As we look to the innovative companies at the forefront of the fintech industry, investors can consider an exchange traded fund strategy to target this growing opportunity in a quickly changing global market.
In the recent webcast, Frictionless Funding, Blockchain, and Next-Gen Transactions: The Technologies Transforming the Financial Sector, Sam Korus, associate portfolio manager at ARK Invest, argued that the convergence of application programming interfaces (APIs), social platforms, and blockchain technology could integrate business and consumer marketplaces, dis-intermediating the middlemen dominating financial ecosystems.
Specifically, Max Friedrich, an analyst at ARK Invest, highlighted the growth of the nascent financial technology industry. The number of digital wallet users has surpassed the number of deposit account holders at one of the largest U.S. banks. Based on publicly available data, Square’s Cash App and PayPal’s Venmo have amassed 74 million and 82 million annual active users in the past eight and 11 years, respectively. In comparison, J.P. Morgan hit 60 million deposit account holders after five acquisitions in more than 30 years.
Friedrich also underscored the more competitive business model that many fintech industries have employed, with differentiated customer acquisition strategies that result in lower customer acquisition costs. For example, on a net basis, traditional banks in the U.S. spend roughly $750 in paid marketing and roughly $2,500 in total, including the occupancy expenses for branch networks, to acquire a new customer. In comparison, based on network effects, viral marketing, and arguably superior value propositions, digital wallet providers spend as little as $1 to acquire new customers, giving them room to invest and move up market.
Looking forward, Ark Invest believes that this U.S digital wallet opportunity will continue to scale. By 2026, the potential value per digital wallet user in the U.S. could reach an average of $22,500, and the potential value of the average global digital wallet user could rise to $3,800. To put this in perspective, if every global smartphone user, valued at $3,800 per user, would adopt a digital wallet by 2026, the total global digital wallet opportunity could reach $20 trillion.
Among the innovations supporting the fintech industry, ARK Invest has highlighted the public blockchain technologies.
“In our view, the Bitcoin protocol created the most profound application of public blockchain infrastructure. In addition to the Money Revolution, public blockchains also have catalyzed Financial and Internet Revolutions,” Friedrich said.
Friedrich explained that public blockchains could revolutionize the financial industry as the new technology diminishes the need to trust centralized authorities. Public blockchains shift the distribution of trust, replacing institutions that rely on centralized authorities with decentralized, open-source software. The first profound application was self-sovereign, digital money. While centralized institutions must coordinate the functions of a financial system, public blockchains can operate as a single, decentralized institution. Instead of relying on accountants, regulators, and governments, public blockchains rely on a global network of peers to enforce rules.
Public blockchains help remove the middle man in the traditional financial industry, which could help reduce costs and increase market efficiency. Friedrich noted that public blockchain infrastructure serves as the backbone for new forms of economic coordination. It minimizes the need to trust centralized institutions. The decentralized, open, and permission-less characteristics of public blockchains lower the cost of coordination, among other advantages.
As a way to access this revolution in the financial industry, investors can look to the ARK Fintech Innovation ETF (ARKF) to capitalize on the burgeoning fintech industry and capture innovative financial solutions in a digital age. ARKF invests in equity securities of companies that ARK believes are shifting financial services and economic transactions to technology infrastructure platforms, ultimately revolutionizing financial services by creating simplicity and accessibility while driving down costs.
ARK invest defines a company engaged in the theme of fintech innovation if it derives a significant portion of its revenue or market value from the theme of fintech innovation, or it has stated its primary business to be in products and services focused on the theme of fintech innovation. The Adviser defines “fintech innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the financial sector works, which ARK believes includes transaction innovations, blockchain technology, risk transformation, frictionless funding platforms, customer-facing platforms, and new intermediaries.
Financial advisors who are interested in learning more about next-gen financial transactions can watch the webcast here on demand.