Investing in fintech: what, why and how

When most people think of fintech, well-known brands such as PayPal or Afterpay might spring to mind. But Australia’s fast-growing fintech sector offers investors a diverse range of stocks to consider. In this article, we look at why fintech is booming here in Australia, and what to look for when thinking about adding fintech stocks to your investment portfolio.

What is fintech?

Fintech — short for financial technology — is a broad term applied to firms that combine innovative business models and technology to disrupt traditional financial services. 

Fintech companies, and the solutions they offer, allow us to access innovative new products more tailored to our needs, often in a quicker and cheaper way. Technologies such as the digital wallet are not only changing the way we pay for goods and services but how we interact with the world around us.

Why Australia has a booming fintech sector 

Australia punches above its weight when it comes to fintech - with more than 800 fintech firms, we have one of the world’s most sophisticated financial technology industries ranking 6th in the global fintech rankings¹. According to Fintech Australia, the industry has grown from a A$250 million industry in 2015 to a $4 billion industry in 2021².

Globally, the fintech sector is estimated to reach $190 billion by 2026, achieving a compound annual growth rate (CAGR) of 13.7%³. The largest countries in the fintech market are USA, UK, China, Germany and India.

There are a number of reasons for Australia’s success in fintech, including our early adopter attitude as a nation and government. Australia is number one in the world for contactless payment penetration and number two for smart phones⁴ with smart phone adoption sitting at 89%⁵. 

Embracing fintech innovation has followed just as quickly, with a world leading fintech regulatory framework that provides fintech companies the ability to test smale-scale innovative ideas within a relaxed but safeguarded environment. Our nation’s size, diverse talent pool, business and cultural ties with Asia make Australia an ideal base for regional operations and ideal global test market for innovative new solutions.

The COVID-19 pandemic has accelerated the growth of digital banking and fintech innovation, with record investor capital raised and increasing numbers of start-ups moving to post-profit⁶. One of the most notable fintech trends is the shift away from cash to cards. According to a survey by the Australian Banking Association (ABA), 37% of Australians with a smartphone now use digital wallets like Apple Pay, Google Pay and Samsung Pay to make payments, more than double pre-pandemic levels⁷. The same survey revealed that one in ten Australians now leave their wallets at home, preferring instead to pay with digital wallets on their smartphones.

 

 

A broad category with plenty of options

Of all the fintechs in Australia, the most well-known would have to be Australian fintech export Afterpay Ltd [ASX:APT], a company that pioneered the ‘buy now, pay later’ (BNPL) payment model and became one of the rising stars during the pandemic as retailers moved their operations online. And while Afterpay reached a market cap of over $37 billion and an enterprise value is 32-times bigger than it was forecast for 2021⁸, dwindling consumer interest and ongoing losses have seen the BNPL category experience a significant downturn.

While rapid growth rates seen in the BNPL category can be appealing to investors, they do often come with more volatility. Here are some other key areas of the fintech ecosystem to consider:

Payments

Small and large companies offering a multitude of ways for us to pay for goods and services online and in-store. One of the most well known ASX-listed payments provider is Tyro payments [ASX:TYR], Australia’s largest EFTPOS provider outside of the big four banks (ANZ, CBA, NAB and Westpac) servicing the business sector.

Middle and back office

Accounting software such as XERO [ASX:XRO] and MYOB [ASX:MYO] that help businesses streamline and improve their operations are a sizeable category in the fintech space⁹.

Wealth tech

Another key category in the fintech space is wealth tech, which often uses big data and artificial intelligence to change the way we manage and invest our money. Examples include robo advice, micro investing platforms and financial services software providers such as HUB 24 [ASX: HUB], an investment and superannuation platform.

Neobanks

A neobank is a purely digital bank that is not backed by one of the big four and doesn’t use any physical infrastructure such as branches. Their technology is usually developed from scratch and bank customers will typically access their account via an app. The neobank sector continues to disprupt traditional banks, with new challenger neobanks such as Douugh [ASX:DOU] and Judo Bank [ASX:JDO] entering the market since 2020. 

Blockchain

While blockchain technology is synonymous with cryptocurrencies such as bitcoin, the technology is expanding into new areas of finance. Companies such as Fintech Chain Ltd [ASX; FTC] and Digital X [ASX: DCC] are revolutionising regular financial payments and processes, creating lightening fast secure transactions and allowing for more peer-to-peer transactions to take place.

