From online payment processing to virtual banking, financial technology is omnipresent in our lives and has been for quite some time. However, a over the past decade the fintech sector has flourished and transformed our financial capabilities. Technological breakthroughs, enhanced convenience and shifting customer demands have all played important roles in the rise of e-commerce and digital financial management.
Investments in fintech in 2021 amounted to $210bn, which is $90bn more than the figure for 2020. But according to global venture capital investment trends, the fintech industry is going through a rough patch. Shares in fintech stocks across the board slumped in the first half of 2022, as the growth experienced during the pandemic tailed off. Additionally, overarching market factors like the interest rate hike have put negative pressure on the market.
Despite this, KPMG analysts have given a somewhat optimistic outlook on fintech investing, highlighting the rise of M&A (mergers and acquisitions) transactions, an increased interest in fintech-oriented ESG (environmental, social, governance) solutions, the proliferation of fintech banking alternatives, and the sustained growth of data processing companies. Experts have also predicted that the cryptocurrency and blockchain sector will remain a popular avenue of investment in 2022.
In this article, we are going to examine why investing in fintech may be a savvy decision.
Main trends in fintech
Let’s consider the main trends in fintech, and analyze why they are apt to grow.
— Open banking & Embedded finance
Investors are still trying to identify companies that are committed to making payments easier for businesses and individuals. The digital banking revolution is in full swing and investors have been opening their coffers for companies that have the potential to make an impact in this now saturated field.
A central idea in this field is open banking, which is basically a less regulatory-laden version of what is offered in traditional banking. Open banking allows companies that are not licensed lenders to offer financial services in a convenient and user-friendly manner. These companies have been able to make a lot of progress on the digital payments front, a fact that is corroborated by investment trends.
Another key idea here is embedded finance. Embedded finance is when companies that are not financial firms incorporate financial products into their offerings. This is currently very much en vogue with a number of major companies that are not financial institutions offering banking-as-a-service. This is most often done via payment cards, lending programs, and digital wallets.
— Democratization of the non-public asset market
This market has become more transparent, which has led to new opportunities opening up for retail investors. Now there are public marketplaces for transacting with shares of private companies, tools for capital management, and avenues for the financing of new business models.
Looking ahead, regulators are likely to either limit access to the non-public asset market or seek to introduce frameworks that will allow investors to continue while reducing risk exposure.
— Products for freelancers
Traditional banks do not really know how to work with freelancers and the self-employed. Because their income tends to be unstable, freelancers have problems when trying to obtain financing. More and more fintech platforms have developed credit solutions tailored to freelance workers and the self-employed that make their lives much easier. For example, the new fintech firm Payrow has singled out work with freelancers as a separate area. Payrow offers convenient functionality for freelancers and SME, which simplifies business processes and manages finances with digital payment solutions.
Covid has led to an increase in the number of remote workers and freelancers, and according to Payrow experts, this trend will continue. Which means that the demand for online financial services will only grow, because modern fintech companies offer higher interest rates, lower fees (or no fees), and a higher level of service and support than traditional banks.
— Fintech for open ecosystems
Open ecosystems that serve as exchange hubs for independent parties have emerged as preferable alternatives to marketplaces and other kinds of centralized platforms. In stride with this, universal checkout services and embedded investment products are actively developing.
Looking ahead, if independent parties unite, the fragmentation of the traditional financial market and the specialization of fintech solutions will increase. And, as a result, the gap in services and quality between closed ecosystems, centralized platforms, and marketplaces will grow.
— The post-big data era
To improve the quality of analytics, companies are developing a more selective approach to data gathering that takes into account more particular user details. Fintech solutions are leading the way in this movement, with solutions that use synthetic data, audit information, and specialize in processing certain types of key data.
This could play out in two ways. Either one massive, centralized company will emerge and monopolize the industry, or specialization in data processing will increase and the industry will become more robust, offering clients a wide array of services tailored to their individual needs.
— Tokenization of the real world
Many key sectors of the global economy still need additional funding to recover from what was lost during the COVID-19 pandemic. To attain that funding, many companies have restructured and tokenized their illiquid assets. Fintech firms have already built up a solid infrastructure for the digitization of rights and transactions of new asset classes.
