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Fintech Certificate Fintech Certificate
SLIDE 2 Fintech Certificate
➢ The AtonRâ Fintech Index is a long-only, USD-based, actively managed total return index. ➢ The pace of innovation in financial technology (Fintech) has been accelerating lately with notably the emergence of mobile payments. ➢ This is just the beginning of a secular trend as technology and digitization are likely to reshape the financial industry with applications ranging from robo-advisers, P2P lending and money remittances to blockchain. ➢ Banks and insurers will have no choice but to invest heavily as Fintech is expected to spark major
- perating efficiencies through increased automation and is also likely to lift the financial industry's
revenue outlook through enhanced customer experience and engagement. ➢ The investment universe is naturally composed of Internet and mobile financial platforms, payment networks and processors and hardware and software vendors. It can also include more traditional companies whose business model shifts thanks to Fintech innovations.
Fintech Certificate details
✓ Issuing bank: Natixis, Calculation agent: Natixis SA ✓ ISIN: XS1365787230 ✓ Currency: USD ✓ Fees: 1.65% management fee + 15% performance fee, high water mark ✓ Bloomberg ticker: NXSRFINT
Investment Case
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Fintech Certificate
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Payment Processing Biometrics & Security Financial Software Mobile Payments B2B Payments Loyalty & Rewards P2P Lending AI & Bots Blockchain
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Fintech Certificate Fintech Certificate
➢ Now that the mobile payment infrastructure is in place, widespread adoption of mobile payments by consumers is just a question of when, not if
Mobile Payments: The Tip Of The Iceberg (I)
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➢ Upcoming catalysts: Loyalty programs and P2P features In-car payments Payments in virtual stores Seamless, mobile-based checkout experience Government incentives
SLIDE 5 Fintech Certificate
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Mobile Payments: The Tip Of The Iceberg (II)
85 57.8
32.8 26.7 8.5 1.5 163.6
101.3
90.7 64 22.3 6
20 40 60 80 100 120 140 160 180
Asia/ Pacific Africa North America Europe Latin America Middle East 2012 2016 ➢ The annual transaction volume via mobile payments in 2017 was $780bn and is expected to exceed $1.1 tn in 2019. The forecast is expecting a CAGR growth pace of 32% for the next 4 years to reach more than $ 3 tn volume in 2022!
+92% +75%
➢ Asia Pacific and Africa are early and faster adopters of mobile payments with more than 260 million mobile payments users in 2016
+177% +140%
Annual transaction volume in US$ bn - Mobile Payments Mobile Payments users by region (in mn)
Source: AtonRâ Partners, Statista 2018 Source: AtonRâ Partners, Gartner Inc.
500 1000 1500 2000 2500 3000 3500 2015 2016 2017 2018 2019 2022 (est.)
CAGR growth of around 32% between 2017 and 2022
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Fintech Certificate Fintech Certificate
Mobile Payments: The Tip Of The Iceberg (III)
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➢ Highly scalable business models hint at significant earnings leverage ➢ Strong balance sheets and cash-flow generation give ammo for M&A in a highly fragmented industry ➢ Payment processors are the best way to capture the volume growth of digital transactions
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Fintech Certificate
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Infrastructure
✓ Online / P2P lending ✓ Mortgage ✓ Auto finance ✓ Credit scoring ✓ Blockchain ✓ Artificial Intelligence, bots ✓ Cybersecurity ✓ Risk assessment ✓ Anti-money laundering ✓ Client profiling ✓ IoT and connected devices ✓ Analytics ✓ Mobile payments ✓ Digital wallets ✓ Payment processing ✓ B2B payments ✓ International remittances ✓ Point-of-sale devices ✓ Artificial Intelligence ✓ Robo-advisors ✓ Advanced analytics ✓ Process Automation ✓ Crowdfunding ✓ Social investing
Asset and Wealth Management
Insurance Lending Payments
The Fintech Universe Is Much Larger
SLIDE 8 Fintech Certificate
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Borrower Lending Platform (e.g., Lending Club) Partner Bank (e.g., Web Bank) Lender/ Investor
Applies for a loan (1) Loan repayment (10) Loan note (8) Commits to a borrower (2) Gives cash to the platform (6) Investor receives loan note (9) Loan repayment (11) Informs a third- party bank that borrower is verified, investors have committed (3) Purchases the loan note using investor’s cash (7) Loan note purchasing Loan repayment Loan note transfer Initial application and funding
