investment viewpoints
How is FinTech transforming financial services?
In this Q&A, portfolio managers Jeroen van Oerle and Christian Vondenbusch discuss FinTech and how digital technologies are changing financial services and companies.
Why did you join Lombard Odier?
Christian Vondenbusch: We liked the entrepreneurial spirit that is central to Lombard Odier. This is a very cooperative place, with a pure focus on fundamental investing. There is broad support across the organisation, and strong collaboration in terms of sharing best-practices and ideas. This is an environment where we can operate most effectively and deliver the best results for clients.
What is Financial Technology, or FinTech?
CV: FinTech emerged in the aftermath of the 2008 global financial crisis. This point in time was marked by the rapid development of new digital technologies, which coincided with regulators forcing banks to hold on to more capital, instead of spending it on these technologies themselves. Developments in technology and new consumer expectations also meant financial services could be delivered in novel ways. In this environment, FinTech flourished.
Does FinTech investing prioritise financial or technological expertise?
CV: On the financial services side, expertise is pivotal to identifying how regulations, capital requirements and other factors drive the sector. On the technology side, specialisation is necessary to fully evaluate new technologies and their potential to disrupt.
This explains why we have taken the unusual step of bringing portfolio managers from both the technology and financials areas to work together on developing a holistic strategy.
What are the drivers of FinTech?
JVO: In our view, three megatrends drive FinTech. Demographics is a key megatrend and refers to the rise of a younger, tech-savvy generation of Millennials and Gen Z, especially in China and India. We see this arriving in combination with strong growth of the middle class in emerging markets.
Technology is, obviously, very important. After the digitalisation of the consumer and manufacturing side of the economy, we are convinced that the financial sector will go through a similar transition.
Finally, we consider the implications of worldwide inequality. Financial inclusion is a growing phenomenon which has brought 2 billion people into the financial system in emerging as well as developed markets. This represents a very strong and secular growth trend as once this group is incorporated into the financial ecosystem at a basic level, it opens the door to a wider variety of financial services down the road.
How are digital technologies changing financial services and companies?
JVO: FinTech is already a USD150 billion industry and we estimate it will grow by around 20% over the next 5 years. FinTech is going to keep reforming financial services at every level but we think there are five key trends to watch for in the coming decade
- The world will move towards a fully cashless society
- Digital finance will lead to financial inclusion for all
- The rise of technology ecosystems offers opportunities in FinTech
- Digitalisation will continue to lower barriers to entry, improving efficiency and enabling new financial services
- Cybersecurity and insurance are basic necessities for all digital financial services
How do you translate these trends into a strategy?
JVO: The next step is to translate these trends into an investable universe comprising of close to 250 companies that best execute on these trends with a high purity factor. This universe grows and shrinks at the same time. It shrinks because of high mergers and acquisition (M&A) activity that comes naturally as a result of the benefits of scale. And it grows because of a healthy initial public offering (IPO) pipeline.