The Fintech Revolution – A Chance for Consumers and Banks?
The fintech sector is changing finance. Greg Grimaldi, who co-manages a Credit Suisse fund focusing on identifying growth-oriented fintech firms, shares his views on the sector, its future and its impact on finance.
Dorothée Enskog: How would you define the financial technology (fintech) sector?
Greg Grimaldi: There is no single accepted definition of the “fintech” sector. In Credit Suisse Asset Management we use a broader definition. We include any product or service that affects financial institutions, ranging from trading platforms and marketplace lending to data security and database management. It might not sound like financial technology, but all are used by and impact the financial services sector.
In more general terms, fintech is the provision of financial services to consumers, businesses or institutions in an online or automated manner, from robo-advisers to online credit card management where you can manage your own credit card scores.
Which more specific fintech areas do you find particularly interesting right now?
The changes in the regulatory environment have created numerous investment opportunities for financial institutions like Credit Suisse. Their common denominator is that traditional financial institutions are not present in normal transactions.
Marketplace lending, for example, is growing in the US because banks don’t lend to consumers on an unsecured basis. The only option a consumer has is to hold a credit card. So the decline in trading has nothing to do with marketplace lending.
In the institutional space, increased regulatory pressures have led many banks to reduce their market making activity in certain asset classes. There’s been a significant gap in the financial markets that is being filled by unregulated, non-bank entities.
In both cases, the vacancies that have been created interest us most. Traditional lenders are not providing certain financial products or services any longer, either, because they are not allowed to or they have chosen not to do so.
What do you look for in a company before investing in it?
We look at the market opportunities and ask: ‘What is the scale of the business opportunity that we are looking at?’ We are seeking growth: big market opportunities with big growth potential. This is obviously tempered by the competitive landscape: How many other players are trying to do the same thing and what barriers does the company have to protect itself from competition? Is the company being looked at as a follower or a leader?
The other major factor we look at prior to investing is the management team. We invest long term, so we need to trust the managers in place. We look for teams we can trust, with the right experience and the right makeup in terms of character.
How are clients reacting to these new fintech services?
There has been a great demand for a new approach to lending, particularly on the consumer side. Take marketplace lending for instance, where companies lend unsecured money online to borrowers without going through a regulated financial institution. It has gained significant interest and seen early success. There is a huge market need. The interest rate charged on revolving credit card debt often exceeds 20 percent, while marketplace lenders typically offer savings of 25 percent or more. The current development is a clear win for consumers.
On the institutional side, certain fintech services have been adopted very easily when they provided solutions to immediate needs. The foreign exchange (FX) market is a good example. We believe the FX market place is evolving and moving toward independently operated exchange venues. There’s been less innovation in FX market structure compared with the equity market. We have invested in companies that have applied some of the market innovations that worked very well on equities and applied those to FX. This has been very well received. In other markets fintech hasn’t worked. Just look at fixed-income. It’s very difficult to make electronic trading work here, but momentum is clearly building.
How are tougher regulations affecting the fintech sector?
It’s a clear opportunity for the fintech sector. Banks are not allowed to offer certain services anymore, so others will do so for them. Regulators are not seeking to control the trade of the booming fintech sector. Their role is to control banks so they do not take on certain risks regulators deem excessive. Prior to the financial crisis, banks could use the deposits made by their clients to make very highly leveraged investments. This is no longer the case.
Investors view it as a strong sector right now and want to invest in fintech.
How do you see the fintech sector evolving during the coming decade?
The sector evolves very quickly. As regulations won't go away, but only get stronger, the entire (fintech) industry is being pushed toward exchanges. There is a continuous trend toward more transparency on those marketplaces.
If you look at big markets such as fixed income and FX, they are still largely operated by voice, leaving little transparency. There is no central way to see what is going on in a particular product. This has to change in order to reach the same volume or liquidity as the equity market. One side effect of regulations has been lower liquidity – a crucial factor for the financial markets.
On the consumer side, there is a continuous trend toward the automated delivery of financial services such as a mortgage, a loan, a car insurance… online. The question is whether online platforms ultimately will replace broker markets. Will they be able to add some value? This will drive the ultimate success or failure of the online platforms.
How stiff is the competition among venture capitalists and other investors to invest in this sector?
It's very competitive. Investors view it as a strong sector right now and want to invest in fintech.
Who has the greatest competitive advantage?
Banks. They have a long history of investing in technological services and spend very large amounts on technology. On the other hand, you have fintech companies that aim to access customers. If a bank is a customer and the bank's customers are customers, then all those introductions are very valuable to the fintech company. They also give the fintech company access to executives they may want to hire or potential partnerships…
What advice would you give an entrepreneur looking for an investor?
Look for the investor who will add the most value to your business. In the case of fintech, this investor may likely be a financial institution for the reasons just mentioned. Look for the investor with the most value to add and with the fewest strings attached.
What are the return rates of the types of funds focusing on private growth equity?
Overall, the performance is in line with that of venture capital. It's a good opportunity to make very good returns because there is so much growth in this market despite the level of competition.