Fintech Is Accelerating Digital Transformation And
Benefitting As A Result
Digital payment and banking solutions, as well as personal
finance tools, are revolutionizing how we transact and manage our finances,
while solutions geared toward the financial sector are drastically enhancing
how financial institutions operate.
Fintech's impact extends beyond the financial system,
serving as both a core component and catalyst of digitalization. E-commerce,
the gig economy, consumer finance, retail investing, and countless other
disruptive innovations can attribute their rapid and recent growth to the
fintech enablers that power them.
Amid remote business operations and stay-at-home measures,
the world embraced the full gamut of fintech services and solutions. To put
this into perspective, the annual value of global digital transactions grew 33%
in the first year of the pandemic. This adoption is not only still intact but
is continuing to grow, with transactions expected to reach $14.2 trillion by
the end of 2022, 107% more than 2019's pre-pandemic levels.
While much of fintech's growth is coming from its
transformative impact in developed markets, an even larger piece of this
growth, and a key area of future growth, is the formative nature of fintech for
developing economies. From China to India to Eastern Europe and Africa,
historical financial infrastructure is limited. As a result, solutions such as
mobile payments do not have, for example, checking or credit card
infrastructure to displace; in these locales, financial infrastructure is
built, or is being built, digitally to begin with. This presents leapfrogging
opportunities for emerging economies, as well as much needed solutions for the
1.7 billion people in the world without access to bank accounts, credit, and
other essential financial services.
With digital adoption set to continue around the world, from
the transformative to the formative, we expect that future fintech could be
more pervasive, benefitting related companies as a result.
Fintech Investments Can Target A Wide Range Of Products
Digital Payments & Wallets
Payment solutions that enable the electronic exchange of
money, usually over the Internet, between businesses (B2B), individuals (P2P),
and businesses and consumers (B2P). Digital wallets store payment information,
removing the need for physical wallets.
Fintech For Businesses
Software and platforms that optimize how businesses manage
their finances, often through automation. Examples include spend management and
accounting software, as well as payroll management solutions.
End-to-end or specialized banking services delivered over
the Internet, including digital deposits, business and consumer lending, and
mortgage and insurance services.
Fintech & Banking Infrastructure
Spans a wide range of products serving traditional financial
institutions and fintech firms, enabling payment processing, account linking,
data transfer and processing, and underlying processes for digital banking
Personal Finance & Investments
Tools that help users manage their finances, typically
assisting or automating budgeting, saving, and financial planning. Also
includes digital platforms that offer individuals and professionals the ability
to buy, sell, and/or manage investments over the Internet.
Software and platforms for financial institutions that
streamline and/or automate operational and business processes. Examples include
third party financial services software and regulatory and compliance
Digital Payments And Wallets
Slim Enough To Fit Comfortably Inside Your Smartphone
Consumers and businesses are increasingly adopting digital
payments and wallets as the primary way they pay each other. For consumers, the
ability to pay digitally affords greater flexibility to make payments, no
matter the time and setting, as well as the opportunity to dispute fraudulent
charges. Consumers are embracing these benefits. In 2021, 82% of Americans
reported using these technologies for browser-based or in-app online purchases,
contactless in-store checkouts, and person-to-person (P2P) payments, up from
72% in 2016. And for businesses, digital payments mean access to more
customers, increased revenues, and lower transaction costs. According to Visa,
businesses that accept digital payments generate 17% more revenue and save 28%
on digital transactions compared to cash ones.
Though recent adoption is impressive, there is still room
for significant growth within the category: 37% of global consumption
expenditures are still paid through cash or check. With more transactions
moving online every year, and new digital payment options like "buy now,
pay later" (BNPL) seeing greater use, we expect that digital payments and
wallets could capture additional market share, driving revenue growth for
digital payment and wallet fintech companies. In fact, the total annual value
of digital transactions is expected to grow 100% over the next five years,
reaching $28. trillion in 2027.
Digital transactions are expected to grow significantly
across all major fintech verticals, illustrating greater adoption
Digital transactions are expected to grow significantly
across all major fintech verticals, illustrating greater adoption
Stacked column chart showing the annual total value of
fintech transactions across major fintech verticals. The chart shows how,
moving forward, digital payments are expected to drive significant transaction
dollars, while transactions related to digital banking and investments are
expected to grow and gain share. (Statista, 2022.)
Note: Digital banking = alternative (digital) financing 8:
lending, neobanking; digital investment = digital investment, digital assets.
No More Lines, No More Deposit Slips
Fintech innovators are driving significant disruption across
the banking industry. Digital-only newcomers are challenging traditional banks
for new business as incumbents struggle to modernize. These companies often
offer end-to-end, a la carte, digital banking services with lower fees and
simpler processes or specialize in a single services like business lending or
insurance. Many customers of these firms prefer their user-friendly and
specialized platforms as compared to the complexities of full-service banking providers
who have been slow to adapt.
As a result, adoption of these technologies is surging.
Digital banks' share of primary banking relationships is up 80% since 2019,
today representing 21% of all relationships. Moreover, 80% of people prefer
online banking over visiting a brick-and-mortar establishment, while 59% of
millennials will switch or have already switched to digital-only banking.