How peer-to-peer lending works Online Lending Has Been A Major Area Of Development
➢ According to KPMG, non-bank startups arranged more than $36bn of loans in 2015, mainly for consumers, up from $11bn in 2014 ➢ The boom of peer-to-peer lending platforms is mainly due to:
✓ Reduced lending by incumbents to small merchants and consumers following the 2008 financial crisis ✓ The low rate environment, a positive for the funding of P2P platforms ✓ Increased use of online banking services by consumers
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Fintech Certificate
➢ A few examples: ✓ Amazon has offered more than $1bn in small loans to third-party sellers on its site in the past 12 months, compared with $1.5bn in the 2011-2015 period. Loans range from $1,000 to $750,000 and interest rates from 6% to 14% ✓ Square and PayPal have launched lending businesses targeting small businesses ✓ Qiwi, the Russian digital wallet and remittances company, is just launching a consumer lending business ✓ Robinhood, which lets customers trade stocks for free, makes money thanks to margin trading ➢ Lending has become a natural extension of the services offered by many fintech and tech companies
Online Lending At The Core Of Many Fintech Offerings
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✓ They can leverage their existing relations with consumers and merchants to develop a potentially large and profitable lending business ✓ They can increase the stickiness of customers to their main platform / business
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Fintech Certificate
➢ Lending, and more generally financial services, fit well with tech companies’ know-how ✓ They are data-rich businesses ✓ The large amount of data that is easily labeled makes this an interesting place for Deep Learning (DL) methods
Online Lending And Banking: Tech Companies To Play A Major Role?
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✓ Access to detailed data on the customers’ business allows to mitigate risks ✓ Securitization suggests balance sheets will not balloon ➢ A couple of tech companies already act de facto as banks ✓ By storing clients’ cash and allowing them to use their cash balance through debit cards
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Fintech Certificate
➢ Until now, Fintech companies have grown wild, without many restrictions ➢ The US government (through the OCC) just set up of a specific bank charter for fintech companies that may seem at first sight as a regulatory headwind… ➢ It has actually more pros than cons:
The Bank Status Offered By The US Government Is A Major Positive
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SLIDE 12 Fintech Certificate
➢ Mobile payments offerings from Tech giants (Apple/Android Pay…) could be a Trojan horse to develop a full financial services offering in the future ✓ Bypassing credit card companies would allow them to fully monetize mobile transactions ✓ Leveraging huge numbers of users, unique data sets and AI skills, would then allow them to expand into lending and banking and to find a new growth avenue
Tech Giants Likely Eager To Tap A Huge Market
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1'697.5 1'055.8 470.5 200 400 600 800 1'000 1'200 1'400 1'600 1'800
The 20 largest banks in US The 20 largest banks in Europe Credit cards companies (V, MA, AXP, DFS) In $bn
Market Capitalization (in $bn) – banks & credit cards companies
Source: Bloomberg, Banksdaily.com, Relbanks.com
SLIDE 13 Fintech Certificate
Traditional Banks Have No Choice But To Make Large Fintech Investments (I)
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ew ew co competi etitors
always ays will ill be be emerging emerging and that is even truer today because of new technologies and large changes in regulations. The combination of these factors will have a lot of people looking to compete with banks because they have fewer capital and regulatory constraints and fewer legacy
- systems. We also have a healthy fear of the potential
effects of an uneven playing field which may be
- developing. Below are some areas that we are keeping an
eye on
N
There always will be new emerging competitors that we need to keep an eye on…
ilicon ilicon Valley Valley is is co comin
hundreds of startups with a lot of brains and money working on various
S
alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small business very quickly and
- these entities believe – effectively by using
Big Data to enhance credit underwriting.
JP Morgan CEO, Jamie Dimon in April 2015
hey ey are are very ery good good at reducing the “pain points” in that they can make loans in minutes, which might take banks weeks.
