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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
Lessons in innovation from key FinTech trends and successes
Creating Strategic Value through Financial Technology explores the growing Financial Technology (FinTech) industry to provide insight on how traditional financial institutions and FinTech companies can boost innovation and enhance valuation in a complex regulatory environment. In plumbing the depth and breadth of several niches within in the FinTech sector, author Jay Wilson uncovers key themes that have contributed to the industry's success; in this book, he maps them together to provide useful guideposts for investors, entrepreneurs, and traditional institutions looking to facilitate growth as technology and financial services collide. With an expert's perspective on FinTech history and outlook, certain trends and examples of value-enhancing strategies stand out. FinTech niches covered include: payments, crowdfunding, alternative/marketplace lending, the blockchain, and technology solutions in the context of banking, insurance, and investment companies.
There is no denying the growing importance of technology in the financial services industry, and the FinTech sector offers valuable solutions for a diverse array of financial services providers and their customers. This book guides you through several niches of the FinTech sector, and highlights the most important takeaways from recent endeavors.
- Navigate the financial technology sector
- Enhance customer and product offerings
- Improve efficiency and cost structure
- Enhance profitability and company valuation from the intersection of technology and finance
Innovation and customer preference is a key driver of FinTech's growth. Customers are demanding better value and convenience, and the organizations that provide it are reaping the rewards of growth. As financial regulations grow more and more complex, and customers are presented with more and more options, it is becoming imperative for traditional institutions to modernize processes and carve out a place in the future of financial services. Creating Strategic Value through Financial Technology provides a handbook for navigating that space, with practical guidance on how FinTech companies and traditional financial institutions can enhance profitability and valuation from the trends.
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Seitenzahl: 454
Veröffentlichungsjahr: 2017
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Table of Contents
Cover
Title Page
Copyright
Dedication
Preface
Acknowledgments
Section One:
Chapter 1: What Is Financial Technology?
Technology's Impact on Financial Services
What Is FinTech and Who Are the Players?
Why the Hype for FinTech?
Why Is FinTech Potentially So Important to Society?
Recent Trends and Market Conditions for the FinTech Industry
Conclusion
Notes
Chapter 2: Community Banks and FinTech
Is FinTech a Threat or an Opportunity for Community Banks?
FinTech's Potential Impact on Bank Valuation
How Community Banks Can Help FinTech Companies
Conclusion
Notes
Chapter 3: The Historical Context for FinTech
Introduction
FinTech History
Visa and MasterCard: The Largest IPOs in FinTech History
Core Vendors
Notes
Section Two:
Chapter 4: State of Community Banks Embracing FinTech Today
Introduction
Overview of U.S. Community Bank Industry Trends
Banks and FinTech Increasingly Intersect
Serving More Customers Digitally
Evolving Regulatory Oversight of FinTech
Conclusion
Notes
Chapter 5: The Alternative Lending Niche
The Mortgage Market
The Consumer Lending Market
Government Regulation of Alternative Lending Platforms
Conclusion
Notes
Chapter 6: The Payments Niche
Trends to Watch
Digital Currencies and Blockchain Technology
Conclusion
Notes
Chapter 7: The Wealth Management Niche
Introduction
The Evolution of the Online Brokerage Industry
The Rise of Robo‐Advisors
Conclusion
Notes
Chapter 8: InsurTech and the Future of Insurance
Introduction to InsurTech
Technology Trends in Insurance
Conclusion
Notes
Section Three:
Chapter 9: Partnering with a FinTech Company
Introduction
Conclusion
Notes
Chapter 10: Early Stage FinTech Valuation Issues
Introduction
Why You Should Have a Valuation Performed
Valuation Considerations for FinTech Companies
What about Preferences and FinTech Valuations?
Special Issues: Valuations for Other Stakeholders
Conclusion
Notes
Chapter 11: Acquiring a FinTech Company
Introduction
Recent Trends in FinTech M&A Activity
Metrics to Analyze FinTech Transactions
Accounting Considerations and Goodwill Creation in FinTech Deals
Special Issues to Consider with FinTech M&A
Conclusion
Notes
Chapter 12: Liquidity Options Beyond a Sale
Introduction
Liquidity Options
Is Your Buy–Sell Agreement Solidly Built?
Conclusion
Notes
Chapter 13: Is There a Bubble Forming in FinTech?
Introduction
Factors Leading to a Bubble?
