Webinar Replay: What’s Driving FinTech’s Growth

FinTech is emerging as a powerful theme in 2018, driven by the rapid adoption of cutting edge technologies across the financial services industry, such as digital payments and money transfers, financial software and automation, and alternative lending and funding platforms. In this webinar, we discuss the major trends that are propelling FinTech’s growth, including:

  • The digitalization of financial services
  • The rising number of payment options at retailers
  • Tapping into the emerging markets’ middle class
  • The expansion of FinTech beyond traditional financial services

 

Transcript:

Jay Jacobs: Hello, everyone, and thank you for taking the time to join us today. My name is Jay Jacobs. I’m the Head of Research and Strategy at Global X Funds. I’ll pause for just one second here for the disclosures. Just to give a little bit of background about Global X, we are based out of Manhattan. We are an ETF only issuer with about 50 funds available including a variety of different suites that I think many people know us for. Our Thematic Growth suite, which we will be focusing on one of those areas today when we talk about FinTech, as well as our Income suite which includes MLPs, Preferreds, and SuperDividend funds, our International Access suite, and a few others.

Before we jump into it, I just want to contextualize FinTech a little bit. It is one of our 12 ETFs in our Thematic Growth family, which includes a variety of different funds that we’ve spoken about on the RIA Channel on different webinars. We’ve already spent a little bit of time on different webinars talking about lithium and battery technology, robotics and artificial intelligence, an overview of thematic investing. If any of these themes are of interest, please do check out the archives on the RIA Channel website to hear more about those. Today, obviously, we’re going about another one of our thematic technology funds, the FinTech ETF.

Before we dive into it, I just wanted to go over the structure for today. First, we’re going to start off talking a little bit more broadly about thematic investing and how FinTech fits into our framework around thematic investing. Then we’ll dive into what is FinTech looking at the different types of companies that comprise of this industry. Then we’re going to talk about three different trends that are really driving FinTech forward particularly over the last year or so starting with the digitalization of banking, digital payments, and the rise of FinTech in emerging markets. We’ll close out with looking at how FinTech can fit in a portfolio and we will open it up to Q&A.

First, I want to dive into thematic investing as a whole and how we think about FinTech within the context of thematic investing. Just to define thematic investing, we look at it as the process of identifying disruptive macro-level trends and then the underlying investments that stand to benefit from the materialization of these trends. This is a true top down, bottoms up analysis. Top down being identifying the themes themselves. Then the bottoms up analysis of which companies, which end up in a thematic ETF stand to benefit from the materialization of that trend.

The characteristics of thematic investing, these tend to be growth-focused strategies. They tend to be unconstrained by geographic and sector definitions. When we look at FinTech, we think about the fact that geography really shouldn’t matter if a FinTech company is in the US, or in Europe, or in Asia. We’re essentially indifferent because we just want to look at the FinTech companies that are around the world. Some of these are classified as tech companies. Some are classified as financials companies. By the very nature of being FinTech, it could really live in either sector. Frankly, we don’t really care because we just want to own the FinTech companies that are leading in the world today.

Because of the lack of any sort of geographic or sector constraints, these strategies tend to have pretty low correlations to other growth strategies. FinTech doesn’t really behave like a tech industry and doesn’t really behave like financial industry either, so low correlations to other growth strategies. What I like about thematic investing is that these are relatable concepts. As we saw on the poll before, many people are already using FinTech. To some extent, this is a tangible theme; something that people really see in their everyday lives. As an investment, being able to relate it to your everyday life I think makes it easier to conceptualize.

Now, when we think about which thematic ETFs to bring out to the broader investment community, it’s frankly a fairly straightforward three-step process looking at conviction, investability, and time frame. When we think about FinTech, the first question we ask ourselves is, do we have high conviction in the FinTech theme? When we look at FinTech, we already see it being adopted around the world; not just in developed markets, not just people looking at online banking. We’re seeing it in developing markets, in developed markets outside the US. We’re seeing it really happen as a global trend and across many different areas: online banking, peer-to-peer payments, digital payments. Many different subindustries are happening within FinTech right now. That gives us a lot of conviction that this is a theme that is well underway and unlikely to reverse anytime soon. It definitely hits the mark when we’re looking at conviction behind this theme.

The second question is investability. Is this a theme that we can get exposure to through publicly traded equities? I think there’s a bit of a misconception around FinTech that these tend to just be early stage companies that are only really in the venture capital stage. The reality is there are publicly traded companies that have very good exposure to the FinTech theme. Our FinTech ETF, for example, has 36 holdings around the world, so it checks the mark for investability as well.

