By Nancy Zambell
Editor of Investment Digest and Dividend Digest
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Fintech—The Next Disruptive Technology
A New Wave of Automation
Why Big Money Likes Fintech
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The M&A markets are expected to surpass pre-recession levels this year. According to a recent study by Deloitte, the number of M&A deals in the U.S. in 2014 hit 9,802—a 10% increase. The value soared to $1.5 trillion, up more than $500 billion, or 51%.
And 2015 has been no slouch, either. As of March 25, the value of deals inked year-to-date was $746 billion, about 9% higher than the same period in 2014.
Those deals are spread around the board, but technology leads, with a vote as the top sector by 29% of the survey respondents, followed by energy (25%) and healthcare (20%).
KPMG LLP analyzed the technology sector deals and forecasts that mobile, data and analytics, security, and “the cloud” will be the primary focus of M&A deals this year. Upon review of the stocks we’ve recently been recommending in the Digests, I heartily agree with this assessment.
And one area that has whetted the appetite of both private equity and public company acquirers is fintech.
A New Wave of Automation
Fintech can be loosely described as an emerging technology using software to provide and automate financial services. Examples include technologies that allow clients to manage their portfolios and trade electronically, lending platforms, payment systems and computer-generated investing advice.
Fintech is a rapidly growing niche that evolved from the field of Big Data. Big Data is broadly defined as the collection of huge and complex data sets that defy the reaches of traditional data processing applications.
It’s difficult to imagine the magnitude of this data, until you think about all the data you personally collect—just on your cell phone, for example—email addresses, telephone numbers, bookmarks, game statistics, books, movies, etc. Now just multiply that by everyone you know and their friends and relatives, and all the people and every business around the world. The numbers become staggering.
According to research firm IDC, the digital universe is expected to double every year to reach 44 trillion gigabytes by 2020. The company says this is enough memory to stretch a stack of tablets between the earth and the moon more than six and a half times! And trying to capture, store, analyze and share this data is a challenge that has created a booming tech sector.
Big Data is a $125 billion industry and is expected to create 4.4 million jobs this year alone. And many of those jobs will be in fintech, a subsector that has caught the eye—and money—of Silicon Valley investors.
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Big Money Likes Fintech
Just for the week ended May 15, In total, 14 fintech companies raised $160 million from venture capitalists and private equity buyers, led by personal finance portal NerdWallet, who took the largest chunk—$64 million in equity and $36 million in debt. Other large beneficiaries included:
• Credit Sesame, consumer credit management, $16 million ($35.4 million total raised since inception)
• Wave, online accounting and invoicing, $10 million ($28.5 million)
• Exchange Corporation, online lending (Paidy), $8.3 million ($11.6 million)
• Credifi, data analytics for commercial real estate, $8 million
• Vouch, lending social network, $6 million ($9 million)
• Vested Finance, next-gen student financing, $5 million
Analysts predict that fintech will soon take away $4.7 trillion in sales and $470 billion in profits from traditional Wall Street firms. The automation of specific investing practices, including social media collaboration on portfolios, computer-generated investing advice, slice investing (buying fractional shares), and commission-free trading are all threats to Wall Street’s traditional practices.
Consequently, those are the firms that are trying to get in on the action by buying fintech companies.
A recent USA Today article cited several white shoe firms who are actively seeking fintech companies to buy, including Aberdeen Asset Management, Goldman Sachs, Barclays and JP Morgan. But the possibilities extend farther than investment firms. Think of the online mortgage lenders like Quicken, Lending Tree, Amerisave and Prospect Mortgage that can benefit from the new technologies. Add payday lenders like Advance America or Check City, or payment processors such as Bitcoin or PayPal, and you can see why the forecasts for the fintech industry are exploding.
But the industry is not limited to just financial firms. Sectors such as healthcare and energy are also great candidates for new financial technologies.
And while the typical investor doesn’t have the deep pockets of private equity buyers or venture capitalists, you can certainly participate in this booming industry by buying shares in the firms that will be the acquirers of fintech companies. You need look no further than the M&A created by Google and Apple to see how their tech purchases fueled tremendous profits for both the companies acquired and investors who held Google and Apple shares.
I think fintech is going to be the next disruptive wave of technology, and will usher in an era of incredible profits for investors who are early to the game.
Sincerely,
Nancy Zambell
Editor of Investment Digest and Dividend Digest
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