Investors must be wary of focusing solely on tech unicorns when playing the digital revolution sweeping through the financial system, AXA Investment Managers’ Vincent Vinatier says.
Both newcomers and established financial services providers have the potential to dominate the nascent digital transformation taking place in the financial world, with investors likely to miss out if they focus solely on emerging business.
Changing consumer behaviour has already seen banks and other global financial institutions ramp up investment in technology as they seek to stay ahead of competition from peers, as well as from new fintech businesses. As a result, total IT spending by banks alone is forecast to hit $296.5bn globally by 2021.
Vinatier, manager of the AXA WF Framlington FinTech fund, says there will be winners among both the established names as well as the new players in this market, and the infrastructure providers supplying solutions to both.
“Financial services firms are aware that with the market continuing to transform at a rapid rate, it’s a case of disrupt or be disrupted,” he says. “This is particularly true given the emergence of challenger banks, many of whom have been able to react quicker to the digital revolution and build their technology around customers’ needs today. These newcomers – which also include non-bank payment institutions and large tech companies – now command around one-third of revenue growth in Europe.”
While it may seem like the best route is to focus on the emerging players, Vinatier says many established names are fighting back. “Digital challenger banks still face stiff competition from established banks, with many customers inclined to stick with what they know,” he says.
“Nonetheless, it is crucial for the established retail banks to invest more in their own technology in order to keep pace with digital transformation and these digital disruptors. Therefore, for investors a barbell approach is needed.”
Vinatier, whose fund has returned 27.42% year-to-date versus the MSCI World return of 16.49%, explores some of the established names, disruptors, and enablers at the forefront of the digital financial revolution below: –
The old guard:
“JP Morgan has increased its tech budget by $600m to $11.4bn for 2019, with the spend expected to be split between IT maintenance and innovation change. Such an investment will allow it to keep pace with the digital age and compete with new market entrants.”
“An emerging markets bank, HDFC was one of a number which has partnered with established tech players to ensure they remain ahead of the digital curve. In the case of HDFC, the Indian bank and three peers teamed up with Google – which holds vast amount of data on individuals in the country – to create a digital consumer loans business.”
“The Norwegian online-only bank, originally part of Skandia group, is an example of a pure digital play in the sector which we favour.”
“FinecoBank is a wealth manager gaining market share rapidly in Italy with one of the most advanced digital customer interfaces in the country. Italy’s market still has many small, local banks and that is a big opportunity for providers that have cutting edge digital capacity. If the incumbents do not have the resources to invest in their systems, then it makes it harder for them to integrate with the digital revolution, leaving FinecoBank well placed to exploit this.
The technology enablers behind the banks:
“As well as the old guard converting their businesses and the new players using cutting edge technology to fully capitalise on the digital revolution, there are also the technology enablers which act as the building blocks to be used by innovative leaders to build their own products and services. One such company is Temenos, a Swiss company which offers its own cloud-based software for banks to be able to launch digital products. This is a big area of growth within the wider financial services sector.”
“In the same space as Temenos is Q2, a white labelled digital services business, which allows regional banks to enhance and offer a digital service to customers without having to build their own from scratch.
“US-based, the company seeks to enable banks and credit unions to deliver secure digital experiences for customers by providing the back office platforms they need. It builds specific software which allows banks to offer app-based services for clients.”
 According to AXA Framlington data, year-to-date to the 21st June 2019.