Introducing the Global X FinTech ETF (3185)
The growth of the financial technology industry, or FinTech, is rapidly changing how people invest, take out loans, lend, fund early stage companies, and shop for insurance. The Global X FinTech ETF (3185) tracks the Indxx Global Fintech Thematic Index NTR. The ETF seeks to invest in companies on the leading edge of the emerging financial technology sector, which encompasses a range of innovations helping to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions.
The Ecosystem: What Is FinTech?
FinTech is a broad term applied to various digital tools that endeavour to make a financial service or product more accessible, efficient or affordable. Such technology is often deemed “disruptive” because it upends the conventions of traditional solutions such as in banking and lending, to name a few. FinTech has also, however, empowered longstanding financial services firms to embrace tech-enabled solutions to remain competitive in the 21st century.
FinTech is not merely one type of solution. Rather, it is an ecosystem of digital tools designed to serve a multitude of needs. Well-established examples include mobile payments, integrated billing, peer-to-peer lending and automated portfolio management. More recent innovations include digital buy now, pay later solutions and crypto trading platforms and wallets, which are at the forefront of FinTech’s innovative underpinnings.
Everyday investors can engage with FinTech as they conduct their banking and investing needs. Businesses can use FinTech to understand their customers better, distil actionable ideas from big data, or streamline business practices.
The Big Six: In Which Areas Is FinTech Most Active?
Broadly, FinTech serves several categories. The areas experiencing the greatest activity today are payments, funding, lending, investing, business services and digital currencies. Let’s take a look at each.
Digital payments have become a mainstay in the life of nearly all consumers. Research shows that global digital payments climbed from US$635 billion in 2016 to over US$6.7 trillion in 2021.1
Peer-to-peer lending (P2P) is a way for borrowers to access loans online without the intermediary of a traditional bank. Estimates show that the global P2P lending market size was valued at US$67.93 billion in 2019 and is projected to reach US$558.91 billion by 2027.2 P2P borrowers can seek loans for personal use, small businesses, home improvements, automobile financing, home purchases, and more.
Crowdfunding allows individuals to pool their capital to fuel a company’s growth. It can be easier for a company to raise money when it can tap into small investments from hundreds or thousands of individuals. In 2019, the global crowdfunding market was valued at raised approximately US$13.9 billion and was forecast to triple by 2026.3
Robo-advisors use basic input from investors like risk tolerance, financial goals, and time horizon to establish an investment portfolio. The global robo-advisory market size was valued at US$4.51 billion in 2019 and is projected to reach US$41.07 billion by 2027.4 Many asset management firms are beginning to offer robo-portfolios along with human advice for a hybrid approach to managing client assets.
FinTech can amplify and streamline processes for financial institutions struggling to keep pace with a faster marketplace. These technologies can lend efficiency to recordkeeping and regulatory reporting requirements, a niche sometimes called “RegTech”. The RegTech market size is expected to grow from US$6.3 billion in 2020 to US$16.0 billion by 2025.5
Cryptocurrencies* like bitcoin are enabling people to make secure, private payments. These digital currencies often regulate the creation of new currency supply, making devaluation less possible than those issued by central banks. In addition, cryptocurrencies often depend on blockchain technology, which keeps a public ledger of all historical transactions.
FinTech Trends Beyond Digital Payments
The ability to pay for goods and services by tapping a smartphone on a point-of-sale receiver or tapping a “buy now” button on an e-commerce app makes digital payments FinTech’s most recognisable segment. But digital payments alone don’t capture the full disruption happening at the intersection of technology and financial services. In this piece, we will discuss a few of the trends beyond digital payments that are powering Fintech’s long-term growth trajectory, including:
- Buy Now Pay Later (BNPL) services putting a new spin on the old concept of paying in instalments with enhanced benefits for merchants and consumers
- Digital wallets providing access to cryptocurrencies.
- Cloud enterprise solutions for financial firms provide reducing costs through automation, while allowing for effective and convenient client onboarding, and risk mitigation.
Early adoption of new trends like these may create opportunities for higher growth rates than some of the more known verticals in the FinTech ecosystem, like mobile payments.
Buy Now, Pay Later: Disrupting Credit Card Debt
Credit cards date back more than 100 years, but it wasn’t until the 1950s when credit card adoption began to rise. Since then, credit card networks have mastered facilitating payments in exchange for transaction fees and interest on credit balances. They give customers a loan to buy something on the promise that the customer pays back the debt over a period of time. The longer it takes the customer to pay, the more fees or interest that accrue.
BNPL services change the consumer credit paradigm by allowing consumers to purchase goods and services in pre-defined instalments. For example, instead of paying upfront for a US$100 product, consumers can acquire the item for an upfront payment of US$25 and pay the remaining balance in instalments over several weeks or months. Australian firm Afterpay, for example, let’s online shoppers break down payments in four instalments due every two weeks.
