Doesn’t everyone want to invest in something that will ride the tide of the great economic and technological trends sweeping our world? That next big thing could be fintech. Fintechs (financial technology) are businesses that combine the latest technology with a focus on meeting financial needs.
If you use PayPal, you’re a fintech customer. PayPal is valued at around US$285 billion1 so it’s the grandaddy of fintech firms. The best known Australian fintech may be Buy-Now-Pay-Later specialist, Afterpay, a company valued at about $30.5 billion.2
Moving money online
Many fintechs are much smaller – but growing quickly – and they often focus on specific areas of customer need – such as share trading (Robinhood), payment platforms (like PayPal and Swedish firm, Klarna) and online home loans (Australia’s Athena Home Loans). In online financial planning (sometimes called robo-advice) a US company called Betterment is a much-cited example.
As fintech is a rapidly growing, innovative business sector, new fintechs are springing up all the time, with the ‘start-up’ mentality sending entrepreneurs in search of the next big opportunity to use digital technology to help people and businesses manage all aspects of their finances more effectively.
Big and growing fast
That intersection between a massive, highly developed industry – finance – and the power of emerging technologies is what’s making fintech attractive to many investors. You get all the advantages of big total addressable markets:3 consider the number of home loan or credit card customers in Australia alone, and their value to financial services providers.
Plus, many of the founders of these businesses come from the financial services sector, with accumulated business expertise. Maybe that’s why more than $50 billion has been invested in fintech companies in the US alone since 2010 (according to Australia’s financial planning association, the FPA).4
Need to be aware of risks
But while the attractions of fintech are obvious, it’s equally important for investors to be aware of the investment risks associated with technological disruptions. In the 1840s, one the first great stock market bubbles exploded in the UK when a massive railroad boom was derailed by rising interest rates and changing legislation. There’s no doubt the development of the railways was a major boon for the UK economy – but many ordinary British investors endured pain along the way.
In more recent memory the tech-wreck of the early 2000s followed a similar pattern. The internet and telecoms boom unleashed revolutionary innovation. The results are still with us today, in the fintech space, but also in the size and power of tech giants like Google and Amazon. But many tech investors paid a heavy price when the dot-com bubble popped.
To take one final historical example — the tech boom of the late 1990s also spawned one of the biggest mega-mergers ever – an alliance between newspaper and entertainment giant Time Warner and America’s dominant internet provider, America Online or AOL.
At the time, the TimeWarner-AOL deal was the biggest merger in history (worth US$350 billion).5 The story of that deal has similarities with the fintech story. TimeWarner-AOL brought together a giant, highly profitable media business with a young, high-growth tech firm that looked set to dominate the internet sector for years to come.
It didn’t work out that way. As one of the key players – Ted Turner – founder of CNN, sometime husband of actress Jane Fonda and America’s Cup winner, said, “The Time Warner-AOL merger should pass into history like the Vietnam War and the Iraq and Afghanistan wars. It’s one of the biggest disasters that have occurred to our country.”6 It’s a reminder that a big idea whose time has come – like the link between finance and digital technology – doesn’t automatically turn into a great investment.
Picking the right stocks in a changing world
That’s not to say that there’s no upside in investing in visionary tech companies. Any early investor in Apple, Google, Amazon or Microsoft would disprove that idea while sipping expensive champagne.
But picking the winners in a space where the shape of the future is up for grabs is inherently risky.
So are there potentially better ways of investing in technology? Here are three ideas:
- A diversified portfolio of shares put together with the help of a financial planner (or via a managed fund specialising in shares) can give you access to some up and coming tech companies as well as to the more established tech companies – ones with proven business models and cash in the bank.
- Managed funds that specialise in tech stocks can give you exposure to a basket of tech opportunities. As managed funds, they have the advantage of professional management as well as diversification (albeit only within the tech sector).
- If you’re really passionate about the opportunities in the fintech space you can, alone, or with the help of a broker or financial planner, invest in these companies on the stock market. It could be highly rewarding – both intellectually and financially. But a prudent investor would make sure that tech investing makes up a manageable portion of their overall portfolio. That means enough to make a difference if the stocks do well. But not enough to derail your life plans if those big tech ideas don’t play out.
As always, a chat with a trusted adviser – like an MLC financial planner – can help you integrate your fintech investing strategy into the big picture of your overall financial strategy.
1 PayPal Holdings, Inc. (PYPL), NasdaqGS - NasdaqGS Real Time Price, 24 March 2021, https://finance.yahoo.com/quote/PYPL/, accessed 24 March 2021.
2 Afterpay Limited (APT.AX), ASX - ASX Delayed Price, 24 March 2021, https://finance.yahoo.com/quote/APT.AX/, accessed 24 March 2021.
3 Total addressable market or TAM refers to the total market demand for a product or service. It’s the most amount of revenue a business can possibly generate by selling their product or service in a specific market.
4 Fintech. Mapping fintech to the financial planning process and guiding you through selection. Financial Planning Association of Australia 2017, https://fpa.com.au/fintech/, accessed 24 March 2021.
5 AOL, Time Warner to Merge in $350B deal. Mary Lisbeth D'Amico, IDG News Service, ComputerWorld, 10 January 2000, https://www.computerworld.com/article/2594246/aol--time-warner-to-merge-in--350b-deal.html, accessed 24 March 2021.
6 What (or who) is the future for Time Inc? Colin Morrison 24 December 2014. Flashes & Flames. https://flashesandflames.com/2014/12/24/what-or-who-is-the-future-for-time-inc/, accessed 24 March 2021.
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