Signs That a Bubble May Be Forming in FinTech
Case Study of a FinTech Failure
Conclusion
Notes
Index
End User License Agreement
List of Tables
Chapter 01
Table 1.1 Top Search Trends for “FinTech” by Country
Table 1.2 Value Added to U.S. GDP by Industry (billions of dollars)
Table 1.3 Net Income as Percentage of Revenue of Financial Institutions
Chapter 02
Table 2.1 Potential Cost Savings from a Digital‐Focused Bank
Table 2.2 Traditional Community Bank and FinTech Community Bank Comparison
Table 2.3 Price‐to‐Earnings Multiple Comparison of Traditional Community Bank to FinTech Community Bank
Table 2.4 Summary of Guideline Company Analysis
Chapter 03
Table 3.1 Number of ATMs per 100,000 People
Chapter 04
Table 4.1 Simple's Significant Corporate Events
Table 4.2 Banno's Significant Corporate Events
Chapter 05
Table 5.1 2006 Top Mortgage Originators
Table 5.2 2014 Top Mortgage Originators
Table 5.3 Major Holders of Consumer Credit Outstanding ($Billions)
Table 5.4 Selection of Largest Alternative Lending Funding of 2015 to Mid‐2016 in the United States
Chapter 06
Table 6.1 Gyft's Significant Corporate Events
Table 6.2 Check's Significant Corporate Events
Table 6.3 Stripe's Significant Corporate Events
Table 6.4 Largest Payments, Bitcoin, and Blockchain Funding in 2015–2016
Table 6.5 Coinbase's Significant Corporate Events
Chapter 07
Table 7.1 Comparison of Key Metrics of Selected Robo‐Advisory Services
Chapter 09
Table 9.1 Potential Cost Saving from Digital Focus
Table 9.2 Community Bank Comparison
Table 9.3 Price‐to‐Earnings and Valuation Ranges
Table 9.4 Investment Returns for FinTech Company
Table 9.5 Capital Budgeting: Sources and Uses of Capital
Table 9.6 FinTech Partnership Example
Table 9.7 FinTech Partnership: IRR and ROE Spread
Table 9.8 Equity FinTech Partner (Minority Shareholder)
Table 9.9 FinTech (Full Acquisition)
Table 9.10 FinTech Partnership and ROE Spread Comparison
Chapter 10
Table 10.1 Change in Value per Share
Table 10.2 Value Stages
Table 10.3 Public Market Information: Multiples & Margins (as of June 30, 2016)
Table 10.4 Overview of FinTech M&A Activity (Comparisons)
Table 10.5 Terminal Value Calculation ($Millions)
Table 10.6 Test of Reasonableness for Terminal Value
Table 10.7 Valuation Conclusion for Digital Advisory ($Millions)
Table 10.8 Scenarios for PWERM Analysis ($000)
Table 10.9 Synthesizing the PWERM Analysis ($000)
Chapter 11
Table 11.1 Top‐Ten FinTech M&A Exits
Table 11.2 Acquisitions of FinTech Companies (1/1/2005–6/30/2016)
Table 11.3 Acquisitions of Traditional Banks by FinTech Companies (1/1/2005–6/30/2016)
Table 11.4 Hometown Community Bank: Acquisition Analysis
Table 11.5 Hometown Community Bank: ROI and COE Comparisons
Table 11.6 Hometown Community Bank: Synergies to Premium ($000)
Table 11.7 Hometown Community Bank: TBV Accretion/Dilution and Earn‐back Period for FinTech Acquisition
Table 11.8 Hometown Community Bank: TBV Accretion/Dilution and Earn‐back Period for Traditional Bank Acquisition
Table 11.9 Hometown Community Bank: EPS Accretion/Dilution Comparison
Table 11.10 Value Creation Scorecard
Table 11.11 Assets, Liabilities, and Common Identifiable Intangible Assets in a Typical Bank Acquisition
Table 11.12 Changes to Target Bank's Balance Sheet at Closing ($Millions)
Table 11.13 Pro‐Forma Balance Sheet for Traditional Bank Acquisition ($Millions)
Table 11.14 Assets, Liabilities, and Common Identifiable Intangible Assets in a FinTech Acquisition
Table 11.15 Changes to Target FinTech's Balance Sheet at Closing ($Millions)
Table 11.16 Pro Forma Balance Sheet for FinTech Acquisition ($Millions)
Table 11.17 Fair Value Accounting Example of Traditional Bank Acquiring FinTech Company
Chapter 12
Table 12.1 Liquidity Options
Table 12.2 Top FinTech IPOs
Chapter 13
Table 13.1 Tennis Junior and Professional Rankings
List of Illustrations
Chapter 01
Figure 1.1 Google Search Trends for “FinTech”
Figure 1.2 Disparity in Mobile Banking Account Usage between Sub‐Saharan African Countries and Upper‐Middle‐Income Countries
Figure 1.3 Percent of Adult Population with Bank Accounts and Mobile Subscription Comparison between Africa and India
Figure 1.4 FinTech Funding Trends (2011– First Half of 2016)
Figure 1.5 Public Returns: FinTech Indices vs. S&P 500
Figure 1.6 FinTech Public Company Pricing Multiples: Median Enterprise Value/EBITDA Multiples
Figure 1.7 FinTech Public Multiples: Median EBITDA Margins (%)
Figure 1.8 FinTech M&A Overview (2011– First Half of 2016)
Chapter 02
Figure 2.1 Overview of U.S. Banks
Figure 2.2 Community Bank Profitability Trends
Figure 2.3 Community Bank Loan Portfolio Mix (1990 vs. June 2016)
Figure 2.4 Community Bank Real Estate Loan Portfolio Mix (1990 vs. June 2016)
Chapter 03
Figure 3.1 Total Returns for Visa
Chapter 04
Figure 4.1 Overview of U.S. Banks and Thrifts
Figure 4.2 Community Bank Profitability Trends
Figure 4.3 Net Interest Income Trends
Chapter 06
Figure 6.1 How Blockchain Works
Chapter 08
Figure 8.1 InsurTech Financing Trend
Chapter 09
Figure 9.1 Attractive vs. Less Attractive Capital Projects
Figure 9.2 Considering Returns of FinTech Strategies
Figure 9.3 Hurdle Rates for Transactions
Figure 9.4 FinTech Partner/Invest in/Acquire Analysis
Chapter 10
Figure 10.1 Comparison of Returns to Benchmark Measures
Figure 10.2 Digital Advisory's 5‐Year Forecast
Figure 10.3 Process to Value FinTech VC Investments
Chapter 11
Figure 11.1 FinTech M&A Overview 2011–2016
Figure 11.2 Accounting Models
Chapter 12
Figure 12.1 Mr. Smith's Portfolio Including His FinTech Portfolio
Figure 12.2 Levels of Value
Chapter 13
Figure 13.1 FinTech Public Company Pricing Multiples: Median Enterprise Value/EBITDA Multiples
Figure 13.2 FinTech Public Company Pricing Multiples: Median EBITDA Margins
Guide
Cover
Table of Contents
Begin Reading
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Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.
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For a list of available titles, visit our Web site at www.WileyFinance.com.