Then the last point is time frame. Is this a theme that we think is going to last to the medium, or long-term, and maybe even evergreen in nature? When we look at FinTech, it is the expression of the growth of a technology and the application of that technology to a specific sector. We see this time frame being very long-term and potentially even evergreen because it’s hard to see how technological progress would be impeded over the long run and how that would be applied to financial services. We think this really hits the mark on all three of the things we look for in a thematic ETF: high conviction, investable, and a long time frame.

Now, the reason why we like this long time frame idea is because we really segment thematic investing into two different buckets:  cyclical themes and structural themes. Cyclical tend to look like the wave pattern in the blue line in the chart here. It tends to be mean-reverting. It tends to come and go with business cycles. You could look at something like valuations, or interest rates, or currencies. Those are cyclical trends. Now, you can certainly do very well by investing in cyclical trends, but it’s very dependent on timing because there’s nothing that says if you buy and hold over the long-term, a cyclical trend, you’re going to end up better than where you started.

If you look at a structural theme, that looks much more like the S-shaped curve. The orange one on this chart here where timing is much less important because what you see is a more unidirectional expression of that theme as it continues to progress over time. Of course, timing is still important; you don’t want to be too late or too early. You generally are going to see a continuation of the growth of the technology over time rather than the wave pattern that you would see with things that are more business cycle driven. When we think about FinTech, we certainly think about this as a structural theme; not something that is going to mean-revert over time.

We’ve talked a lot about FinTech from a thematic investing perspective. Now, we should define what FinTech actually is. What I think is interesting about FinTech is it’s really a combination of many different subthemes that are happening simultaneously. I know we have other thematic ETFs that we’ve talked about in the past on these webcasts like robotics, and artificial intelligence, or lithium and battery technology. Those tend to be perhaps more single-focused themes in the sense that I think it’s very clear if you’re investing in robotics, you’re getting robotics exposure. When you’re investing in FinTech, it’s really a combination of many different ways the technology is being utilized in the financial services space.

Most commonly, I think people see this as we saw on the poll earlier in online and mobile banking, but we’re increasingly seeing it in the payments industry, how people are paying for goods and services. We’re seeing it in very disruptive industries like in crowd-funding where previously, people really didn’t have a way to access small companies or concept-level products we’re seeing in investing with more software utilizing artificial intelligence or data techniques. We’re also seeing it in newer areas like insurance where it’s disaggregating major insurance brokers and turning it into more of a tech-enabled industry. You’re seeing FinTech really disperse across the entire financial industry looking at very many different business models and impacting the financial services in a variety of different ways.

Here’s another chart to show a similar concept that FinTech is not just the hot new app that’s letting people trade for free or the hot new app that’s letting people take pennies and invest those in stocks or ETFs. There’s really two different sides to FinTech. Of course, there is the disruptive business model where you see things like peer-to-peer lending, and crowd-funding, and app-based investing. Those have really been driven by the desire to remove middlemen, to reduce costs, or to expand access to consumers who never really had the chance to do these types of financial services.

On the other side, you have what I would call companies that are enhancing existing business models. These are not as exciting because these are B2B companies. They’re selling to the banks, or they’re selling to insurance companies new software to automate processes, or risk analytic software, or specialized data. This is not the stuff that’s going to be terribly exciting. The consumers are going to know, but this is actually a huge part of the FinTech landscape because they are literally billions of dollars that are getting poured into these types of businesses which we’ll touch on in a couple of slides.

This is really being driven by the desire for these existing financial institutions to reduce cost, to manage risks, and to improve existing processes. I just want to make sure people are aware that there’s really these two sides of FinTech. As we dive into some of the drivers of FinTech later in this presentation, we will touch on both of these trends going forward.

This first theme is where we’re seeing the B2B spending on FinTech: enterprise software being utilized to help with the digitalization of banks. I know many people think this is probably a theme that’s already been perhaps played out, but I want to actually walk through what I think many banks look like today, and how that’s not really the concept of a digitalized bank, the way it can be improved in the 21st century. This is an example of a bank that is what I would consider partially and yet poorly digitalized so far. It is a bank where it has data on customers, but it is siloed in different areas of the bank. If you have the same customer that is in wealth management, and has a mortgage, and has loans, and has a small business, that data is not aggregated together. That is existing in many different parts of the bank for whoever is the relationship manager or the adviser on that account. That data is spread across the bank.

