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December 9, 2021
3 mins

Unstoppable trends | Fintech is redefining financial services

December 9, 2021
3 mins
Wietse Nijenhuis
Equity Client Portfolio Manager, Citi Investment Management
Charlie Stuart
Equity Portfolio Manager, Citi Investment Management

The disruption of financial services is gathering pace. We advise building portfolio exposure to fintech leaders, while avoiding potential victims.

Key takeaways

The COVID pandemic has accelerated the adoption of digital financial services

Fintech firms are effectively and competing directly with traditional providers. This will accelerate and disrupt markets

Among our favored areas in fintech are payments and developers of solutions that can be sold to traditional providers

What makes fintech unstoppable

The world of financial services is changing fast. Disruptive technologies are transforming how we perform many vital activities, such as making payments, investing, borrowing, and saving. Increasingly, financial institutions’ back-office work – including administration and compliance – is now being carried out by intelligent machines.

These developments are being driven by a new breed of innovators: financial technology or fintech firms. For consumers, the benefits are typically faster service, better access and lower costs. In developing countries, hundreds of millions of people are gaining bank accounts and vital financing for the first time ever. But while recent progress has been impressive, we believe fintech’s transformation of financial services still has far to go.

In our Outlook 2020 report, we identified fintech as an unstoppable trend. The financial services sector was facing genuine and sustained disruption for the first time, driven by shifting demographics and the considerable resources of sovereign wealth funds and venture capitalists. We believed this disruption presented investment opportunities that could potentially benefit portfolios over the long term.

Now the benefits of Fintech innovation are more than evident, they are essential. The spread of the coronavirus caused structural changes across many sectors, as lockdown forced large swathes of the global population online. Few of these digital natives are likely to revert to their old behavior.

Why is fintech unstoppable?

People want to transact faster and safer. They want access to their money and to information about how to spend and save it. Thus, their customer experience remains a key driver of fintech adoption. Digital payments offer benefits to customers, businesses and governments alike. For customers, they are convenient, faster, safer and more hygienic. Businesses no longer need to worry about having cash on hand, while accounting and inventory management have become much easier.

In markets that have less access to traditional financial services, fintech provides a leapfrog opportunity. For example, in countries lacking the Western world’s regulatory and political barriers, entire new financial ecosystems have emerged with such speed and success that the term bank may be irrelevant to local consumers. Across parts of China and Africa, payments are predominantly digital. Gone are the days when people living in rural areas needed to travel several hours to open a bank account. They can now sign up on their smartphones.

Regulation is another driver of fintech adoption. In the past, strict capital requirements and other regulations made it difficult to disrupt financial services. Now, for regulators and governments, an electronic trail makes it easier to collect taxes and tackle corruption.

Footholds, the dominance

As we discussed in Outlook 2020, fintech firms initially plugged gaps in the market. They focused on activities such as peer-to-peer lending or improving customer experience at the point of sale. However, evolution typically happens in stages. At first, disruptors erode market share by targeting new segments while coexisting with the incumbents. After achieving a certain scale and establishing their reputation, disruptors compete directly with the incumbents for their core business revenues.

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