In a dramatic contrast to credit card lending rates, BNPL often features 0% APR for consumers, which can make BNPL a good option for consumers with low or non-existent credit. Consumers only incur fees if they’re late on their payment schedule. Late payments can hurt a consumer’s credit score or their chances of qualifying for another BNPL loan. For merchants, BNPL may lead to higher sales. Some studies show that half of consumers spend 10–40% more when they use a BNPL service instead of a credit card.6 American BNPL firm, Affirm, estimates that BNPL solutions increase by 20% conversion rates and 87% in average order value for retailers.7
Despite often offering zero-interest loans, BNPL firms have several ways to monetise their services. Some firms charge merchants a flat fee on a portion of the total transaction. They can also collect revenue from late fees. Other firms structure their business models differently, choosing to charge interest to consumers but forgo late fees, service fees, or prepayment fees.
BNPL is expected to take market share from credit cards over time. BNPL accounts for only 1% of online shopping in the U.S., but countries such as Sweden, Germany and Australia have over 10% penetration rates. By 2023, BNPL may account for about 3% of total e-commerce sales in North America. 8 The appeal is such that established FinTech and
e-commerce companies are looking at the segment. PayPal entered the segment with its “Pay in 4” offering, which allows payment over a six-week period for purchases between US$30 and US$600.9 And Shopify partnered with Affirm, which recently went public, to let Shopify merchants offer this more transparent, flexible alternative to traditional credit card payments.
Cryptocurrency Integration*: New Growth Avenues for Digital Wallets
The FinTech firms behind digital wallets continue to add products that can drive higher customer lifetime value. Cryptocurrency is one vertical that is proving adept at accelerating top-line revenue growth for companies. For example, Square launched Bitcoin trading through its CashApp in 2018. Cumulative revenue generated through its Bitcoin offering since then totals US$3.5 billion, including US$1.6 billion in Q3 2020 alone.10
PayPal introduced cryptocurrency trading in 2020, and since then almost 20% of the company’s user base of more than 300 million has transacted in Bitcoin in the app.11 By one estimate, PayPal users are responsible for buying 70% of Bitcoin’s new supply. PayPal expects to monetise cryptocurrency transactions on the spread between what it costs the company to acquire the currency and what the consumer purchases from any of the company’s 26 million affiliated merchants. 12 For merchants, the cryptocurrency is immediately converted and settled in fiat currency at no additional cost to the merchant. PayPal has a take rate similar to the one offered for other purchases which, essentially, is a percentage or flat fee of the total payment volume.
The recent rally in prices for certain cryptocurrencies may be due to integration like this, in addition to other factors such as large public companies adding Bitcoin to their balance sheets. Importantly for investors, crypto integration among digital wallet companies may result in a less volatile way to capitalise on the potential growth of cryptocurrencies. Over the last 4.5 years, Bitcoin’s price volatility is twice as much as the Indxx Global FinTech Thematic Index.13
Cloud Banking: Enhancing Traditional Bank Products and Services
FinTech’s reputation is that of a disruptor of traditional financial services. That reputation is well-earned, but it doesn’t tell the whole story. FinTech firms also offer technologies that help traditional financial services companies enhance their services, rather than disrupting them. Cloud banking is one such growing vertical. Worldwide banking spending on enterprise software solutions is expected to increase 11% year-over-year to US$112 billion in 2021.14
Increased investment in these solutions comes in tandem with growing consumer appetite for cloud-driven financial services. According to one report, 80% of Americans believe they can manage their financial services without ever going to a bank branch.15 Digital access to different services like banking, brokerage, lending, and more can be easier and more convenient.
Cloud technology can also streamline previously cumbersome processes for banks, such as onboarding new clients, opening accounts, and managing regulatory compliance. For example, nCino’s cloud solution for commercial lenders can reduce underwriting times by as much as 81%.16 Cloud banking also allows firms to react quickly to market dynamics and enter new markets. With Temenos’ software, U.S. banks can bring new products to market up to 16 times faster than the average.17 Cloud banking provides these solutions while being cost-effective because it shifts bank expenditures from large upfront investments in IT services to lower-cost, subscription-based software-as-a-service (SaaS) models.
FinTech’s scope continues to increase, helping consumers and financial institutions alike. As it grows, we believe investors should broaden their view of FinTech. More than just digital payments, the next generation of disruptive FinTech includes services like BNPL, digital wallets, and powerful cloud solutions that can improve the banking experiences. These are a few of the trends in the FinTech ecosystem that we expect to increasingly test the financial service industry’s traditional norms and create new investment opportunities.
*This document is not an offer or an invite to buy into any cryptocurrency.