Creating Strategic Value through Financial Technology
JAY D. WILSON, JR.
Copyright © 2017 by Jay D. Wilson, Jr. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at http://www.wiley.com/go/permissions.
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Cover Design: Stephanie WigginsCover Images: smartphone © LOVEgraphic/Shutterstock;Bank Icon by Freepik/www.flaticon.com
To Becky, my supportive wife, who inspires me to be better each day.
To Connor and Sadie, my two children, who bring so much joy and keep us entertained.
Preface
As the financial crisis and Great Recession illustrated, the health and vibrancy of the banking industry is an important ingredient in a healthy economy. In the United States, community banks play a special role in the economy as they constitute the majority of banks, are collectively the largest providers of agricultural and small business lending, and are often key employers and providers of financing in their local communities. While conditions have improved since the depths of the financial crisis, community banks face difficult market conditions with intense and growing competition from both larger banks and non‐bank lenders, a relatively difficult interest rate environment that places pressure on margins, and a heightened regulatory and compliance burden.
Community bankers are also increasingly facing an additional challenge with the rise of FinTech and its vast array of emerging companies and technology innovations in different areas of financial services. FinTech is a challenging strategic threat to assess for banks since competition is coming from startups focused on addressing a number of core banking services. While many bankers view FinTech as a potential threat, FinTech offers the potential to improve the health of community banks for those banks that can selectively leverage FinTech to enhance performance and customer satisfaction and improve profitability and returns. FinTech can also help level the playing field for community banks to compete more effectively with larger banks and non‐bank lenders.
This book seeks to illustrate the potential benefits of FinTech to banks, both large and small, so that they can gain a better understanding of FinTech and how it can create value for their shareholders and enhance the health and profitability of their institutions. We provide a map of the FinTech industry and present guideposts for navigating the sector so that different parties (investors, entrepreneurs, and traditional financial services companies like community banks) can enhance customer/product offerings, improve efficiency/cost structure, and ultimately profit by creating strategic value as financial services and technology increasingly intersect.
Section One introduces the reader to FinTech and discusses the reasons behind the excitement and interest in the sector globally and, more specifically, for financial services in the United States. Additionally, we examine how FinTech can help community banks close the performance gap with larger banks and enhance customer services offerings, efficiency, profitability, and valuations in a challenging operating environment. Lastly, we delve into the history of FinTech to determine themes and trends from some of the more mature FinTech companies. For those bankers still skeptical of the power of FinTech, consider the time and money saved by both customers and bankers through the use of the ATM, an earlier FinTech innovation that we discuss in Chapter 3. Imagine the lines at banks before a long holiday weekend if that were the only place to go and get cash, as well as the inconvenience of being unable to obtain cash on a Sunday or holiday because all of the bank's branches were closed.
Section Two discusses several FinTech niches that have great potential for banks. Each chapter focuses on a particular niche (Bank Technology, Alternative Lending, Payments, Wealth Management, and Insurance). We provide an overview of emerging trends in each particular FinTech niche and highlight certain FinTech companies that have developed in these areas. Finally, we discuss key insights that can be gleaned from the successes of these emerging FinTech companies. The case studies presented hopefully provide guideposts for bankers as they assess the vast array of companies in the FinTech ecosystem and that particular niche.
Despite the potential benefits of FinTech for community banks and vice versa, significant challenges exist for community banks considering FinTech opportunities. Community banks typically operate with a leaner technology staff and the appeal of FinTech can often be overshadowed by the breadth of the landscape. Lastly, there can be significant cultural, valuation, and risk differences between banks and FinTech companies, which can make partnerships and mergers between the two difficult.
Consequently, Section Three attempts to address some of these issues in greater detail and illustrates how both financial institutions and FinTech companies can create strategic value from improving one or some combination of the three primary valuation elements of cash flow, risk, and growth. For those interested in pursuing FinTech opportunities, they present traditional financial institutions with a number of strategic options, including focusing on one or some combination of the following: building your own FinTech solutions, acquiring a FinTech company, or partnering with a FinTech company. While we do not yet know which strategy will be most successful, we do know that discussions of whether to build, partner, or buy will increasingly be on the agenda of boards and executives of both financial institutions and FinTech companies for the next few years. In Section Three, we discuss a range of topics that should assist banks with analyzing these strategic options, including how to value a FinTech company and the pros and cons of partnership and acquisition strategies, and provide an introduction to the frameworks and return analyses banks can use to analyze and structure potential FinTech partnerships and mergers.
FinTech is an increasingly important topic for bankers seeking to navigate complex and difficult market conditions. As FinTech continues to spread across the financial landscape, banks of all sizes are beginning to craft their responses and prepare to either embrace future innovations as an improvement to their business models or attempt to shield their business models from potential disruption. Banks are starting to realize that they must develop a strategy that considers how to evolve, survive, and thrive as technology and financial services increasingly intersect. For these reasons, a number of banks are seeking to engage in discussions with FinTech companies. The right combination of technology and financial services through a partnership has significant potential to create value for both FinTech companies and traditional financial institutions.
FinTech presents the financial services industry with a unique opportunity to both increase revenue, particularly non‐interest income, while also lowering costs and improving efficiency. In order to harness the potential of FinTech, bank managers and directors need to understand which FinTech niches best suit their business model and also how to prioritize FinTech initiatives and compare their potential to other strategic initiatives in order to focus on those areas that generate returns and enhance valuation. Similarly, FinTech entrepreneurs need to understand the financial services and banking landscape to be able to discern whether they should approach the industry as a partner, disruptor, or some combination of the two. Therefore, this book should also benefit FinTech companies and entrepreneurs who will gain a greater understanding of the challenging conditions facing banks, how their innovations can create value, key valuation drivers, and how to structure mergers and partnerships with banks.