In addition to that, the software that the bank is using is really a patchwork of different legacy software systems. Maybe some was implemented in the last couple of years. There’s probably some older software. A lot of this is being driven by the fact that there’s been a lot of acquisitions in banks. Every time there’s a purchase of a new bank, they have to patchwork that software together in a way that’s really non-optimized. Then certainly, it’s a bank that still relies very heavily on back office staffing or local branches to perform basic functions.

What are the issues with that type of digitalized bank? The first thing is for the client, there’s a lack of the ability to have the one-stop shop. I think a lot of clients think about their bank is their bank and they don’t want to have four different phone numbers to call to have different services. From the bank’s perspective, because that data is siloed in different areas, they really don’t have that much information about their client; they can’t paint a full picture of what that client looks like to offer personalized experiences or to accurately assess the risk of that person. In addition, that can lead to very high IT maintenance costs having this type of patchwork of software, and it being very expensive to maintain because it’s a super customized solution to try to make all these systems loosely talk to each other. It’s estimated that about 80% of IT spending with these banks is spent on maintaining those legacy systems. That’s a lot of money being used to not develop new technology, but to just keep the engine running, an engine that’s frankly running fairly poorly.

The third aspect is this is just expensive overall. If you’re not fully digitalized, having these back office functions or local bank branches performing basic functions is very expensive. There’s some estimates showing that if this was a more automated process, it could reduce bank’s expenses by more than 7%. This is the picture of a bank that I would say is poorly digitalized and not necessarily ready for the 21st century.

Here’s what a well-digitalized bank looks like. One that has implemented the right type of architecture and infrastructure to build a fully digitalized offering. The first off, let’s focus on the customer experience. Customers can get all of the data they want from any way they interact with the bank from anywhere: from their mobile app, from online, to go into a branch if they need to. They can get any information they want anywhere. Because all of this data is being processed together, the bank can deliver a very personalized experience offering basically very specific content on product offerings to each customer because they really know who they are by combining all this data together. Then they can pipe in third-party data or their own proprietary data to make it real-time, to give real live information to those clients that they can act on very quickly.

From the operations side, this is where I think it gets very useful to banks not just growing their top line but really focusing on costs and improving the bottom line. By having centralized data, they can really understand their customers. They know everything about the customer if all this data is put together. They know how much client assets they have. They might know how the customer’s business is doing, what their mortgage looks like.

That allows for a much more extensive look at that customer, the potential profitability of that customer, the loyalty of that customer, and the kind of risks that they’re presenting to the business. It allows for a lot more automation of back office functions, simply reducing risk of airs because it can be automated. You’re also seeing a much more scalable platform because you’re automating back office functions instead of having to hire more back office every time you bring on a certain amount of clients. There’s a very scalable architecture behind that that’s essentially a fixed cost with very little variable costs for new clients.

Last, from a risk perspective, it really allows for a 360-degree view of the firm’s risk because they know everything about every client and they can manipulate all this data in one place. It gives a very full idea of what are the risk inside of this bank. This is what a fully digitalized bank looks like. What does that mean for the FinTech space? There’s some estimates showing that right now, banks are spending about $440 billion this year on IT services which will expand to about half a trillion dollars by 2021.

In the FinTech space, this means 70% of that money is being spent externally towards third-party firms whether it’s in hardware, or software, or IT services. There’s a lot of money being spent on banks to fully digitalize. Now, I think in the US, we’re probably a little bit more used to banks that operate pretty well. When we sign online into our accounts, we generally can see real-time information. There’s a pretty good website behind that. If you think about regional banks, credit unions, emerging market banks, other developed market banks, there’s still a huge world of finance out there that still hasn’t fully digitalized. Even within some of the bulge bracket banks in the US, there’s still a lot more work that could be done on the underlying infrastructure to see that 360-view of clients and risk.

Where’s this going to express itself in the FinTech space? There’s a lot of – there’s a significant amount of companies that have public stock that’s in integrated core banking software. These are not names that people know off the top of their head, but there are providing the underlying software to many of these banks. There’s a lot of specialty software providers out there whether it’s in portfolio management, or risk analytics, mortgage processing, insurance claims, etc, that’s helping to automate a lot of these back office functions. Then, of course, third-party market data providers that are helping to provide a lot of data into these banking systems as well. There’s a significant amount of companies out there that are involved in the FinTech space, very much behind the scenes, not the consumer-facing companies that are as exciting as perhaps some of the ones we’ll touch on later. A very huge portion of IT spending dollars will be spent in this area in the next few years.

