Fintech is a buzz word in investments circles, yet most investors understand very little about this market sector. In this article we outline the key points on fintech and explain how it can deliver great returns for early stage investors.
What is FinTech?
FinTech is an abbreviation for financial technology. It is an all encompassing term that refers to software, mobile applications, blockchain and other technologies created to improve and automate traditional forms of finance for both businesses and consumers. Whilst the term “fintech company” describes any business that uses technology to change, enhance, or automate financial services for businesses or consumers.
Fintech companies could relate to mobile banking such as Revolut, or peer-to-peer payment services such as Venmo and CashAp. Alternatively, fintech companies can also be automated portfolio managers such as Betterment or trading platforms such as Robinhood. The term can also apply to the development and trading of cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin.
As you can see fintech can include everything from straightforward mobile payment apps to complex blockchain networks housing encrypted transactions.
A background of FinTech
Fintech sounds very new. However, the basic concept has been around for a long time. Early credit cards in the 1950s generally represent the first fintech products available to the public. The technology eliminated the need for consumers to carry physical currency to make payments for transactions in their daily lives. Fintech then evolved to include bank mainframes and online stock trading services.
PayPal was founded in 1998. This was one of the first fintech companies to operate primarily on the internet. Today there are full financial services firms such as Revolut that operates on the internet.
How Does FinTech Work?
In essence fintech simplifies financial transactions for consumers or businesses, making them more accessible often with significantly lower fees. Fintech can also represent AI, big data, and encrypted blockchain technology to facilitate highly secure transactions.
Fintech’s purpose is to streamline the transaction process, removing any unnecessary steps for all involved parties. For example, mobile services facilitate immediate payments compared to outdated ways of paying such as a check.
- Digital banking continues to grow: Digital banking is easier to access than ever before. The simplicity and convenience of mobile banking will continue to drive additional growth in this sector.
- Blockchain: Blockchain technology allows for decentralised transactions without a government entity or other third-party organisation being involved. Blockchain technology and applications have been growing quickly for years, and 2022 is likely to continue this trend as more industries turn to advanced data encryption.
- Artificial Intelligence (AI) and Machine Learning (ML): These technologies have changed how fintech companies scale, and changed the way companies interact with their clients. This tech can reduce operational costs detect fraud and offer better value to clients.
The tech in FinTech
Fintech today is driven by AI, big data, and blockchain technology. This redefines how companies transfer, store, and protect digital currency. Specifically, AI can provide valuable insights on consumer behaviour and spending habits for businesses, allowing them to better understand their customers.
Whilst Blockchain, a newer technology within finance, allows for decentralised transactions without inputs from a third party thus removing the need for a central exchange.
This sounds great but how does it make investors’ money?
Better returns for investors
There are a number of key benefits for investing into fintech companies.
As fintech is about using technology to streamline processes, the technology reduces the cost to a businesses whilst simultaneously improving the customer’s experience. This means that a company can use the underline technology to create more sales revenue whilst increasing its profit margin at the same time. This is a win-win for the investor.
Furthermore, due to improved profit margins, they can undercut existing business and target rapid growth. This means greater returns to investors.
More resilient business model
When a company has low profit margins, a change in the external market (i.e. the economy) can quickly turn a money making business into a loss making one. However, if a company’s profit margins are higher, its business model is more resilient. As investors like resilient companies, with higher profit margins, these types of companies will trade at far higher price-to-earnings ratios. As a result, this benefits early-stage investors.
If the company operates a franchise model the company with the tech will rapidly gain franchisees as the tech results in a better service to the end user and reduced costs to the franchisee.
Most early stage fintech companies offer considerable tax advantages. This is because they qualify for SEIS and EIS investment. These schemes offer exceptional tax breaks. They can also qualify for R&D breaks as well.
Later-stage funding for fintech companies has proven to be very fruitful. Companies operating in private equity understand the benefits of disruptive technology so are keen to provide the venture capital needed to scale a business.
Fintech in action
In 2015 Revolut raised just over £1,000,000 from 433 investors in an EIS-qualifying investment. Two years later these early-stage investors toasted a 19 times return on their investment. Revolut has continued to go from strength to strength, and by 2021 the company was valued at $33 billion.
PropTech is a form of fintech which focuses of technology specifically relating to real estate. There are quite a few developments in this sector including smart contracts and tokenisation of real estate.
PropTech in action
In 2009 Zoopla raised money for its technology through the Enterprise Investment Scheme. Fast forward to 2014 the company floated on the London Stock Exchange with a listing value on its IPO at £919 million. After listing, Zoopla quickly broke the £1 billion market capitalisation value. It became another fintech unicorn that used EIS to catapult the company to the big leagues.
Esper Wealth is an early-stage growth company operating in the property sector. Our company has developed exceptional PropTech which is set to disrupt the way property is bought and sold in the UK. We aspire to become the market leader in digitalised real estate. Currently, we are raising finance through SEIS and EIS to suitably qualified ‘high-net-worth’ and ‘sophisticated investors’, as well as ‘restricted investors’. These funds will be used to further develop our tech to scale our business.