Globally, banks face many of the same difficult market conditions and challenges currently affecting U.S. banks. However, it is an exciting time to be in financial services. Similar to innovations like the printing press or the steam engine or assembly‐line manufacturing that led to significant changes in their respective industries, FinTech offers a unique opportunity to transform the financial services industry while also improving the greater good and providing better and more efficient services for customers, including many un‐ and under‐banked people around the globe. FinTech also offers those countries with a weak financial infrastructure the opportunity for greater financial inclusion by providing financial services like banking, insurance, and wealth management at lower costs through digital channels. This can have a profound impact on people's lives and create profitable business models for banks and innovative FinTech entrepreneurs.
We are still in the early stages of development of a number of FinTech niches and innovations. For example, an innovative development in banking the last few years has been the use of mobile check deposit, which entails writing a physical check and snapping a picture on the phone. As a user of this product, I must admit that it is very convenient and something that I use often as it saves me a trip to my local bank branch. While this is innovative, it is not a fully digital deposit system as it still requires a paper check and doesn't reduce the time spent writing the check or replace the inconvenience when you are out of paper checks.
As the FinTech industry evolves, it will be interesting to see whether idiosyncrasies like depositing a check persist and also whether this dichotomy continues to exist between FinTech, its many niches, and traditional financial services. One can certainly envision a financial services industry in the future where the remaining successful companies combine the best elements of both traditional financial services and FinTech and the two industries converge.
Thanks for taking the time to read this book and please feel free to reach out with comments or questions. In addition to having a keen interest in community banking and FinTech, I am also an avid tennis player. As such, I forewarn the reader to expect a few tennis analogies and stories in different sections of the book.
Acknowledgments
Thanks to my family (my wife Becky, son Connor, and daughter Sadie) for putting up with my time away from them and sometimes my sleepiness while working on the book. Other friends and family have also been sources of encouragement and support as the book came into being, and I would like to extend my thanks to them as well.
The idea for this book was first discussed with Barbara Price, Mercer Capital's chief marketing officer, in mid‐2015. More likely than not, this book would not have been the end result of those conversations without Barbara's assistance and encouragement. Additionally, I would like to thank the staff at Wiley for providing editorial guidance and also a listening and an encouraging ear to those initial conversations in mid‐2015.
A number of colleagues assisted with the development of the book and I am very grateful for their contributions. Specifically, I would like to thank our marketing associates, Stephanie Wiggins, Connor Bran, and Tammy Falkner, for working on edits and making the charts and cover look great. Also, thanks to my summer 2016 associate, Tripp Crews, who assisted with the preparation of the book by researching and drafting certain sections. He contributed greatly to portions of Chapters 1, 3, 6, and 7, as well as portions of Chapters 4 and 5. Additionally, my colleague, Lucas Parris, and another summer associate, Michael Anthony, provided significant assistance for the insurance technology chapter (Chapter 8). They have my thanks. I would also like to extend my appreciation to all my colleagues at Mercer Capital for encouragement, assistance, feedback, and general support for the book.
Also, thanks to the many clients with whom I have worked over the years. The projects I have worked on for these clients and the resulting relationships have exposed me to a number of different segments and sectors within both community banking and FinTech and this has helped to frame my perspective and insights on a number of issues.
SECTION One
Section One of this book introduces the reader to FinTech and discusses the reasons behind the excitement and interest in the sector globally and more specifically for financial services in the United States. Additionally, we examine more specifically how FinTech can have a significant impact on community banks through opportunities to enhance customer service offerings, efficiency, and profitability in a challenging operating environment. Lastly, we delve into the history of FinTech to determine themes and trends from some of the more mature FinTech companies.
Chapter 1 is titled What Is Financial Technology? We answer that question and present an overview of current trends in the FinTech industry. We also provide perspective on why FinTech is important and receiving significant attention from investors, regulators, entrepreneurs, and management/boards of traditional financial services companies.
Chapter 2, Community Banks and FinTech, discusses traditional bank valuation trends and drivers and shows how incorporating FinTech into your bank's existing strategy can help improve the profitability and valuation of your community bank. This chapter is also important for FinTech entrepreneurs as it demonstrates the potential value proposition for FinTech companies in the community banking sector. Successful FinTech companies need to be able to demonstrate their potential to improve the profitability and valuation of banks in order to attract them as customers or partners.
The Historical Context for Fintech is presented in Chapter 3. This chapter walks through the history of FinTech, including ATMs, electronic stock exchanges, and core vendors. We also look at the largest IPOs in the industry's history. This history lesson should help the reader understand what might be important in today's FinTech environment.
CHAPTER 1What Is Financial Technology?
TECHNOLOGY'S IMPACT ON FINANCIAL SERVICES
Tennis was invented a long time ago. How long ago? Well, it depends upon whom you ask. Similar to a number of other sports, the origins of tennis are unknown. The earliest records of the sport include paintings of European commoners and royals batting a ball around. However, the history of modern (lawn) tennis is clearly documented, as it was first publicly announced in March of 1874 by two British papers. The announcement included a patent for “A Portable Court of Playing Tennis,” which included a history of the sport, instructions for how to set up the court, and rules of the game.
While basic tenets and elements of the game have remained similar over the years, tennis continues to evolve with changes to scoring, court surfaces, equipment, and playing styles. A key driver of these changes is the influence of technology. The development of stronger and lighter materials for a variety of industrial purposes would not at first glance be noted as a key driver of change in tennis, but these changes had a significant impact on the game. Graphite and other stronger, lighter synthetic frames are commonplace in the game today. The last wooden racket appeared in a major tournament in the 1980s. The confluence of technology and design affects balls, court surfaces, and even the pristine grass of Wimbledon. Many players now regularly use high‐tech training tools to improve their fitness and stroke mechanics.
