To capture potential benefits of Fintech, investors should look for innovative new entrants and quick-to-adapt incumbents.
Is cash dead? Not yet. People in most countries—75% of them around the world—still conduct most transactions in cash.1 Yet, a massive shift is underway.
Cash can be inconvenient (where’s the nearest ATM?), and it’s often not an option as the COVID-19 world moves more of our activities online. Indeed, during the early months of the pandemic, e-commerce spending in the United States rose to 15.7% of retail sales from 11.4% the previous quarter. Although the share has fallen back a little since (2021 Q1 = 13.6%), it appears the pandemic caused a one-off shift of certain purchases online, which will not be reversed.2
The world is in the midst of defining a new normal, and Fintech (short for financial technology) is poised to enable and benefit from the transition.
The Fintech investment opportunity is moving from early phase to focal point. Over the last 18 months, the largest companies in the technology space have been using their financial resources to acquire firms with niche capabilities in financial technology.3 Indeed, global Fintech funding reached a new high of $33.7 billion in 2021 Q2, up 191% from a year earlier, and representing 22% of total global venture capital funding that quarter 4
Publicly traded markets are beginning to recognize the growth potential, too. Between now and 2022, the FactSet Global Fintech Index is expected to see its earnings per share grow at an annualized 43%—double the average forecast for the MSCI All Country World Index.
One increasingly powerful tailwind is the priority placed on Fintech by governments and regulators. In the last 12 months alone, we have seen several landmark events:5
- The People’s Bank of China began a real-world trial in one district of Shenzhen in October for its central bank digital currency—the digital renminbi.
- The Monetary Authority of Singapore issued its first two digital banking licenses to the Grab-Singtel consortium and to tech giant SEA, in addition to two digital wholesale bank licenses to Ant Group and a consortium including Greenland Financial Holdings Group Co. Ltd., Linklogis Hong Kong Ltd., and Beijing Co-operative Equity Investment Fund Management Co. Ltd.
- The European Central Bank recently started a 24-month trial of a digital euro.6
Analysts expect a Fintech boom
What is Fintech?
Financial technology is the umbrella term for products and services that use the internet, software, mobile devices or cloud capabilities to individuals, businesses, governments and others with anything money-related.
Many key services categories, such as payments, banking, lending, trading, investing and insurance, have significant and growing market value. For example, all global payments totaled roughly $200 trillion in 2018, while electronic transactions accounted for only about $40 trillion. However, by 2030, estimates suggest that total global payment volume will grow by 30%, to about $260 trillion, of which, electronic transactions are expected to be $90 trillion—an eye-popping rise of 125%.7
Fintech is changing many aspects of our financial lives
Where are the opportunities?
As financial services is transformed, new business models are generating significant growth. Look, for example, at digital stock brokerage trading platforms: U.S. platform Robinhood has seen its user base rise from one million in 2016 to more than 10 million at the end of 2019, and surging further to 18 million at the end of Q1 2021;8 its order flow revenue nearly doubled from $91 million in Q1 2020 to $180 million in Q2 2020, and increased further to $331 million in Q1 2021.9
Consider three other examples: digital contactless payments, digital banking and artificial intelligence (AI)–based insurance solutions.
Moving to contactless payments in a post-COVID-19 world
The pandemic has helped accelerate a number of technological trends, with consumers increasingly turning to payment means such as 1) electronic payments for e-commerce, and 2) contactless in-store payments out of safety, necessity and convenience.
For digital payments, consider China—the e-commerce capital of the world, whose e-commerce sales in 2019 accounted for ~56% of the global total. In China, roughly one-fifth of total retail sales are through e-commerce channels. The degree of penetration has been enabled by online payment platforms and digital wallets that streamline the process by auto populating billing and shipping information. A prime example is Alibaba’s Alipay, which has emerged as a dominant player, with over 1 billion users. Although recent regulatory changes highlight the risks to this sector of the Chinese economy, we believe the long-term opportunity remains compelling.
Meanwhile, despite the rapid growth cited above, only around 14% of U.S. retail sales last quarter were classified as e-commerce, suggesting much room for catchup in adoption, especially now that e-commerce/omni-channel commerce is a must for businesses amidst COVID-19. The race is on for Western payments companies to emerge as the predominant enablers and beneficiaries of the e-commerce growth potential in the United States. PayPal and other third-party wallets are already accepted at nine of the 10 largest U.S. online retailers. But tech giants are gaining traction, such as Apple, with its Apple Pay service becoming increasingly integrated with online stores, and Amazon is working to leverage its 300 million+ user base to move its Amazon Pay to the forefront.
Fintech and tech companies are wading deeper into contactless payments in the physical world as well. Contactless payments such as QR-code, tap-and-pay card and mobile usage reached 37% of in-person transactions in 2020 (versus 28% in 2019).10 Furthermore, by 2025, over half of all U.S. smartphone users will be expected to use contactless mobile payments.11
Post COVID-19, we expect that the secular shift to omni-channel commerce, which requires a digital payments backbone and contactless payments for in-person transactions at places such as dentists’ offices and restaurants, will proceed at an accelerated speed.
Fostering financial inclusion with Fintech banking
Estimates suggest that about 1.7 billion adults across the world are “unbanked” (i.e., not served by a bank or similar financial institution)—that’s a little more than 20% of the global population.12 Within that demographic, about two-thirds have a mobile phone. Serving the unbanked who have mobile phones is a huge opportunity for companies offering text- or app-based banking services. Solutions, and the companies offering them, include:
- Banking where physical bank branches are scarce—For many, access to banks is limited. U Microfinance Bank Limited has introduced UPaisa in Pakistan, which offers purely mobile banking: Users can transfer and receive money, pay bills, shop online and make donations, even without a smartphone.
