech exposure, we believe current levels represent a potentially attractive entry-point.

Of course, there are risks to our positive case. If interest rates continue to rise – contrary to our call for a peak this year – it would put further pressure on fintech and growth-orientated equities more generally. Other risks include a weaker than anticipated macro backdrop, unfavorable regulatory changes, the deceleration of e-commerce’s advance over in-store activity and a high-profile cyberattack on digital wallets.

Ultimately, however, we believe the greatest risks for investors arise from not having long-term exposure to this unstoppable trend and from having excessive exposure to its likely victims.