Why Fintech is something every investor needs to know about

Fintech is the hot 'new' sector everyone is talking about

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You may have heard the new term 'Fintech' and wondered what it really means.

It's a fairly simple term that represents financial technology and is usually applied to companies offering technology (usually software) to provide financial services.

But the industry is wide, and the companies regarded as fintech companies quite diverse.

Accounting firm Xero FPO NZ (ASX: XRO) could be regarded as a fintech company, because the cloud software it provides allows small and medium enterprises to manage their financial accounts.

Recent listing Link Administration Holdings Ltd (ASX: LNK) is another, providing software to superannuation funds to administer members accounts and portfolios, while also providing share registry services.

With billion-dollar market caps, both Xero and Link are a couple of the largest fintech companies. However, they are by no means the largest. Australia's big four banks could be regarded as the ultimate fintech companies – since much of their financial service business is conducted digitally these days.

Generally, however, the fintech term is applied to smaller, up-and-coming, more agile software companies that pose a disruptive threat to their larger competitors. That could be in the area of mobile payments, peer-to-peer lending, crowdsourcing, superannuation and investing platforms, financial planning and advice software, and foreign exchange to mention but a few.

Some examples of ASX-Listed companies operating in those spaces include Ozforex Ltd (ASX: OFX), GBST Holdings Limited (ASX: GBT), Hub24 Ltd (ASX: HUB), Mobile Embrace Ltd (ASX: MBE), Mint Payments Ltd (ASX: MNW), Praemium Ltd (ASX: PPS), Smartpay Holdings Ltd (ASX: SMP) and Touchcorp Ltd (ASX: TCH).

The rapid adoption of technology has allowed these up and comers to gain a foothold in their markets – while their less-agile larger competitors have struggled to adapt – or not bothered to compete as yet. And that's just a small list of ASX-listed companies – there are plenty more start up fintechs looking to grab their share of revenues including companies such as Sharesight, PromisePay, Equitise, Macrovue, GetPocketBook and MoneyBrilliant.

But investors should not underestimate the ability of incumbents to adapt to new threats. For one, larger competitors usually have the firepower to easily acquire companies they regard as a threat, or that can add to their product suite. Some of Australia's largest banks and financial services companies are also investing behind many of these new players.

Foolish takeaway

Fintech is an exciting space to watch, particularly given the size of the financial services industry in Australia and our superannuation system, but not every company will be successful. Some may find that no one is willing to pay for their products or services, or that their market is too small for them to survive. But there's certainly plenty of potential for some of the above companies to go on and make their shareholders very wealthy.

Motley Fool contributor Mike King has no position in any stocks mentioned. You can follow Mike on Twitter @TMFKinga Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of TOUCHCORP FPO and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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