The reality is, there’s more ways to pay for a cup of coffee than there’s ever been before. The box on the right, I pulled from the Starbuck’s website where they talked about how you can pay for a cup of Starbuck’s coffee. You can use a gift card, a mobile app, different cellphone mobile wallets to pay for it, PayPal, and Visa, credit cards, cash, and apparently, they’re working on paying with cryptocurrency as well. Paying for something as simple as a cup of coffee has never been from one sense easier for a customer because you have so many options, but also harder for the retailer because they have to be able to process so many options together.

What we’re trying to show on the left-hand side, and it’s a little bit crazy with all those lines, but the reality is there’s a few different forms of payment that people are becoming pretty accustomed to paying with, the more traditional credit and cash options, but increasingly gift cards, loyalty points, and digital currencies, all are different ways to pay for a cup of coffee. Then, of course, there’s a way to do that physically in person. They can do so online. They can do so mobily. What you’ve created is essentially many different combinations of ways to use these different forms of payment and to actually pay for those thing in a coffee store or whatever store you can imagine.

I wanted to walk through a couple different types of payments companies because I think there’s a little bit of confusion around the different types that are out there. First, a mobile wallet. This is simply the software platforms that you see on a cell phone where you upload a credit card or a debit card. Then you can use that cell phone to pay for – let’s stick with a cup of coffee. This is where we’re seeing a lot of growth recently simply because it’s taking an existing form of payment that people are very comfortable with, credit cards, and using a new technology to deliver that payment. People can go for a jog outside and listen to music on their smartphone, and not have to bring their wallet with them, and then buy their smoothie on their way home. That’s the potential advantage of a mobile wallet.

Digital wallets I would say are a close relative of the mobile wallet. These are things like Visa Checkout, or MasterPass, and PayPal where it stores your payment information online whether it’s cash or credit as well as your delivery information. When you’re checking out of an online platform because you’re ordering something, it simply fills in all the relevant information and executes the payment. Crypto wallets, of course with the crypto craze is becoming more popular as well as people look for ways to store their cryptocurrencies outside of exchanges. Peer-to-peer payments, these are apps like Venmo or the Cash App, where it’s able to facilitate cash payments. As we think about it peer-to-peer, it was friends paying each other. If you went to a restaurant and someone put down their credit card, you could pay them cash afterwards. Increasingly, you’re seeing merchants accept this type of payment as well.

Last, point of sale systems. This is really on the merchant side. This is the technology that’s accepting all these different types of payment. It’s taking in those different transactions. It’s aggregating them, allowing for that data to be effectively collected. This is where you see something like Square, or ShopKeep, or Revel. All these more technology-enabled platforms to execute point of sale systems effectively replacing the old school cash register.

One question that I think is a fair one to ask is do we need all of these types of payments. The reality is probably not. That’s a lot of different ways to pay for things, but as I mentioned, if you are a merchant, you want to make it as easy on your customer as possible to pay for things. If you look at all these different payment options, those different wallets we walked through, the idea behind it is can we make it as easy as possible for someone to pay for an item.

It is very expensive to try to acquire a new customer. If someone is coming into your store or coming online with the intent of purchasing something, and getting all the way to check out, and they realize they don’t have their wallet, but they have their smartphone, or they don’t have their smartphone, but they have their wallet. Stores want to make sure that you can still pay for the good that you want. I do think part of the proliferation of digital payments is simply trying to make it as easy as possible for people to pay for things no matter what they have in their pocket at the time.

There are some specific advantages outside of just simply making it easier for people to pay for things. On one hand, I think you can look at the overall convenience of not needing a physical wallet. If you like to just carry around a cell phone, transactions are pretty easily facilitated. There’s many stores in New York City that simply do not allow for cash anymore because it slows down the lunch line too much. Digital payments allow for those quick transactions, of course, similar to credit cards.

In terms of security, of course, it is less likely for you to physically lose something that’s digitally stored like you could lose cash if you misplace it or it’s stolen. It does open up different questions around cybersecurity. I think the real important fact here is data. There’s many software programs and apps that you can download that allow you to monitor your own spending. That’s really only possible if it’s happening digitally.

