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Next wave in fintech: technology enablers
Different growth drivers in emerging and developed countries
The fintech market is still growing at a rapid pace. In addition to the booming area of digital payments, traditional banking services such as lending are currently being adopted there. This development makes sense because payment service providers typically know their customers well. This also makes them suitable as lenders - banks, on the other hand, often see a loan applicant for the first time. "Fintech is gradually absorbing many of the banks' high-margin businesses, including cross-border payments, lending and securities accounts," said Jeroen van Oerle, co-portfolio manager of Robeco Global Fintech Equities Fund.
This dynamic growth is based on different drivers in different regions of the world. "In developed countries, fintech is benefiting from the transition from cash to card payments and then to digital forms of payment," explains co-fund manager Patrick Lemmens. In parts of Europe, some countries are still a long way from being fully digitized. “In Italy, 80% of payments are still made in cash,” says Lemmens.
In developed countries, change is being driven not by economic growth as such, but by consumers switching to online purchases, which in turn favors online payments. "The economy in developed countries is not growing very quickly, but the area of digital payment is doing it."
In contrast, the driving factor in the emerging markets is the underlying economic growth, which is causing more and more people to move up from the lower to the middle income brackets. As part of the trend towards financial inclusion, new forms of payment have developed in Asia from the very beginning. The infrastructure associated with cash payments, such as ATMs, is becoming increasingly rare there.
“In countries like China, it's almost impossible to pay cash,” says Lemmens. Paying with the mobile phone is so widespread there that "the worst thing that can happen to you in China is that the phone is defective."
Wave of mergers and acquisitions in the fintech space
The current wave of corporate takeovers in developed and emerging countries alike is being driven by the need for higher payment volumes and the expansion of IT capacities. “Companies gain economies of scale through mergers and acquisitions,” explains van Oerle. At the beginning of the year, the US payment service provider FIS bought its competitor Worldplay, and Fiserv also acquired another major provider in the market, First Data. Global Payments has bought Total System Services. Van Oerle believes that this wave of mergers and acquisitions will continue and will hit Europe next. Up until recently, the markets here were highly fragmented. But now there will be a consolidation at the European level.
Conglomerates in the field of digital payments have already formed in the emerging countries. The offer is dominated by a few large providers.
"Smaller companies find it difficult to compete with state payment systems such as UPI," explains van Oerle. UPI (Unified Payments Interface) is an instant payment system that is also available as a smartphone application. It was developed in India to facilitate banking transactions.
Leading Chinese providers are also acquiring stakes in other Asian payment service providers in order to be able to serve both Chinese and non-Chinese customers.
B2B as the next growth topic
B2B providers or enablers will be a new growth opportunity in the fintech sector. This includes all the companies that provide providers in the field of digital payments with appropriate systems or infrastructure - whether software, payment terminals or cybersecurity services. Since the fintech market is growing so quickly and relies on these providers for its basic applications, such B2B companies are not influenced by the macroeconomic environment, believes Van Oerle. "They tend to be immune to a recession because their customers cannot afford to keep putting off investments."
Such enablers in the technological environment supply banks, insurance companies and asset managers as well as fintech companies that are emerging on the market. This development is the driving force behind the mergers and acquisitions between Enablers and large financial institutions. For example, the Japanese financial services provider and asset manager SBI Holdings has a stake in Ripple, which offers global cross-border payments.
The enablers of the technical environment in the fintech market are still at an early stage and will follow developments in the field of digital payments. While digital payment service providers will still offer considerable growth and investment opportunities in the next 5-10 years, in the next few years we will focus on identifying the winners among the B2B providers who will then open up new and additional investment opportunities, "says Lemmens.
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