Investors can find opportunities in the innovative Fintech space and consider a targeted exchange traded fund strategy to capture this quickly growing industry.
On the recent webcast, Fintech Innovation: How to Access This Growing Industry, Maximilian Friedrich, Analyst at ARK Invest, said that while the modern financial industry has evolved over 1000 years, technology has transformed it completely in just 20 years. For example, Friedrich highlighted China’s booming mobile payment adoption, with volumes almost double its gross domestic product. China’s mobile payment volume reached $24 trillion in 2018, compared to the economy’s $13.0 trillion GDP.
Friedrich argued that the quickly growing fintech industry covers economic activity that is not measured by GDP, which opens up a tremendous untapped market.
“ARK believes that fintech will impact economic activity well beyond that measured by GDP,” Friedrich said.
Propelling the growth in the nascent fintech industry, millennials or the younger tech-savvy generation have been adopting technology at a much faster pace relative to the older age groups. For instance, 42% of millennials have a Venmo account, a mobile payment service owned by PayPal, compared to 7% of people aged 55+. Around 43% of millennial Venmo users also utilize the services at least once per day, compared to just 1% for those aged 45+. Overall fintech penetration was 42% for the age group 18 through 29 in 2018.
Looking ahead, Friedrich contended that fintech could be the next revolution in the financial services industry as innovative technologies bring financial solutions to billions of individuals without access to banking services. In 2017, 1.7 billion adults globally had no access to banking services, but two-thirds of the world’s unbanked own a mobile phone, which may potentially enable access to financial solutions. There are 1.4 trillion transactions that still occur in cash annually, potentially opening up a $100 billion opportunity for fintech solutions.
As a way to help investors potentially capitalize on the fintech growth opportunity, Friedrich identified some key areas within the industry, including mobile value transfer devices, artificial intelligence, cloud computing and blockchain technology.
Mobile value transfer devices or digital wallets are scaling quickly relative to traditional banks. As of the end of 2018, Venmo had the fourth largest customer base in the U.S., falling behind the likes of established Wall Street names like Wells Fargo, Bank of America and J.P. Morgan Chase.
Artificial intelligence or deep learning could create three times the value of the Internet across industries, Friedrich said. If deep learning were to achieve the current internet’s reach, it could add $30 trillion to global equity market capitalization in the next two decades across all industries.
Blockchain could also revolutionize remittances and trade settlements, providing users with instantaneous access to cash transactions. For example, Bitcoin experienced annual transaction volumes of $1.3 trillion and a daily transaction volume of $3.1 billion in 2018.
As a way for investors to tap into these industries, Renato Leggi, Client Portfolio Manager for ARK Invest, pointed to the recently launched ARK Fintech Innovation ETF (ARKF). The portfolio managers define “Fintech innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the financial sector works, including companies that are engaged in Transaction Innovations 29%, Blockchain Technology 12%, Risk Transformation 15%, Frictionless Funding Platforms 19%, Customer Facing Platforms 17% and New Intermediaries 8%.
“ARK’s Fintech Innovation ETF focuses on innovations hat are revolutionizing the financial industry. Regulatory hanges have shifted the economics of intermediating capital, reconfiguring the value-chain and allowing exploitation by competitors. Technology is changing the ability of financial institutions to access risk, interact with customers, and facilitate transactions,” Leggi said.
Financial advisors who are interested in learning more about the financial technology segment can watch the webcast here on demand.