Also, on the merchant side, the reason why they like these point of sale systems, they can take in these different forms of payment and aggregate all that information is they get a ton of data about their customers. They know what’s selling. They know who’s buying it. They can make inferences about who those people are. They can use that to manage their own inventory. They can use it to actually increasingly get loans because if they have the data to back up their cash flow, it’s easier for banks or other lenders to give them credit. The data is becoming incredibly important in these digital payments.

Then, of course, costs. Anything that’s happening in the physical world ultimately is going to be more expensive than in the digital world. That is just a broad trend. Taking out money from an ATM that has to have a physical location and be restocked physically every couple of days, that’s just going to cost more than having a digital app that can easily access your bank account, take out cash, and transfer it to the right person. Because of those four potential advantages, this is what’s really causing the rise of digital payments and why we’re seeing a real acceleration of growth there. You can see some of those stats on the right-hand side. I think some of the more interesting stats here is how fast it’s growing in developing markets, 21.6% growth versus mature markets which is a nice lead-in into our next segment on emerging markets FinTech.

This is the last of the three segments on the growth of FinTech. I think the emerging markets is really a fascinating case on FinTech for a couple of reasons. I wanted to run through four of those quickly. Why is FinTech so important to emerging markets? What you see is just a huge market size.

Of course, with countries like China and India, there’s a huge addressable market with the middle class of consumers that are now going to want banking services. That’s growing at 6% a year compared to about 0.5% growth in developed markets. The interesting thing is a lot of these consumers have never been banked before. They’re called the unbanked. There’s some very clear reason why they’ve never been banked.

It’s not profitable for a bank to service a bank account with $50 in it our $100 in it. It’s not profitable to service a loan for a $100. With FinTech a lot of the costs are fixed. You’re developing the software. You’re developing the infrastructure behind that FinTech. Then essentially, each additional person that’s using FinTech software is a very minimal incremental cost.

With traditional banking, you have to open up branches. You have to provide the back office support for every new account. That means you have to have a very high bank account size for every new one you’re opening. If you have a very fixed cost-based platform, you do a lot of that upfront development, and suddenly, that $50 account and the $100 account can be profitable for that company over the long run. What you’re seeing is that FinTech has really enabled a lot of those people that were previously unbanked in the emerging markets to now have access to financial services that have never really had that opportunity before.

I think the second important reason why we’re seeing this growth in the emerging markets is competition. Many emerging markets just simply have one, or two, or three banks that really dominate their banking system, so there really hasn’t been a lot of competition. That usually means the costs are high and innovation is low. FinTech is really looking at the opposite of that. It’s looking to reduce costs and to increase innovation, so there’s pockets of opportunity that have really been created in a lot of these emerging markets that lack competition in the financial services.

The third, which I think is a really important point, is leapfrogging technology. Because many of these EM consumers have never banked before, they haven’t had these ingrained habits in them that they’ve learned to trust over time. If you look at the US, people are very comfortable using credit cards overall. They’ve been using them forever. They’ve worked with these companies. They understand what happens if your credit card gets stolen that you call up and you tell them.

With a lot of these emerging market consumers, they’ve just never had a credit card before. They’re going from unbanked to suddenly using digital payments. That’s the form of payment that they grow to trust over time. The leapfrogging technology actually makes EM consumers more likely to accept FinTech than some developing markets where people have very entrenched habits.

Then fourth, governments of emerging markets really like FinTech. A lot of emerging market governments struggle with monitoring their economies because they are cash-based. That means it’s hard to tax transactions. It’s hard to monitor transactions for illicit activities. FinTech really brings a lot of those cash transactions online and makes it easy to monitor as well as it creates good jobs in the local markets where the FinTech firm is operating. There has been a good amount of government support for FinTech in the emerging markets as well.

What does this look like in real life? This is an image from China where you see someone using a digital payment to pay for food in a market. In many places in China, digital payments have just superseded credit cards as the dominant form of payments. This in itself as a picture I don’t think is very interesting.

This picture I find very interesting. This is a taxi cab that accepts Alipay as a form of payment. This is not a taxi cab in Shanghai; this is a taxi cab in New York City. Essentially, Chinese consumers have gotten so used to paying for things with digital transactions. You have many Chinese tourists in New York City that the taxi cabs have decided that they should be able to accept Alipay as a form of payment to make sure that those Chinese tourists can pay for their transactions. I think this is a very interesting example of how an emerging market has become so adapted to FinTech that even when they travel abroad, you’re starting to see these more tourist-friendly areas need to adapt to their clientele which has increasingly become really a digital payments-based clientele.