How do we see this playing out in the future? Tokenization will become deeply integrated within many other business processes, which will give firms an unprecedented level of financial flexibility.
— Fintech for the metaverse
The metaverse represents a whole new world in which consumption and consumer interaction occur in real-time. The metaverse is also not bounded by the limitations of any single company, rather it is an open market where companies and consumers have free reign to pursue their interests and strategies. The more proactive firms in the metaverse are providing users with spaces and events tailored to their interests. This is invaluable from a data standpoint.
At this point, the growth of this space seems inevitable. The only issue is whether it will remain inline with the decentralized principles of web3, meaning that users will have rights over their data and content, or it will become centralized and fall under the control of corporations.
— “Green” fintech
Governments are aggressively implementing programs aimed at achieving carbon neutrality. As a result, the green industry is expanding and investors are flocking to promising green projects.
From our vantage point, green fintech will go mainstream, the only question is how fast. It could take 3-5 or 10-15 years. The trend will accelerate if regulators and society require ESG resilience parameters to be used in scoring and credit models, and also if these parameters will influence funding decisions.
— Cybersecurity
Just judging by the headlines of the past few years, there are few issues as pressing as that of cybersecurity. When it comes to digital finance, security is paramount. If a platform cannot provide adequate security, investors are not going to be willing to trust them with their funds. While progress in this field has been achieved, there is still a long way to go, meaning that growth in this sector is a sure thing.
Companies involved in investing will have to establish reliable standards for asset and data protection. The way forward here is via fintech firms continuing to refine advanced security protocols such as the 3d secure v.2 protocol.
— Biometric security protocols
This field is tied to what we just covered, but biometric security has taken off in its own right due to the capabilities it has as a safeguard. As more and more security flaws have been uncovered, there is currently no better remedy than advancing biometric security measures.
The evolution of biometric security measures will have a large say in how the future of investment and finance plays out. There are already a number of viable solutions out there, but currently companies are hard at work developing contactless biometric measures that are likely to reshape how we conceptualize digital security.
How to invest in fintech?
Purchasing fintech stocks may seem daunting, especially with some of the current price tags and uncertainty in the market. Luckily for you, we’ve put some tips together to help you decide if now is the right time to add fintech firms to your portfolio.
— When to buy fintech stocks
You should not think too much about the price right now. If a firm is solid from a fundamentals perspective and you think they are positioned well moving forward, any time is a good time to buy.
Trying to time the market is a good way of losing out on great investment opportunities. It is much better to think in macro terms, like where is the market moving and will this company play a role in that movement? Waiting for the right time to buy in could result in you stuck on the sidelines.
— Buying fintech ETFs
ETFs make great options for those looking to invest in fintech companies without exposing them to the risks of backing any one particular company. Given the high attrition rate in this sector, going the ETF route is a smart move.
— Acquisition of shares in non-public companies
Acquisition of shares in non-public companies through specialized platforms with syndicates for referrals.
— Fintech investment risks
All forms of investment come with risks, and fintech is no exception.
Despite the solid performance of many fintech firms during covid, there has been significant upheaval in the market, and there is a lot of turnover with fintech companies. Where we stand right now, with high inflation and a possible recession looming, there is nor protected asset class in the market. Like all industries, fintech will only prosper if there is demand and people willing to spend money.
With that said, recent shakedowns in the market have had the effect of lowering valuations for a lot of appealing companies. If you take a long-term investment perspective and play your cards right, you may find that now is a great opportunity for some discount shopping.
Summary
“The global state of the economy coupled with the scarcity of VC capital have allowed Stellared and its investors to access attractive investment opportunities with asymmetric risk / return profiles. We believe that the fintech ecosystems will develop further and companies such as Payrow will reshape the way we think about banking”, — comments Nikita Chirkov, CEO of Stellared Private Investment Office.
There are few sectors that have the same potential from an investment perspective as fintech does right now. The growth possibilities are huge and there are undiscovered gems out there waiting to be found. However, doing your due diligence before investing is essential. There are also a lot of projects that will stagnate. Look at the fundamentals and work out how a firm fits into the bigger macro picture as well as your own strategy.
