Traditional money center banks are spending billions on enhancing technology. For some, it could prove easier to move into the booming fintech arena by acquiring some of the companies dwelling in that space.
Although it’s home to some massive companies, such as Apple (NASDAQ: AAPL), Alibaba (NYSE: BABA) and Facebook (NASDAQ: FB), the ARK Fintech Innovation ETF (NYSEARCA: ARKF) also holds some fintech names that could be credible targets for large banks.
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.
Fortunately for ARKF investors, fintech, though still in its formative stages, has already established a track record of consolidation.
“Last year, three huge mergers— Fiserv $22 billion acquisition of First Data, Fidelity National Information Services’s $35 billion buy of WorldPay and Global Payments $21.5 billion combinations with TSYS—consolidated the payments market,” reports Luisa Beltran for Barron’s.
Assessing ARKF Advantages
Fintech allows financial firms to leverage cutting edge technology to reduce costs, improve decision making and risk controls, remove middlemen and enhance customer experiences. A thematic approach includes investments that stand to benefit from structural change driven by demographic and technological changes.
ARKF holds just over 40 stocks and can hold up to 55. Components such as PayPal (NASDAQ: PYPL), Square (NYSE: SQ) and Shopify (NYSE: SHOP) could be attractive to buyers and Shopify has been the subject of takeover rumors, though it’s an unlikely target for a bank. However, Square makes a lot of sense as bank acquisition.
“According to the FDIC, cash represented just 30% of all payments in 2017. Furthermore, 68.7% of U.S. households had a credit card in 2017 vs. 63.8% in 2015,” notes Harvard University. “Business owners who recognize this trend are responding accordingly, with some opting to go entirely cashless in an effort to increase operating efficiency, reduce wait times for customers, and create a safer work environment by mitigating the risk of theft.”
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Smaller ARKF holdings that are profitable, aren’t overly valued or both could make for compelling targets for traditional banks looking to bolster their fintech footprints.
“Banks are natural buyers of fintechs but haven’t really taken part in M&A as of yet. That may change in 2020. Big U.S. banks are more likely to buy large financial services companies or payment processors with significant earnings and reasonable multiple,” according to Barron’s.
For more on disruptive technologies, visit our Disruptive Technology Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.