Investment Opportunities Within Fintech & Borrowing/Lending
What is FinTech?
According to FinTech Australia, fintech is short for “financial technology” and is part of the worldwide innovation boom surrounding IT and “the future of financial services”.
As it is with almost all forms of Information Technology, fintech covers a wide variety of disciplines and fields of endeavour. Examples of services include:
- Automated financial advice
- Online whole-of-portfolio wealth visualization and planning
- Lending marketplaces
- Same-day International transactions
- Contactless payments
- Fractionalized and crowd-sourced property investment
- Peer-to-peer lending
In this article, we’re seeking to differentiate “fintech” companies and fields of endeavour that provide productivity benefits or automation that speed up transactions or simply make existing business models work better juxtaposed to disrupting market-changing offerings.
Investing opportunities in productivity/automation offerings are essentially not that different to FAANG stocks, IBM, Oracle, SAP, Dell, and a swathe of other well-known companies that have been operating in this space for many years.
Fintech offerings are no different from other IT stocks - unless they deliver market disruption.
Searching for fintech that delivers disruption, innovation and changes to entire workflows and business practice is where we believe there is substantial opportunity for educated investors to make solid returns in the medium to long term.
We want to highlight some key areas of interest to investors looking for alternative investment asset classes.
You may have noticed some retail lending offerings like Nimble or WalletWizard who advertise widely in mass media. This sector mostly offers small (up to $5k) personal/microloans that are unsecured. And while investing in some of them provides reasonable returns for investors (~5-8%), a quick internet search will reveal the lenders are mostly making exorbitant revenues, while attracting the ire of the regulators and consumer advocacy groups. The returns could probably be judged to be poor when considering investors are taking most of the capital risk.
Again, similar to B2C lending, the market has flourished with names including Molar, Prosper, TruePillars, ThinCats, GetCapital, the list goes on. Some 70 per cent of fintech firms in Australia provide services to businesses. Typically, these fintech firms advertise they have a better understanding of the needs of business owners, compared to traditional financial institutions, and therefore have filled market gaps.
For instance, some fintech firms have dramatically improved lending outcomes for small businesses, while others have reduced the time taken for businesses to be paid for their products from weeks to seconds. They use algorithm software-based solutions that analyses business P&L statements and based on cash flows and proven track record, will in many cases provide business finance unsecured.
Cloud-Based P2P Lending/Borrowing Platforms
With more and more technology moving from office-based computing to internet (cloud) based offerings, this latest technology trend has suddenly provided online market places for a vast variety of offerings including a market place where borrowers and lenders can meet and be brokered in a trusted environment.
The cloud offering provides the medium for lenders and borrowers to interact, in many cases anonymously, in order to satisfy each other’s needs, namely, the borrower needs capital which they aren’t able to get from traditional forms of finance (banks), and the lender/investor is looking to secure higher returns for their cash than they might be presently getting from term deposits or other similar styles of private or corporate bonds.
How do the Platforms / Trusts Vary?
With choice also comes the dilemma of selecting the correct investment for you when there is much to consider, including:
- Due Diligence / Research: How much information do you need to make an informed decision about lending your money to a borrower? Does the platform provide comprehensive, easy to understand information, are you able to read and interpret profit/loss statements?
- Security / Collateral: Are the funds going out secured against something of value? Many B2B lenders will loan against office machinery – sounds safe? But if there is a default, what will the lender do with a EU100k printing machine from Germany – who is going to buy it from you?
- Fees / Charges / Fixed / Ongoing: As always, the devil is in the details, what are the costs going in and out, and regular charges?
- Risk Assessment: Where does this fit in your risk profile? It would be fair to say fintech investments span the entire risk/reward spectrum, so caveat emptor!
- Potential Gain / Loss: Is the return worth the risk? What is the fund manager getting in return for using your funds (margin spread), and is it fair?
- DIY vs Professional Management: Are you prepared to do the hard yards for research due diligence, regular administration? Or are you happier to give up 100 basis points or more for professional management and less stress/workload?
Borrowing/lending has been happening since Adam was in short pants. The influx of fintech while providing speed, additional information and additional choice, still has not fundamentally changed the dynamics of someone looking to borrow money, and the person willing to lend them that money on mutually agreeable terms.
Borrowing/lending of money has not significantly changed simply because of technology – the same risks for both still exist.
Fintech provides a swathe of new and exciting investment opportunities, but as we always advise, be educated, understand what you are doing, and if you’re not, seek the advice of professionals.
Ray Trevisan, Director and Funds Manager, OTG Capital - www.otgcapital.com.au