It can be hard, when everyone else seems enthralled by some new concept or other, to admit you have no idea what they are talking about.
Keeping quiet is a tempting alternative to asking what is, for example, quantitative easing? Or Game of Thrones? Or the Paris climate agreement?
So it may well be with financial technology, or “fintech”. This is, apparently, the buzz-phrase on everybody’s lips, but what does it actually mean?
More to the point, how can traders and investors become profitably involved?
A varied industry
We’ll look at that in a moment.
First, some definitions.
Technology in its various forms has always been intrinsic to banking and financial services, from the days of the abacus onwards. More recently, payments systems allowed the growth of credit and debit cards, and auto-teller machines cut out human bank clerks and allowed customers to serve themselves.
But financial technology, as currently understood, has a much more specific meaning. It refers to the use of the latest technology effectively to upend traditional financial-services structures, with the aim of rendering obsolete not only large bank branch networks but, possibly, large banks as well.
In the process, according to fintech’s advocates, costs will be slashed, services improved and the customer will prove to be the ultimate beneficiary.
Maybe, maybe not, but we are getting ahead of ourselves.
An overview of the fintech sector would show a far from homogenous industry.
There is a clear distinction between fintech activities by existing giants, and relatively-young companies that were involved in fintech from the start. Then there is fintech designed to be used within financial institutions, whether back-office technology or machine-learning equipment to work alongside human traders, and fintech whose target market is the consumer.
Three trends to watch
Let’s look at some potential fintech investments in the light of these distinctions.
Mastercard and Visa clearly fall into the category of “existing giants”. They are the best-known payments systems providers in the world, through which a colossal amount of purchasing power is channelled.
But neither is planning on the basis that their little plastic cards are invulnerable to the waves of change transforming financial services. Yesterday’s slick technology can easily become tomorrow’s museum piece.
So Mastercard, through its Start Path programme, has seen the group partner with start-up companies around the world “to build the future of commerce together”. Mastercard has tipped three fintech trends to watch this year: banks moving into artificial intelligence (AI), the growth of “global fintech” and demand for fintech services from the previously-underserved small and medium-sized business community.
Meanwhile, Visa has made extensive investments in mobile and digital payments, leveraging its expertise and reputation as a pioneer in cashless payments.
Straddling all three four categories is the venerable Wall Street investment bank Goldman Sachs. It employs fintech in its own operations, replacing human traders in many cases; it uses fintech also to improve services to customers; it is very much an established giant, but it collaborates with new fintech firms.
If Goldman has one of the best-known names in the business, another major fintech player has a relatively low profile outside financial services. SS&C Technologies, in its own words, has been “helping investment and financial firms of all types gain that advantage for more than 30 years”.
The focus is very much on financial institutions, and SS&C’s pitch adds: “Today’s global financial markets are faster paced, more complex and more competitive than ever…The margin for error is razor-thin, and there’s no time for downtime.”
Its technology, it says, will allow clients to “master complexity”.
Very much at the other end of the spectrum is Intuit, which develops and sells financial software to small businesses and individuals for accounting uses, including tax preparation. It has become well-known for simplifying tax matters for the many casual workers employed in the “gig economy”.
Beware extravagant claims
Also covering both smaller businesses and individuals is payments systems provider Square. It names electricians and clothing boutiques as among its business customers, adding: ”Our new readers helps our sellers accept chip and PIN and contactless payments, and we have tools for customers, too, like our Cash App, which lets people send money instantly to family or friends.”
A company that manages to be both new and huge is China’s e-commerce giant Alibaba Group. Anyone interested in fintech investing ought at least to consider Alibaba, a pioneer in its field.
The company says: “We enable businesses to transform the way they market, sell, operate and improve their efficiencies. We provide the technology infrastructure and marketing reach to help merchants, brands and other businesses to leverage the power of new technology to engage with their users and customers and operate in a more efficient way.”
And it is only 20 years old this year.
Finally, it is impossible to talk about fintech shares without mentioning PayPal. These days, it’s quite mature by fintech standards, with roots going back to 1998.
PayPal’s basic service is to allow anyone with an email address to send and receive payments on-line, “securely, conveniently and cost-effectively”.
It adds: “Our network builds on the existing financial infrastructure of bank accounts and credit cards to create a global, real-time payment solution.”
So, what general factors ought to be borne in mind by anyone seeking to invest in fintech?
One is that this is a very fast-moving scene, and today’s winners may disappear tomorrow. Look at the social media scene and ask what happened to Friends Reunited or Myspace.
Two, following on from this, remember that those who live by the sword can die by the sword. Today’s disruptor, cheerfully creating havoc for staid old banks or insurers may become tomorrow’s “disrupted”. Before investing, scrutinise how “future proof” a company’s model may be.
Three, again a linked point, what are the barriers to entry? Is the fintech business in question in a relatively secure position regarding potential competitors or is it wide open to a challenge?
Four, we are currently in much the same idealistic phase about fintech as we were ten or more years ago about social media. Then we were told the likes of Facebook would open up new avenues of understanding, then came the backlash over “trolling” and “fake news”.
Fintech, we are now being told, is firmly on the side of the consumer, cutting costs and pushing aside vested interests.
Brace yourself for the strong possibility that, in a few years’ time, a spate of horror stories about malpractice and even fraud will come to light, with associated compensation claims. Investors need to study very closely the records and reputations of potential investees.
Five, be sceptical about some of the more extravagant claims made for fintech by its sales people. Wise heads in banking and financial services envisage a future in which machines help humans rather than replace them. Fintech, like every other development in recent history, is capable of being oversold.
Six, keep a close eye on the pronouncements of legislators and regulators. Are they seizing on an isolated scandal to propose much tighter control of the fintech industry and what does that mean for your investments?
Funnily enough, one of the fastest-growing areas of fintech is the specialist offshoot for the automated handling of regulatory issues – regtech. So, the problems raised by financial technology may be solved by it.