What are we actually seeing in the numbers in emerging markets with FinTech? At the top of the order is just what I think is the most fascinating stat. That emerging market consumers have adopted FinTech more than the global average. Because this leapfrogging technology, emerging markets have been very receptive to adopting FinTech in a way that even in developed markets have been much slower. Part of that is being driven by mobile phone adoption because mobile phones have really allowed people to access the internet and to facilitate transactions in the way that they haven’t had before. China and India are now the number one and number two largest smartphone markets in the world passing the US. You see very fast growth in other emerging markets that are adopting mobile phones at a very fast clip.

As we mentioned, digital payments in China is now the largest e-commerce market in the world passing the US. A lot of people have been increasingly used to paying for things online. That’s translating into a huge amount of mobile payments as well. Most recently in 2016, you had about 60 trillion, just shy of 60 trillion yuan being spent in mobile payments. That translates into about $8 or $9 billion – sorry, $8 or $9 trillion. That’s an extensive amount of money that’s being used for digital payments in China.

Another recent action, India, they underwent demonetization. They essentially removed many large cash bills from circulation. That’s forced many consumers who weren’t banked and was holding a lot of money in cash to enter into the banking system. If they were entering into the banking system for the first time, many of them were adopting some form of FinTech as their primary banking use. You’re seeing mobile wallets doubled in size from November 2016 to January 2017 simply because of this demonetization effort in India.

Another area of fast growth is remittances. People abroad sending money home to their families, they are using FinTech channels increasingly because these digital platforms are lowering the costs. What you see is digital costs about half that of traditional channels. You’re seeing remittances at about $1.5 billion last year and expected to grow very quickly through 2025. These are some of the high-level numbers of what’s happening in the FinTech space today in the emerging markets and some of the very quick adoption that we’re already seeing.

I wanted to provide a little bit of a more on the ground example of what this actually looks like. M-Pesa is a company based out of Kenya. This is not a holding in our FinTech ETF. It’s owned by Vodafone, so it’s not really a pure play, but it is a good example of how FinTech is being incorporated into the emerging markets. What is M-Pesa? Essentially, it was born out of an issue that Kenyans were having in terms of paying for things because Kenya had a very underdeveloped banking system particularly for the labor class in that country. It’s a very dispersed country geographically; many people spread across the country.

If you had a farmer that had to go from the farm to the market to sell things, and get cash, and go back home, and buy things with his family, that could take days from beginning to end to collect that money, and to go back, and to be able to spend it. One, that’s not a great experience for that farmer who might need something quicker or his family that needs something quicker. That’s not a great experience for economic growth either because you have cash that’s just not being spent very quickly. The velocity of money is very slow in this instance.

What M-Pesa did is they essentially created a mobile banking system by using these old school Nokia phones that didn’t even have colored screens. You could go to an M-Pesa retail representative in a city, give them your cash. They would upload essentially a cash value to your cell phone. Then you could send that to someone via SMS.

If you were in a market, you could text someone that cash that was uploaded to your phone. You could text it to your family. You could send it abroad. If you wanted to cash out of it, you could take your phone to the local M-Pesa retailer and get cash in exchange for the cash value of your phone. This completely changed the economy in Kenya because suddenly, it made people who could have very low-tech cell phones around the country have access to a banking system. This was effectively a deposit system and a money transfer system wrapped into an old school Nokia telephone.

Nowadays, it’s serving 30 million customers across 10 countries. They estimate that roughly about a third to a half of Kenya’s GDP flows through the M-Pesa network. This has truly inserted itself as the banking system for many Kenyans on a daily basis through pretty low-tech stuff. This is an example of meeting a specific need, increase in convenience, and technology leapfrogging from people who were going from a cash-based economy to now one that is in the digital world. A lot of tailwinds behind this type of FinTech whether it’s very low-tech like M-Pesa or some of the more high-tech things we’re seeing in the US in the developed world.

The last thing I want to touch on is how people think about thematic investing in their portfolios, how people might think about FinTech in their portfolios. We’ve had many conversations with investors. One of the things that people sometimes struggle with is the fact that FinTech, is it technology? Is it financial services? Is it US? Is it international? It’s global.