Despite these significant advances in the game over the years, tennis is not a sport that is linked with technology and a spectator at Wimbledon today would still recognize the sport if shown images from the tournament in the early 1900s. For these reasons, tennis is often referred to by pundits as being “steeped in tradition” and viewed by outsiders as a game that is slow to evolve. They can point to certain things like players still hitting the same basic strokes and the biggest tournaments still being held at some of the same venues (Wimbledon has had a tournament since 1877).
While we do not foresee those in financial institutions like banks, wealth managers, or insurance companies picking up tennis rackets anytime soon, there are a number of parallels between the evolution of tennis and the evolution of financial services. Like tennis, certain basic tenets and activities of financial services (such as depositing money, paying for goods/services, and borrowing/lending funds) have existed in some fashion for many centuries and are not expected to change in the future. However, a number of changes have occurred in the past and will continue to occur within financial services as technology increasingly intersects with financial services.
There is much excitement around technology and its potential applications within financial services as a number of pundits and analysts foresee a growing number of applications and improvements for the sector. Consumers are also increasingly asking for and adopting new technology applications. While the term TenTech (short for tennis tech) has yet to grace magazine covers and TV headlines, FinTech (or financial technology) has become commonplace in major magazines, newspapers, and TV stories within the financial services sector. The excitement around FinTech is difficult to gauge but the expansion in Google searches of the term FinTech and the global dispersion of those searches provide some benchmarks and evidence of the growing level of excitement. (See Figure 1.1 and Table 1.1.)
FIGURE 1.1 Google Search Trends for “FinTech”
TABLE 1.1 Top Search Trends for “FinTech” by Country
Source: Google Trends
1
Singapore
10
Japan
2
Hong Kong
11
Australia
3
South Africa
12
Netherlands
4
South Korea
13
Canada
5
Taiwan
14
United States
6
Switzerland
15
Argentina
7
India
16
Spain
8
United Kingdom
17
France
9
Germany
18
Italy
Given the growing interest in FinTech, let's address a few questions about FinTech: “What is financial technology and who are the players?,” “Why is there so much excitement about FinTech?,” and “Why is FinTech potentially so important for society?” By examining these key questions, we can gain a keen understanding of the topic.
WHAT IS FINTECH AND WHO ARE THE PLAYERS?
Historically, FinTech was limited to back‐end software of financial institutions (banks, insurance companies, wealth managers, investment banks, etc.). More recently, the term has been expanded to include any technological innovation in finance. We define FinTech for purposes of this book as: companies that primarily use technology to generate revenue through providing financial services to customers either directly or through partnerships with traditional financial institutions.
With a working definition of FinTech, let's examine the key players and recent trends in the sector. Keep in mind that categorizing a FinTech company can be difficult as it is much like trying to categorize an all‐court tennis player as a baseline, serve‐and‐volley, or counterpunching player. The types of financial services provided by FinTech companies can vary—ranging from technology for traditional financial services such as wealth management, insurance, payments, and banking to newer, innovative areas such as peer‐to‐peer lending or blockchain technology. There are also a number of technology companies that offer some form of financial services and traditional financial institutions that leverage technology to offer financial services. For example, Apple developed ApplePay, which offers mobile payment services for Apple iPhone users and could on its own be considered a payments or FinTech company. Thus, ApplePay would clearly be classified as a FinTech offering but Apple would likely not be a FinTech company given the expanse of its other non‐FinTech products and services with its FinTech offerings comprising only a small proportion of revenues.
Having historically invested heavily in technology, most (if not all) traditional financial institutions offer myriad technology applications. For example, Lloyd Blankfein, the CEO of Goldman Sachs, has referred to Goldman Sachs as a technology company.1 Many community banks located in rural markets are often some of the more technologically advanced companies in their community. However, these traditional financial institutions would not be included within our definition of FinTech companies because traditional banking services, rather than technology, serve as the primary revenue driver.
These examples illustrate the difficulty in distinguishing between FinTech and traditional financial services—a trend likely to increase as FinTech companies become more like traditional financial institutions and traditional financial institutions become more like FinTech companies. For example, a few publicly traded banks rely more heavily on technology and less on a traditional physical branch footprint. One such example is Live Oak Bancshares (LOB) or First Internet Bancorp (IBNK). In the online brokerage space, Schwab and E*Trade can be classified as FinTech companies although they have acquired and operate bank subsidiaries offering traditional banking services such as deposit accounts and loans.
While reports vary on exactly how many FinTech companies there are, McKinsey noted that there were approximately 12,000 FinTech companies worldwide.2 What reports agree on is the number of FinTech companies is growing daily as funding and interest in the sector increases. The universe of publicly traded FinTech companies is a smaller subset, but as seasoned, mature companies, they represent a notable group of FinTech companies. Their public disclosures also provide benchmarking financial information useful in tracking sector trends.
Public FinTech Companies by Niche
On that note, let's take a closer look at the publicly traded FinTech niches. Publicly traded FinTech companies can be broken into three primary niches—Payments, Solutions, and Bank Technology.
The
Payments
niche includes companies that facilitate and/or support the transfer of money, particularly non‐cash transactions. Key sub‐niches include
processors
that provide solutions related to the transfer and processing of money and
software/hardware companies
that provide software/hardware that primarily supports the transfer and processing of money. At June 30, 2016, there were 32 publicly traded U.S. FinTech companies in the Payments niche and the total market cap of these companies was $458 billion (with a median market capitalization of $2.8 billion). The top three largest public U.S. FinTech Payments companies include Visa Inc. ($176.9 billion market capitalization at June 30, 2016), MasterCard Inc. ($96.8 billion), and Automatic Data Processing Inc. ($41.9 billion).