- Banking without identification documents—In India alone, about 1 billion people lack “proof of existence” documentation. London-based startup Humaniq Limited is leveraging biometrics to integrate people with this challenge into the digital economy, and using blockchain and AI to offer financial services in emerging market economies.
- Banking without a minimum account balance—Many conventional banks charge high penalty fees for falling below deposit thresholds. But companies such as PayPal have developed ways to instantly convert cash to a debit card that works in stores or online.
Filling the gaps in insurance offerings
The number of U.S. households with some form of life insurance is sitting at a 50-year low,13 leading to an estimated $25 trillion underinsurance gap (based on projected income replacement needs in the event of a tragedy).14 But estimates suggest that 50 million households recognize they need more life insurance, and 52% of surveyed individuals said they would be more likely to buy a policy if it didn’t involve physical exams.15 The opportunity is clear, and companies such San Francisco–based Ethos Technologies, Inc. offer both educational resources and life insurance solutions attainable through a fully online (i.e., no medical exams needed) application process that can be completed in minutes.16
The evolving insurance industry is already at the heart of the “integrated finance” trend, where customers are covered in case of certain risks as part of a purchase. For example, in H2 2020, insurance company Chubb introduced Chubb Studio to provide integrated insurance offerings through its partners’ digital channels.17
In China, “Insurtech” leaders are improving efficiencies and client experience using technologies such as big data, AI and cloud software. Chinese insurer Ping An uses AI to reduce fraud and streamline processing of auto damage claims: About 80% of the company’s insurance claims are classified as small claims, and AI processes around 95% of them—with 90% accuracy. As a result, the company saw its claim losses decline by 7.8% (or $480 million) in the first half of 2017.18
More Fintech growth and disruption on the way
Digital transformation is a megatrend that has already disrupted financial services—but even more disruption can be expected. The Fintech industry is expected to generate revenues of $500 billion in 2030, up from $150 billion in 2018.19 Total investment activity in Fintech was $105 billion in 2020. Although this was down from the incredible $168 billion in 2019 (in part due to the lack of mega M&A deals such as 2019’s $42.5 billion acquisition of WorldPay by FIS), it was double the amount seen in 2017.20 Among these Fintech companies are both new entrants and quick-to-adapt incumbents that could become significant market share gainers in areas ranging from payments to investing, to insurance.
But let’s not forget that digital finance has its risks, including regulatory complexity and challenges such as data security and privacy. Still, it could be rewarding to navigate the risks of this fast-growing area. So speak with your J.P. Morgan team about whether such investments suit your long-term goals. And for more insights on this and other megatrends, visit our information hub here.
1 “World Cash Report 2018,” G4S Cash Solutions, May 1, 2018.
2 “May 2021 Advance Monthly Sale for Retail Trade and Food Services,” Census Bureau, June 15, 2021.
3 “Big tech’s playbook,” CB Insights, May 5, 2021.
4 “Q2 2021 State if Venture Report,” CB Insights.
5 “Pulse of Fintech H2’20,” KPMG, February 2021; and “Central Banks lay out a framework for digital currencies,” CNBC, October 9, 2020.
6 Eurosystem launches digital euro project, July 14, 2021.
7 “European Payments 2020: The era of consolidation,” Goldman Sachs Research, January 24, 2020.
8 “Ten Million Thanks,” Under the Hood (blog), Robinhood, December 4, 2019; and “Robinhood has 18 million accounts with $80 billion in assets after rapid growth, IPO filing shows,” CNBC, July 1, 2021.
9 “RHS SEC Rule 606 and 607 Disclosure report,” Robinhood Securities, July 28, 2020; and “Robinhood Filing Shows Enormous Growth in Controversial Revenue Source,” Barron’s, May 3, 2021.
10 “Payments: Interesting chess move by Apple buying Mobeewave to turn iPhones into POS devices,” J.P. Morgan Research, August 3, 2020. Apple Pay’s digital wallet (which has been around since 2014) is an example of one app that enables them. The company also recently expanded its payments capabilities through an acquisition of Mobeewave, which allows iPhones to serve as a point-of-sale terminal to accept contactless payments via an app.
11 “Fueled by pandemic, contactless mobile payments to surpass half of all smartphone users in U.S. by 2025,” TechCrunch, April 5, 2021.
12 Asli Demirgüç-Kunt, Leora Klapper, et al., “The Global Findex Database: Measuring Financial Inclusion and the Fintech Revolution,” World Bank Group, October 2017.
13 “What can breathe new life into the waning life insurance industry?” Gerv Tacadena, Hannover RE and Insurance Business Magazine, April 19, 2019.
14 “Life underinsurance in the U.S.: bridging the $25 trillion mortality protection gap,” Swiss Re Institute, September 2018.
15“Facts About Life 2018,” LIMRA, September 2018.
16 “What we offer,” ethoslife.com, Ethos Technologies, Inc., August 10, 2020.
17 “Chubb studio launch simplifying digital partner integration”
18 “Lessons from China’s Insurtech Leaders,” BCG, 2019.
19 UBS estimates, as of September 2019.
20 “Pulse of Fintech H2 2020,” KPMG, as of December 31, 2019.