T
We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense.
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Fintech Certificate
Traditional Banks Have No Choice But To Make Large Fintech Investments (II)
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RBC wants 40% of total technology budget devoted to innovation JPMorgan Chase pumped $600mn into fintech in 2016 What JPMorgan is doing with that $9.5bn tech spend French Bank BNP Paribas is spending €3bn to “build the bank of tomorrow” Credit Suisse further enhances digital banking with Fintech Partnership; launches regional industry’s first digital client onboarding application
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Fintech Certificate
➢ Robo-advisory start-ups (Betterment, Wealthfront…) have been making the buzz lately ✓ Taking over traditional financial advisors, they offer asset allocation services to users based on their personal and employment situation, assets and liabilities, savings and retirement targets… ➢ Their success so far is limited (roughly $100bn in AUM) as brand is key and client acquisition costly ➢ While it’s highly unlikely to see a high number of start-ups thriving in this low-margin business, traditional banks are expected to capitalize on bots to reduce costs ✓ From portfolio allocation in wealth management ✓ To customer service (chatbots) and process automation
Robo-Advisory And Bots: A Major Cost Saving Opportunity For Banks
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SLIDE 16 Fintech Certificate
Software Solutions: The Picks And Shovels of Banks’ Fintech Revolution
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- Customer analytics
- Portfolio analytics
- Automated compliance
checks
Analytics & regulatory compliance
- Consumer lending
- Mortgage
- Auto
- Credit cards
- Customer loyalty
programs
- Direct marketing services
- Analytics
Marketing
.
Credit scoring
- Bill presentment
- Automatic invoice
processing
- Payment forms on web
- r mobile apps
- Integration with mobile
payment platforms and digital wallets
- Currency conversions
- Dispute management
- Fraud detection
Electronic payments
platforms
- Online account opening
- Financial document
automation
- Electronic payments
- Compliance and fraud
prevention
- Financial messaging
- Front - trading, asset
allocation, portfolio construction, investment products…
reporting, due diligence, tax optimization…
reconciliation, account administration, processing, clearing…
Asset & wealth management Digital banking Electronics payments
SLIDE 17 Fintech Certificate
Software Solutions: Outsourcing A secular Trend
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➢ Keeping up with the latest fintech developments proves difficult ➢ Rising interest rate environment a positive for banks’ revenue and capex/IT spending outlook ➢ Regulatory burden on financial institutions is a driver of continued outsourcing ✓ According to IDC, 79% of bank IT spending is still in-house!
Banks
Convenience - multi channel (mobile, internet) Personalized banking Ease of use Reliability
Basel II and III MIFID II PSD II Telcos Fintech Technology giants Poor ROEs Weak revenue momentum
New Competitors Fast-changing Technologies Increasing Regulations Financial Metrics Under Pressure
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Fintech Certificate
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Blockchain 1.0 CryptoCurrencies Blockchain 2.0+ Smart Contracts Decentralized Apps… The building block of Web 3.0 and Industry 4.0
Blockchain: The Most Disruptive Technology Of The Past 10 Years
SLIDE 19 Fintech Certificate
Blockchain: It’s Just Getting Started (I)
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Blockchain looks like the Internet back in 1994…
➢ The decentralized software market value is $100B+ ➢ ~20M crypto accounts in the world today or 0.3%
1994/1995
0.3% 0.4% 0.8% 1.3% 2.0% 3.1% 4.6% 6.8% 8.1% 10.6% 12.3% 14.2% 15.8% 17.6% 20.6% 23.3% 25.8% 29.2% 31.8% 35.1% 38.0% 40.7% 43.4% 46.1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 500 1'000 1'500 2'000 2'500 3'000 3'500 4'000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
World Population Penetration
Internet Users (Millions) World Population Penetration
We are here
2014 2012 2013 2004 1995 1996 1997 1998 1992 Source: scribblrs.com
➢ In 1995, the entire internet sector (public & private) was ~$70B ➢ In 1994, the entire global internet population was ~20M or 0.4%
Today
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Fintech Certificate
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Blockchain Disrupting Old And New Business Models
OLD (centralized) NEW (decentralized)
Data Storage E-commerce Social Media Sharing Economy
SLIDE 21 Fintech Certificate
ICO: $1,327
VS.