The
Solutions
niche includes companies that provide technology solutions to assist businesses and financial institutions with financial services. Key sub‐niches include
outsourced
companies that are third‐party providers of FinTech solutions,
payroll/administrative
companies that improve the human resources function through technology, and
content
companies that provide content/research that supports financial services and decision making. At June 30, 2016, there were 33 publicly traded U.S. FinTech companies within the Solutions niche and the total market cap of these companies was $197.7 billion (with a median market capitalization of $3.4 billion). The top three largest U.S. FinTech Solutions companies included IMS Health Holdings Inc. ($12.5 billion market capitalization at June 30, 2016), MSCI Inc. ($7.4 billion), and Jack Henry & Associates ($6.9 billion).
The
Technology
niche includes companies that provide software and services to one of three different financial services subsections, including Banking, Investments, and Healthcare/Insurance. At June 30, 2016, there were 22 publicly traded U.S. FinTech companies within the Technology niche and the total market cap of these companies was $55 billion (with a median market capitalization of $1.6 billion). The top three largest U.S. FinTech Technology companies included Intuit Inc. (market capitalization of $28.6 billion at June 30, 2016), Fiserv Inc. ($24.2 billion), and Fidelity National Information Services Inc. ($24.1 billion).
In addition to the FinTech niches noted above, there are other publicly traded companies in the United States that have significant FinTech offerings and would also meet our definition of FinTech companies such as online brokers and alternative online lenders. At June 30, 2016, four U.S. FinTech companies within the Online Broker niche were publicly traded (The Charles Schwab Corporation [SCHW], TD Ameritrade [AMTD], E*Trade [ETFC], and Interactive Brokers Group [IBKR]) and the total market cap of these companies was $57.3 billion with a median market capitalization of $10.8 billion. At June 30, 2016, two U.S. FinTech companies (OnDeck Capital [ONDK] and Lending Club Corporation [LC]) within the Alternative Online Lender niche were publicly traded and had market capitalizations of $364 million and $1.6 billion, respectively.
As you can see, the scope of the FinTech industry is vast with a number of publicly traded FinTech companies to analyze in order to track developments and investor sentiment. For bankers, managers, and investors in traditional financial services companies, this rise of FinTech and its vast scope of company type (for both public and private FinTech companies) is a challenging strategic threat to assess. Many FinTech companies are essentially unbundling the bank's core services and leveraging technology to provide a unique solution only to one particular service (such as payments, lending, billing, underwriting, investing, or compliance). While the majority of FinTech companies do not offer all of the services that even a small community bank does, collectively they are a formidable competitor. This presents a difficult problem for banks and other traditional incumbents to combat since competition is coming from a variety of areas and addresses a number of core services.
FinTech and U.S. Financial Institutions
While there are a number of potential applications for technology in other industries, there are a few basic elements of the financial services industry that make it particularly attractive for technology. For example, the business models of traditional financial institutions like banks, insurance companies, and wealth managers are unique from one another but share common characteristics. Because this book is focused on financial institutions specifically, let's explore the common characteristics of financial institutions and the role that FinTech can play.
Profitability
The first common characteristic is profitability. Financial institutions have historically been profitable and collectively are in a highly profitable segment. Savvy technology entrepreneurs and venture capitalists are recognizing that these market conditions in other industries have historically enabled technology companies to develop and prosper.
To gain some perspective on the size and profitability of financial services, consider that the financial services industry adds the largest proportion of value to U.S. GDP (Table 1.2).
TABLE 1.2 Value Added to U.S. GDP by Industry (billions of dollars)
Source: Bureau of Economic Analysis Release Date: April 21, 2016
2015
% of Total
Gross domestic product
17,947
Private industries
15,623
Agriculture, forestry, fishing, and hunting
196
1%
Mining
305
2%
Utilities
288
2%
Construction
717
4%
Manufacturing
2,168
12%
Wholesale trade
1,080
6%
Retail trade
1,050
6%
Transportation and warehousing
528
3%
Information
868
5%
Finance, insurance, real estate, rental, and leasing
3,636
20%
Professional and business services
2,192
12%
Educational services, health care, and social assistance
1,492
8%
Arts, entertainment, recreation, accommodation, and food services
704
4%
Other services, except government
400
2%
Government
2,324
13%
With the exception of tobacco, banks were the most profitable (as measured by net income as a percentage of revenue) of any industry. Other related financial services industries, like asset managers and non‐bank financial services and insurance companies, were also highly profitable and in the 96th and 93rd percentile respectively (Table 1.3).
TABLE 1.3 Net Income as Percentage of Revenue of Financial Institutions
Source: Aswath Damodoran, http://pages.stern.nyu.edu/∼adamodar/New_Home_Page/datafile/margin.html
Industry Name
Net Income–Based Net Margin
Rank (1–95)
Percentile
Bank (Money Center)
24.48%
2
99th
Banks (Regional)
24.33%
3
98th
Financial Svcs. (Non‐bank & Insurance)
14.82%
5
96th
Insurance (General)
10.49%
49
49th
Insurance (Life)
7.13%
36
63rd
Insurance (Prop./Cas.)
9.82%
29
71st
Investments & Asset Management
3.69%
8
93rd
Basic Necessity
Another common characteristic of financial institutions is that the financial services they offer are a basic necessity. While one can imagine a world where the delivery vehicle for companies that provide basic financial services is different and largely digital, it is hard to imagine a world without financial services for payments, deposits, lending, borrowing, and investing.
Regulation
Regulation is yet another common characteristic of financial institutions and that regulatory burden has increased over time, particularly since the Great Recession. This offers opportunities for technology solutions that can alleviate regulatory/compliance issues. Heightened regulation also tends to limit a traditional financial institution's ability to innovate, which increases its need and desire for FinTech partners and solutions.
