Financial innovation for a fairer investment environment

Billions of people in emerging markets still have inadequate access to banking, while even some financial services are difficult to access for lower-income individuals in developed countries. Fintech is poised to change this and democratize financial services.

Shares for everyone

Last year, the mobile trading app Robinhood gained notoriety outside of financial markets. Lockdowns and contact restrictions because of Covid-19 forced many people to stay at home. Some lost their jobs. Young, tech-savvy people in particular, now had more time to dive into the topic of equities. In addition, the government rolled out aid programs paid out in the form of stimulus checks. This financial stimulus combined with the additional time on hand, was used by many to participate in the financial markets. This also included wild speculation, which gave the phenomenon of “meme stocks” an important boost. Even if the wild speculation around stocks such as GameStop or the U.S. cinema chain AMC Entertainment, can be viewed critically, it is precisely the new service offerings such as Robinhood that can further advance democratization of the financial sector.

At the same time, digitalization is already in full swing. New technologies are already helping us in our everyday lives. This is also the case for financial services. With the help of new technologies and innovative financial products, so-called Fintechs accomplish several things at the same time, whilst shaking up the traditional financial industry. For example, financial services are being made accessible to a much wider range of people. Consider some remote areas in Africa where people have mobile networks and a cell phone, but bank branches are hard to find, if at all. However, new technologies in financial services have the potential to do more than just ensure greater participation. New methods of encryption can make banking transactions and other services even more secure, while providing faster execution than in the past.

Rapidly growing market with many opportunities

In 2019, consulting and IT services firm Capgemini completed a survey with banking executives asking them about the areas of their industry where fintech should have the greatest impact in the future. Virtual wallets and mobile payments were mentioned most frequently (67%). Cards and traditional payment methods stood at 63%. In contrast, only 8% of respondents mentioned wealth and asset management. No matter who and what area in the financial sector, Fintechs are expected to make an impact. Financial institutions are therefore investing large sums in digital solutions, according to Capgemini. They need to.

In many cases, startups can already handle some financial services, such as payment transactions or money transfers, faster and more efficiently than traditional financial institutions. Furthermore, there is a growing need to invest in digital solutions as young, tech-savvy groups increasingly drive demand. Many opportunities are emerging in the fast-growing fintech market. According to Deloitte, the market volume in 2019 was approximately 108 bn Euro. It is estimated that this should grow to around 188 bn Euro by 2024, an average of 11.7 percent per year. Five trends have been identified that should shape the financial industry in the coming years: One of these areas is investments & trading.

This includes topics such as robo advisors. These are designed to automate and optimize investment decisions with the help of artificial intelligence. Trading apps such as Robinhood also belong to this field. The corresponding trends are driven primarily by millennials and ensure that households or individuals with lower incomes, who previously had no access to financial markets at all, can now trade shares, options, certificates or cryptocurrencies conveniently and securely. According to U.S. equity broker Charles Schwab, 15% of all retail investors entered their first trade in 2020. Schwab calls these new market participants "Generation Investor." Other fintech trends include digital solutions for payments & money transfers, personal finance, taxes & real estate. Blockchain & cryptocurrencies is another important trend next to financial software.

Fintech made investable

Global growth opportunities for Fintechs appear enormous. According to McKinsey, digital financial services combined with smartphones could ensure that around 1.6 billion people from developing countries without bank accounts have access to those services. This would boost GDP in emerging markets by 6 percent by 2025, according to estimates. Apart from emerging markets, Fintechs have the potential to transform the financial industry around the world, and there is great potential in Europe or the U.S. as well. The opportunities are favorable. After all, COVID-19 has ensured that digital trends, including those in the fintech sector, are now developing even faster. The growth potential has not gone unnoticed by investors. For example, fintech stocks, as measured by the STOXX Fintech Net Total Return Index, have clearly outperformed bank stocks (MSCI World Banks Net Total Return Index) in recent years.

The growth and return opportunities in the fintech sector are also being made available to more private investors. For example, with a tracker certificate on the Vontobel FinTech Index. This index focuses on the five areas of Payments & Money Transfer (e.g. MercadoLibre Inc., PayPal, MasterCard, Adyen); Personal Finance, Tax & Real Estate (e.g. Zillow Group, Intuit); Blockchain & Cryptocurrencies (e.g. CME Group, Coinbase); Financial Software (e.g. Avalara Inc.) and Investment & Trading (e.g. Robinhood, flatexDEGIRO AG). When selecting the index members, aspects such as ESG or employee satisfaction play a role in addition to the companies' focus on the respective megatrends in the fintech sector, revenues, profit or market power.

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