Sometimes people can have a hard time trying to place this in a portfolio that has a very rigid, grid-based allocation system. What we found is one of the areas that’s really resonating with people in terms of thematic exposure is simply siphoning off a portion of someone’s equity exposure because this is going to be high growth equities. Essentially, creating a bucket within that equity space that’s going to be called thematic growth, or opportunistic growth, or absolute growth where people have a little bit more tolerance for tracking error; where sector exposures and geographic exposures are a little bit less strictly tuned to a specific benchmark; where people can insert certain themes whether it’s FinTech, or robotics, or lithium and battery tech, and accept that tracking error, and essentially say this is going to be perhaps a little bit more volatile. It’s not going to look like a specific index, but over the long run, we believe this will experience high growth. That’s what we’ve seen that’s really resonated in terms of fitting thematic into a portfolio. What we’re showing there visually is certainly just an example, but really looking at that absolute growth bucket that’s going to have a little bit more tolerance for risk and tracking error.

This slide I think looks a little bit hard to read, a little bit blurry. If you do download this presentation, which I believe is available for download in the folder section, it might show up a little bit more clearly. One of the ways that we think about thematic investing from a risk perspective is lining up the disruptive technology or the thematic disruptor with the traditional sector that’s being disrupted. When people look at their financial exposure, and the look at past risk, and past returns, and future expected returns and risks, I don’t know if many people are considering the risk of disruption to that sector.

Of course, many of these banks will survive and evolve in their investing in FinTech themselves. As we showed on one slide, they’re spending billions of dollars on IT systems to digitalize their banks. You do see a lot of disruptive technology coming out of the FinTech space that’s looking to discern immediate banks whether it’s from the lending side, the crowd-funding side, etc. We think in terms of a lot of these themes is to pair some of the traditional sector exposure that people have with the disruptive technology that might be disrupting that sector, so people can look at their portfolios and make sure that one of those sectors isn’t going to be too disrupted in the future. That they have a foot in both sides of the existing sector and what the sector might look like going into the future.

The last before we open it up for questions, this is the quick commercial on the Global X FinTech ETF, FINX. It is a global ETF providing exposure to many different subindustries within the FinTech space that we’ve talked about today: peer-to-peer marketplace lending, mobile payments, crowd-funding, blockchain and alternative currencies, a lot of personal finance software, automated wealth management and trading. Then many of those enterprise solutions that we talked about in the first section: companies that are helping banks facilitate their movement to digitalization.

Alright, thanks everyone for submitting these questions. It looks like we have a lot here, so I’ll try to batch some of these questions together. The first question, it looks like it’s coming up a few different ways: which portion of FinTech is doing the best this year? Maybe this is best answered by going back to some of these subindustries and looking at them. This year alone, you’re seeing two areas really drive the growth of FinTech in particular.

Digital payments is one. You’re just seeing a lot of these companies really benefit from changing consumer habits. That people are getting more comfortable with digital payments. It’s becoming more ubiquitous on people’s smartphones. Actually, I think there’s a few trends. One is it’s becoming more ubiquitous on smartphones.

Two, I think there’s a lot of Millennial consumers that are more likely to adopt this technology that have more spending power than ever before because of their entering more prime earnings years whether they’ve inherited money. I think Millennials are driving a lot of digital payments technology as well. Then if you think about it, a lot of those business models really benefit from a strong economy as well. If you’re a point of sale system that’s accepting digital payments, as well as credit cards, and other forms of payments, those companies are often paid as a percentage of revenue somewhere between call it 2% and 3% of revenue.

The more people are spending, generally, those companies are going to better. That’s where you are going to see a little bit of that cyclical business cycle risk within these companies. We do think that still, the structural trend is there that more people are going to have to turn to these digital point of sale systems to accept these different forms of payments. That’s the area that’s been doing the best this year.

Another area that’s been doing very well is the enterprise software, that enterprise solutions space because I think it’s a good economy as well. You’re seeing a lot of banks really start to separate themselves in terms of their digital capabilities. You’re just seeing a lot of spending in enterprise software where people are looking to automate more and more of those systems and to create a really robust digital architecture behind that bank. Those are the two areas that look like they’re doing the best or among the best this year so far.

Another question we’re looking at: are most of the leading FinTech firms in the US? Why make this fund global? If you look at the fund’s breakdown, it’s about two-thirds US exposure, one-third international. You have a couple of trends happening within it. One, the US is the leader in financial services around the world, so of course, that puts the US in a dominant position in FinTech. Two, we have Silicon Valley and are the leaders in the technology world as well.