Legacy Systems with Hope of Innovation
Another challenge to innovation is the fact that financial services is such a mature industry and companies rely on a number of legacy technology systems. Legacy technology systems are, in many cases, not enough in today's environment. This has created an opening for new technology companies and applications within the sector to develop. Technology entrepreneurs often look for problems to solve. There are a number of problems related to modernizing the legacy systems of traditional financial institutions and reducing friction for services and applications that customers are increasingly demanding.
Financial institutions are attempting to foster innovation either internally, through partnerships with startups, by sponsoring corporate accelerators/incubators, or by strategic investments/acquisitions. While these traditional financial services companies are increasingly looking to innovate, they are also considering how to innovate responsibly by managing potential risks and selectively determining how to incorporate FinTech into their strategic plan.
Current Environment
For many financial institutions, the prolonged period of lower interest rates is crimping profits and increasing interest in technology that can serve to provide financial services and products more efficiently and at lower costs.
WHY THE HYPE FOR FINTECH?
As technology improves and becomes ubiquitous in our everyday lives, consumers expect better technology offerings of financial services. Regulated and often complex, the nature of financial services presents unique challenges to innovation and society, but particularly the Millennials. Millennials are becoming more comfortable using digital (online and mobile) services in other areas of their lives and are increasingly looking for similar services for their financial lives.
FinTech and financial institutions that effectively utilize FinTech applications will have tailwinds for growth in the coming years, as the trend toward digital continues and Millennials acquire more financial assets. For example, Ernst & Young's “EY FinTech Adoption Index” noted only 15.5 percent of digitally active consumers had used at least two FinTech products in the last six months.3 This implies a large potential for sector growth for companies that can adapt and adopt technology.
Ease of use (“easy to set up an account”) was the top reason cited for the consumer adoption of FinTech per the EY Index. Other reasons for using FinTech were that it offered better user experience and functionality as well as better quality of services. Interestingly, the Index noted that FinTech appealed to wealthier clientele with over 50 percent adoption by those under age 54 and whose earnings were greater than $150,000. The FinTech Adoption Index also noted that the most frequent users tended to be those in urban areas. According to the Index, “Early FinTech adopters tend to be younger, higher‐income customers, with adoption concentrated in high‐development urban areas such as New York, Hong Kong, and London. These users are some of banking and insurance's most valuable customers and traditional providers must reconsider the way they meet these users' needs if they want to stem the flight to FinTech.”
In addition to meeting customer demands, other reasons why FinTech is becoming increasingly important include:
In order for financial institutions (banks, insurance, asset managers, alternative lenders) to survive and thrive in the future, different parties (investors, traditional incumbents, and entrepreneurs) must work together to modernize the traditional legacy technology infrastructure.
A significant proportion of the global population is unbanked or underbanked and applying technology to the financial services industry is viewed as one way to both expand and improve services to this significant but underserved proportion of the population. Additionally, financial health and literacy are global issues and a number of FinTech innovations offer opportunities to improve financial health and literacy around the world.
Millennials are driving change in finance and other industries. Those financial institutions that are well positioned for Millennials will likely outperform those that are not. Millennials tend to be more comfortable using digital channels for financial services. As they acquire more financial assets, financial institutions that can leverage FinTech to meet Millennials' preferences will garner a tailwind for forward growth.
Recent technology developments have allowed financial technology to rise. For example, the development of the computer chip, personal computer, laptop, and cell phone have all helped lay the foundation for the environment that we see today on which a number of FinTech companies can build. As consumer preferences have shifted toward using technology as a first means of interacting with other vendors, financial services has followed suit.
In summary, the hype surrounding FinTech is largely premised on the financial services industry being both large and profitable and having many potential applications for technology. This combination of large entrenched incumbents with historically profitable business models where customers are increasingly demanding more digital services provides an attractive market for FinTech companies to develop. While it is hard to know what percentage of the global financial services market is available for disruption, the size of the potential market and the possible applications for technology, as well as consumers' desire to use it, are massive.
WHY IS FINTECH POTENTIALLY SO IMPORTANT TO SOCIETY?
As previously noted, FinTech offers the opportunity to expand financial services offerings to un‐ and underbanked portions of society, and many emerging markets are especially ripe. These ripe conditions include large populations of un‐ and underbanked people and high concentrations of mobile phone subscribers. FinTech offers those countries the opportunity for greater financial inclusion by providing financial services like banking, insurance, and wealth management at lower costs through mobile channels. This can have a profound impact in people's lives and create profitable business models for innovative entrepreneurs.
One area where FinTech has already started to show its potential to impact society in emerging markets is sub‐Saharan Africa. Sub‐Saharan Africa itself has a high percentage of mobile bank account users compared to other regions (excluding high‐income OECDs) as noted in Figure 1.2. More specifically, mobile bank account users in Kenya and Zimbabwe far outweigh those in comparable countries. In Kenya, 74.7 percent of the adult population has a bank account—a very high number for the region—and the vast majority of those with bank accounts have a mobile bank account (58.4% of the population). In Zimbabwe, 32.4 percent of the adult population has a bank account. The vast majority of those with a bank account have a mobile bank account (21.6% of the adult population).
FIGURE 1.2 Disparity in Mobile Banking Account Usage between Sub‐Saharan African Countries and Upper‐Middle‐Income Countries
Source: Global Financial Inclusion Database of the World Bank Group's “The Little Data Book on Financial Inclusion,” 2015
There are many reasons for this rise in mobile money usage in sub‐Saharan Africa, but a desire for financial inclusion, a need to lower transaction costs, and mistrust of financial institutions all serve as key drivers of this rapid growth of mobile money. Africa has a massive unbanked majority, creating a great want of financial inclusion in much of its population. Mobile money makes participation in financial markets accessible to everyone who carries even the most rudimentary type of cell phone with text messaging capabilities.