While not all fintechs perform the same way, generally, growth in the fintech space is strong. Among the fintechs listed on the ASX, the average gain in 2020 was a healthy 54%¹⁰:

 

Code	Company	Price	%Six Mth	%Yr	MktCap
9SP	9 Spokes Int Limited	0.036	200	89	$53.8M
APT	Afterpay Limited	97.11	341	177	$26.8B
CCA	Change Financial Ltd	0.13	147	-40	$52.4M
CWZ	Cashwerkz Limited	0.14	-3	-36	$27.8M
DOU	Dough Limited	0.13	321	450	$32.0M
EML	EML Payments Ltd	3.57	42	-14	$1.2B
FTC	Fintech Chain Ltd	0.1	49	-31	$65.1M
FXL	FlexiGroup Limited	1.12	35	-48	$552.2M
IP1	Int Payment Tech Ltd	0.032	1010	138	$17.3M
LBY	Laybuy Group Holding	1.71	21	21	$306.2M
MME	MoneyMe Limited	1.53	91	22	$258.4M
MNY	Money3 Corporation	2.28	65	3	$426.2M
OPY	Openpay Group	3	329	88	$250.2M
PGL	Prospa Group	0.71	-6	-83	$114.9M
PLT	Plenti Group Limited	1.28	-23	-23	$214.4M
QFE	Quickfee Limited	0.495	106	2	$101.2M
RZI	Raiz Invest Limited	0.72	47	-21	$54.3M
SPT	Splitit	1.52	316	153	$517.4M
SZL	Sezzle Inc.	8.04	447	230	$831.1M
TYR	Tyro Payments	3.92	63	42	$2.0B
WZR	Wisr Ltd	0.185	76	42	$197.2M
Z1P	Zip Co Ltd.	7.58	240	37	$4.1B

 

Another shining star in 2020 was Integrated Payment Technologies [ASX:IP1], providers of integrated electronic payment remittance, achieving a 138 percent growth during the period. Fintechs in the lending category also performed well, most notably Wisr [ASX: WZR] and MoneyMe [ASX: MME] which achieved 42 percent and 22 per cent growth respectively.The top fintech performers on the ASX in 2020 came from a wide variety of categories. The top performer, Douugh (ASX:DOU), a wealth management app that automates day to day money activities such as spending, saving and investing grew by over 450 per cent after entering the ASX through a reverse takeover. 

Important note: The stocks mentioned in this article are not recommendations. Past performance is no guarantee of future performance. 

The golden rules of investing still apply

It’s important to remember that not all fintechs perform like Douugh. When evaluating the performance of a fintech stock, it’s crucial to do as much homework as you would normally do when deciding whether or not to invest. Some of the key areas to look at include, but are not limited to:

Sales growth

How fast is the company’s sales and revenue growing? Remember to look back in time at their track record for consistency, not just the existing quarter. Consistent, strong growth is ideal. Growth potential is important too. How much room is there for the fintech to grow? Is the market growing or is it saturated? 

Profitability

Healthy sales are important, but so is the balance sheet. How much debt does the company have? Do they have plenty of cash reserves? Newer companies may not be generating profits yet, but looking closely at their sales growth and stock performance to provide an indication of whether there is an obvious path to profit.

Competition

What does the competitive landscape look like? Is it dominated by large players or more fragmented? How realistic is it that the company will claim more market share? A company’s competitors can have a big impact on its stock performance so understanding this risk is crucial.

Competitive advantage

In a crowded market, having a superior product that brings competitive advantage is just as important. In fintech, this competitive advantage could, for example, come in the form of intellectual property (IP), proprietary technology or a patent to prevent the competition copying their product.

 

Something else to bear in mind is market capitalisation (cap). Market cap allows investors to calculate the value of a company based on the total value of its shares – in other words, the market value. Typically small cap companies have a market value of $300 million – $2 billion, mid cap range between $2 billion – $10 billion and large cap companies have a market value over $10 billion. 

Large cap companies are more established with long term steady growth and returns, and therefore they generally pose less risk. Small cap fintechs are often younger, niche players that can be more volatile and potentally carry more risk. 

Of course there are no guarantees – every company is different and needs to be researched in its own right. Like any investment – whether fintech or not – remember not to risk what you can’t afford to lose. And keeping your investment portfolio diversified – across companies, sectors and asset classes is the most important golden rule to remember. Doing this will help protect your portfolio against share market volatility.