If you put those two together, I think it makes very clear sense that the US would be leading in the FinTech space. However, still a third of this fund is looking globally. That’s not by design that we’re trying to target a third of exposure international. That’s just simply the way that the publicly traded equity space in the FinTech landscape has shaken out. I do think what you see in the FinTech world is it’s not a winner take all situation. Especially if you look internationally because a lot of these companies, one, still have to have presence on the ground. They have to win over consumers or they have to win over merchants. That’s a very local business operation.

Two, you’re going to have very different regulations in different countries. It just might not make sense for a US FinTech company to bother entering South Africa, or Australia, or Latin America. There are plenty of companies, maybe they’re banks, maybe they’re disruptive companies in those geographies that are very knowledgeable about local regulations, and the local consumers, and are excited to bring out a FinTech platform in that locality. I do think we are going to continue to see this trend be very global in nature and not just dominated by a single country.

Another question we’re seeing: how much overlap is there between FINX and the traditional financial services sector? This is a great question and I think this highlights one of those things that we’ve talked about with thematic investing earlier in this deck is that these tend to be very uncorrelated to existing exposures in people’s portfolios. If you look at the overlap between FINX and the Financial Select Sector index, there’s 0% overlap. If you look at the overlap with the Technology Flex Sector index from S&P, it has 3% overlap.

These are companies that investors have very little exposure to if they’re just looking at broad market indexes or even sector level indexes because they’re missing out on the global portion. They’re missing out in many cases the small-cap portion. Or the exposure that they’re getting to these companies is so diluted out that it just makes up a very small percentage of the overall exposure. These are a very different group of companies than what people may otherwise be getting through those broad market names.

There’s a lot of questions here about blockchain and cryptocurrency. I think people are – of course, that’s been top of mind recently. Yes, this fund has exposure to firms that are engaged in blockchain. It does not have exposure to a specific cryptocurrencies. I highlight that item right here.

In terms of the blockchain exposure, much of the exposure in this fund to blockchain is almost incidental because it’s simply investing in FinTech companies. Many FinTech companies by nature of being at the crossroads of financial services and technology are also very interested in blockchain technology. What I would caveat this with, is the companies that are in here that have blockchain exposure, one, it tends to be a very small portion of their revenue if any part of their revenue. Because they are FinTech companies already because they’re coming in for mobile payments, or peer-to-peer lending, or some other reason, they are interested in blockchain. They are frankly very well suited to be exploring that technology further. I would highlight this as almost an incidental exposure. There are some names where maybe it’s more of the majority of their revenue, but for the most part, the names that are giving blockchain exposure, it’s really coming from other FinTech businesses that they are much more focused on predominantly.

I will take one more question as we’re running out up to the end of the hour here. Do you expect back office functions to be automated by FinTech functions and how soon? I think there’s two things to highlight here in terms of the automation of back office functions. The first thing is not all functions can be automated, but I think some function can and already are able to be automated. There’s simply things like generating reports that by nature should often be automated at this point whether it’s programming a macro, whether it’s using programming software that can pull in all the information automatically and produce a client-facing report, or an internal report. That is technology that is off the shelf today that can work. This is not artificial intelligence predicting the markets or anything like that; this is just simply looking at a function that is able to be automated at this point because it knows what the inputs are and where those should go.

I think there’s aspects of the back office that are ready to be automated today that are being automated today. For a fully automated back office, of course, there’s many more complex operations that are always going to need human input, but many of the lower hanging fruit I think will start to be automated through robotics process automation. At the end of the day, a lot of these things are able to be implemented today. It’s just a question of is the bank set up to do that? Do they have their data in the right architecture to do so or is it this spy load with a patchwork of different software programs trying to pull it all together?

If they build the right architecture underneath that bank, then the automation of that data is incredibly easy. If they have the commitment to spending the money on that, then it also becomes very easy. If companies are still working on this patchwork infrastructure, it’s really hard to build on top of it. It’s very expensive to build on top of it. I think those banks are going to lag behind in automating their systems and then, in the long run, their costs are going to much higher than other banks that have effectively digitalized. From that respect, a lot of this stuff is able to be done today, but some banks are almost getting in their own way because they haven’t made the necessary infrastructure investments to take that leap.

With that, I want to thank everyone for dialing in today. If you asked any questions that we didn’t get around to, I’ll be sure to have the team at Global X reach out to provide any more information. If you’re interested in learning more about FinTech, please do visit our website at www.globalxetfs.com/research. You can also follow myself at @JayJacobs CFA on Twitter where we’re posting a lot of our research and most recent posts on FinTech and thematic investing as a whole. Thank you, everyone. I appreciate your time today.