A need to lower transaction costs also aided the rise of mobile money, as much of the continent still functions as a barter economy. It is also impractical for small farmers and merchants to hold their earnings in African banks, as high fees can dissipate their entire income in a year in some cases. Mobile money can significantly reduce these fees for the customer and reduce the servicing expenses of the bank account for the provider. This allows low‐income earners the ability to build up larger balances than they would otherwise be able to by holding their money in a traditional bank. The fees charged by African banks, as well as other questionable practices, have created an air of mistrust in many countries, pushing consumer preference toward mobile money.
This rich environment for the growth of mobile money in sub‐Saharan Africa has also led to innovations within the continent in efforts to facilitate this growth and create more avenues for the use of mobile money. Perhaps the most useful of these innovations has been the creation of ATMs by mobile service providers that allow customers to withdraw cash by using a onetime PIN sent directly to the customer's phone by text message. Startups that convert bitcoins from foreign currency to Kenyan shillings have also begun to emerge, shielding consumers against exchange rate risk by sending the converted currency straight to the user's mobile wallet. Other FinTech startups are also beginning to create systems that can facilitate and accept small payments to merchants through new business operating systems and software.
The rise of mobile money and e‐commerce in sub‐Saharan Africa has also been aided by adverse living conditions and disastrous events in the countries that are most receptive to the rise of mobile money. In 2008, post‐election violence in Kenya pushed many people toward the use of M‐PESA, a FinTech payments company that is the country's largest mobile money system, to transfer money into and out of the violent slums of Nairobi. In Nigeria, fear of the Ebola virus and terrorist groups forced people to stay at home and rely on mobile money systems and the Internet to acquire goods and services. Zimbabwe has also experienced multiple cash shortages in the past several years, encouraging the widespread use of mobile money.
Consistent with the factors driving the successful development of FinTech in sub‐Saharan Africa, tremendous opportunities exist for FinTech growth in other emerging and developing regions. Those areas with a high percentage of mobile subscriptions and a low percentage of bank account holders are particularly ripe for FinTech growth. These conditions can be found in Africa and India. In Africa, only 34 percent of the adult population has a traditional bank account while 83 percent has a subscription to a mobile account.4 Likewise, in India, 53 percent of the adult population has a bank account while 79 percent has a mobile account.5 The disparity in these two essential tools creates an environment conducive to the future growth of FinTech, as FinTech innovations can be used to close the margin between the two figures. (See Figure 1.3.)
FIGURE 1.3 Percent of Adult Population with Bank Accounts and Mobile Subscription Comparison between Africa and India
Source: Global Financial Inclusion Database of the World Bank Group's “The Little Data Book on Financial Inclusion,” 2015
Beyond just emerging and developing markets, though, developed markets like the United States are also ripe for FinTech to help address un‐ and underbanked populations. The FDIC noted opportunities for FinTech through mobile pay. A survey by the FDIC in 2013 noted that approximately 28 percent of U.S. households were unbanked or underbanked.6 Despite that, in the United States, the majority of adults have a bank account while a smaller proportion utilize a mobile bank account, which implies the potential exists for mobile account usage to continue to grow among both the banked and underbanked population.
RECENT TRENDS AND MARKET CONDITIONS FOR THE FINTECH INDUSTRY
Realizing the potential for FinTech to grow in both emerging and developed markets, venture capital interest in FinTech has been growing and continues to grow both in North America and globally, as noted in Figure 1.4.
FIGURE 1.4 FinTech Funding Trends (2011– First Half of 2016)
Source: The Pulse of FinTech Report 2Q16, KPMG, and CB Insights, 8/17/2016
FinTech's Rising Valuations and Strong Returns
Additionally, publicly traded FinTech companies have also benefited from the excitement around FinTech, outperforming the broader markets and enjoying rising valuations in recent periods, as shown in Figure 1.5. However, the market has been relatively volatile as investors weigh the prospects for heightened competition from new entrants, ranging from other technology companies to traditional financial institutions, continued evolution of consumer preferences and technology, and emerging risks such as regulatory and business model risks.
FIGURE 1.5 Public Returns: FinTech Indices vs. S&P 500
Source: S&P Global Market Intelligence and Mercer Capital
Consistent with recent historical growth patterns and near‐term outlook and excitement for FinTech, publicly traded FinTech companies remain priced at a premium to the broader markets with the S&P 500 priced at 16.6× estimated forward earnings in mid‐2016 (per FactSet). Additionally, valuation multiples have been expanding despite flat‐to‐declining margins for the FinTech sector (Figures 1.6 and 1.7).
FIGURE 1.6 FinTech Public Company Pricing Multiples: Median Enterprise Value/EBITDA Multiples
Source: Capital IQ, Mercer Capital Research
FIGURE 1.7 FinTech Public Multiples: Median EBITDA Margins (%)
Source: Capital IQ, Mercer Capital Research
Within the private company realm, FinTech valuations appear to be rising as well with FinTech “unicorns” (i.e., those private companies with an estimated market value of greater than $1 billion) growing and continuing to garner significant investor and media interest.
FinTech's Upward‐Trending Exits
The level of interest in FinTech is also paralleling the rising level of exit activity in both mergers and acquisitions as well as IPOs. For perspective, note the number of deals and median deal value increases in recent periods, as shown in Figure 1.8. Pricing details are often not reported for the majority of FinTech transactions, which limits the amount of reliable pricing metrics, but the data indicates a clear, upward pricing trend in recent periods.
FIGURE 1.8 FinTech M&A Overview (2011– First Half of 2016)
Source: S&P Global Market Intelligence
IPO activity slowed in late 2015 and 2016. There were eight FinTech IPOs in 2015 and 16 in 2014. Significant FinTech IPOs in 2014 and 2015 included: First Data ($2.3 billion in proceeds); Square ($279 million in gross proceeds); and Lending Club ($1 billion in gross proceeds).