Beyond capturing existing market share, digital banks can expand the reach of
financial services to unserved populations. As a core fintech service, digital
banking presents an opportunity to connect the unbanked to the global financial
system and empower them financially.
Personal Finance And Investments
So Much More Than Memes
Fintech also includes solutions for managing personal and
business finances. Individuals are increasingly looking to these tools to
manage and grow their wealth, and to great effect. Last year in the US, the
share of people's money managed digitally jumped 10%, reaching 65%, while
trades initiated by individual investors grew to 25% of all equity trading
volumes, up from the 10-15% range experienced in the 2010s. Among those using
these tools, 70% report greater overall confidence around their finances and
approximately 90% plan on adopting additional products for saving, budgeting,
Fintech For Business
Do Accountants Dream Of Electronic Software Innovation?
Businesses are also using fintech to manage their finances.
Innovative new offerings, driven by artificial intelligence and machine
learning across spending management, accounting software and payroll management
solutions are seeing heighted adoption as firms adapt to the virtualized nature
of the post-pandemic world - a catalyst to be sure, but efficiencies and cost
savings are the true drivers. That is why global business spending application
sales, for example, are expected to reach $31 billion by 2029, growing at a
10.5% compound annual growth rate (CAGR) over the coming years, while
accounting software sales are expected to reach $70 billion by 2030, growing at
a 20% CAGR.
Fintech And Banking Infrastructure
The picks and shovels for an entirely different kind of
Many point to the transatlantic cable as the first true
instance of transformative fintech - enabling the first electronic fund
transfer and making it possible to transact over long distances. Beyond the
products and services that are disrupting how consumers and businesses interact
with money, today's fintech innovations include less visible, but equally powerful,
technologies rewiring and optimizing global financial systems. Digital banks,
payments, and platforms that provide investment, insurance, and consumer
finance services require significant infrastructure to operate, relying on
systems and applications that can dependably process and handle transactions
and customer data.
Payment processing platforms, for example, are essential to
ensuring successful digital transactions. They connect payments companies to
check clearing and settlement systems and offer the ability to track money
movement in real time. Equally important, data transfer networks make it
possible to directly connect to customers' bank accounts and are vital to
processing and transmitting consumer data. Finally, a variety of solutions can
use this data to deliver vital supporting functions like fraud prevention, risk
management and underwriting. With digital payment and banking services expected
to grow in the coming years, we believe fintech companies that provide the
infrastructure solutions underpinning these services could experience
significant revenue growth in turn.
Enterprise Fintech Innovators
To Boldly Go Where No Financial Institution Has Gone
Enterprise fintech software is rapidly becoming a key
priority for financial firms. Legacy IT systems are extremely costly to
maintain and present meaningful risk, while new systems are expensive to
implement and subject to future obsolescence. Enterprise fintech, or outsourced
fintech solutions, can address this without subjecting companies to either
option. For example, zero-code software platforms, which allow companies to
integrate financial software without the need for their own coding, can deliver
complex custom applications and systems for financial companies that can be
easily deployed and integrated. Currently representing an $18 billion market,
outsourced fintech software is expected to capture $26 billion in revenues by
2025, growing at a 10% CAGR from 2021.
How To Invest In Fintech Stocks
Regtech, or regulatory technology, is a particularly
fast-growing enterprise fintech vertical. It encompasses solutions that improve
or automate regulatory and compliance processes. Operating in one of the most
regulated industries, financial firms dedicate significant time and resources
to fulfill their regulatory obligations. As a result, errors can lead to
financially damaging penalties. Regtech offers an effective means of mitigating
this risk and is fast becoming a key priority for financial operators - but is
only one of the many examples in which fintech is helping financial services
players streamline processes while simultaneously reducing costs and risk.
Investors looking for exposure to fintech via public
equities may want to consider ETFs that invest in fintech companies across the
full spectrum of fintech solutions.
The breadth and scale of fintech makes it unique as a theme.
The sub-themes in this paper - from payments to banking to enterprise fintech -
have truly different players, not to mention barriers to entry, technology, and
regulatory regimes. Moreover, these sub-themes themselves are multifaceted: for
example, personal finance solutions encompass accounting, investing and
budgeting, each of which has a range of diversified and specialized fintech
innovators. So, we believe investors may want to consider investments that can
rotate across fintech sub-themes, add new ones, and seek to uncover not just
disruptors but also the nimbler, better-prepared incumbents who are positioned
to have the greatest growth potential amidst the overall theme's rise.
We expect fintech to become increasingly important as the
boundaries of the digital and physical worlds blur further. Fintech offers the
ability to move seamlessly between these worlds by unifying our digital and
physical wallets and identities, facilitating commerce and economic activity.
We expect this potential to translate to immense revenues for fintech stocks -
the global fintech market is expected to reach $332.5 billion by 2028,
representing a 20% CAGR from 2021's $112.5 billion market. Therefore, investors
looking for opportunities in fintech may want to consider ETFs that provide
exposure across the fintech value chain.
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