VC: $259
Blockchain: It’s Just Getting Started (II)
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In 2017 alone, $4bn has been raised through ICOs (Initial Coin Offerings)
Source: CB Insights, BI Intelligence $179 $161 $122
$83 $130 $248 $259 $12 $21 $21 $39 $38 $757 $1327 $0 $200 $400 $600 $800 $1000 $1200 $1400
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Conventional VC Funding To Blockchain Firms Vs. ICO Funding
Global, Millions ($), Q1 2016-Q3 2017 VC funding ICO Funding
Q3 2017:
ratio of 5 to 1
SLIDE 22 Fintech Certificate
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➢ A Blockchain (2.0+) is a distributed database of transactions (and computer code) recorded and verified across a network of participants
Someone requests a transaction
How blockchain works:
The first block is created
transaction The requested transaction is broadcast to a P2P network consisting of computers, known as nodes The network of nodes validates the transaction and the user’s status using known algorithms A verified transaction can involve cryptocurrency, contracts, records or other information Once verified, the transaction is combined with other transactions to create a new block of data for the ledger The new block is then added to the existing blockchain, in a way that is permanent and unalterable The transaction is now complete Validation
Blockchain: The Ultimate Disintermediation
SLIDE 23 Fintech Certificate
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Streamlining compliance procedures (AML, client onboarding…), hence reducing manual intervention Smart contracts allow the performance of trackable and irreversible transactions without third
- parties. This level of automation and security has the power to revolutionize the management of
traditional contractual engagements across all industries.
Use cases
lockchain technology isn't just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself.”
Abigail Johnson, CEO Fidelity Investments
B
itcoin is a remarkable cryptographic achievement…The ability to create something which is not duplicable in the digital world has enormous value… Lots of people will build businesses on top of that
Eric Schmidt, Executive Chairman of Google
B
Improving and speeding the post-trade clearing and settlement processes
Blockchain: Wide-Ranging Applications
SLIDE 24 Fintech Certificate
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WEALTH MANAGEMENT PAYMENTS LENDING
A rich newsflow ahead in Fintech: expected IPOs and M&A targets $60 bn Lufax $4 bn SoFi $4 bn
Commonbond
$3.5 bn
Credit Karma
$1 bn
Kabbage
$150 bn
Ant Financial $10 bn Stripe
$5.6 bn Robinhood
$2.3 bn Adyen $7.5 bn $2.3 bn
$1.6 bn Transfer wise $500 mn WealthFront $800 mn Betterment
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Fintech Certificate
M&A frenzy in sight: many Fintech businesses are highly fragmented and
scalable Conclusion
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A major positive impact on GDP growth (greater efficiency of the banking system) A huge revenue opportunity in lending and payments Many cost savings opportunities at stake for traditional financial institutions
Financial software a sweet spot Blockchain to have a massive impact as it represents the ultimate
disintermediation
SLIDE 26 Fintech Certificate
This report has been produced by the organizational unit responsible for investment research (Research unit) of AtonRâ Partners and sent to you by the company sales representatives. As an internationally active company, AtonRâ Partners SA may be subject to a number of provisions in drawing up and distributing its investment research documents. These regulations include the Directives on the Independence of Financial Research issued by the Swiss Bankers Association. Although AtonRâ Partners SA believes that the information provided in this document is based on reliable sources, it cannot assume responsibility for the quality, correctness, timeliness or completeness of the information contained in this report. The information contained in these publications is exclusively intended for a client base consisting of professionals
- r qualified investors. It is sent to you by way of information and cannot be divulged to a third party without the
prior consent of AtonRâ Partners. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performance is not indicative or a guarantee of future results. Investment losses may occur, and investors could lose some or all of their investment. Any indices cited herein are provided only as examples of general market performance and no index is directly comparable to the past or future performance of the Certificate. It should not be assumed that the Certificate will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between the Certificate’s returns and any index returns. Any material provided to you is intended only for discussion purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any security and should not be relied upon by you in evaluating the merits of investing in any securities.
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