Georgie Friederichs
CrowdfundingHub
As a starting or young investor investing into fintech companies can seem like a big step to take. The fintech market is a very specific, fast-moving market with its own risks and opportunities which can differ a lot from other more settled markets It requires research and careful selection of the right companies to fit your investment goals and your portfolio. But how to go about finding the investments that fit you and your goals? This article will give a short introduction on investing into fintech and how to prepare yourself for success.
What is Fintech and why should you invest in it
Fintech – short for Financial Technology – is an emerging class of companies that use technology to automate and improve financial services for businesses and consumers, making them more user-friendly and accessible to a broader audience. Fintech fuses two of the richest sectors of the economy, Finance and technology.
Fintech is used to help companies, business owners, and consumers better manage their financial operations, processes, and lives. It is composed of specialized software and algorithms that are used on computers and smartphones.
There has been a growing global demand for digital banking services for a number of reasons, for example, convenience, accessibility, cost-effectiveness and enhanced security. This has meant fast development and growth in the fintech sector. Over the past decade fintech companies have revolutionized how we all do transactions, regarding payments, insurance, ordering consumer goods etc.
A good example of a fintech company are mobile banking apps. The apps combine technology and finance so that we can pay and do transactions with our phone or laptop. To make the payments they use other Fintech companies who provide online payment platforms. Paypal for example was one of the first payment platforms. Another example is Adyen. Adyen started in 2006 and has created one platform to accept payments, protect revenue, and control finances. It is a market leader now but started out as a fintech start-up.
Fintech usually operate in new markets or digitalize existing markets. This means it is difficult to evaluate the opportunities and risks of an investment in a fintech.
But it is a very interesting investment opportunity! Revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2023 and 2028. The FinTech sector still has further to develop and there are many opportunities for investors to get in on the action.
Fintech specific opportunities and risk
So why is the Fintech market so interesting to invest in? Here are some interesting characteristics that drive the high revenue opportunities.
The Rapid Growth – Fintech is growing rapidly, empowering those in both emerging economies but also in developed countries.
The High demand – there is a huge customer demand for Fintech, we all like the accessibility of services and have grown used to the convenience and safety. There is still a lot of room to grow further with these services.
Its Highly Profitable– Fintech companies can offer financial services at a fraction of the cost of traditional banks.
But high returns come with potential high risks. There is no standardized set of rules or regulations governing the FinTech industry. This can make it difficult for companies to operate in multiple jurisdictions and raises the risk that new entrants will face regulatory hurdles. For investors it means checking what local rules apply to the Fintech you are interested in.
As the companies are new and innovative it is difficult to determine the value of fintech companies and the chance they will survive.There are aslo specific business model risks for Fintech companies, like limited access to capital, liquidity issues and a fragemented customer base divided over countries and income groups.
This means investing into fintech is not as easy as it may look. Research is defintely required. It is important to understand the risks and build a diversified portfolio to spread your risk over more companies then one.
How to start your Fintech Investment
So Fintech investments take a bit more work, but they also give huge growth potential and are defintely interesting to include in your investment portfolio. Most Fintech startups are looking for equity investments, so you buy shares, or a convertible asset, which means a loan can be converted into shares later. This means your investment is riskier, but your upward earning potential is also larger. A good way to start Fintech investments can be to join a fund or a group of expereinced investors (like business angels).
If you are ready to invest on your own and are considering a company, here are some factors you look for when deciding. Start with the founding team of the company. Do the founders have a background in finance? Have they previously worked in another fintech company and achieved success? Were they former bankers or did they work in related financial fields such as insurance?
Their reputation in the market is also important. Founders need a supportive market to start their business. The local financial ecosystem, comprising banks and regulatory authorities, plays a critical role in their success.
Some other things you are looking for are:
- The Market Growth Potential of the company
- Do they have an Innovative Business Model
- Do they have a strong Technology Backbone
- Is there Regulatory Compliance & Adaptability
- Is there Scalability & Growth
- What is the revenue Model & Profitablitiy
- What are their strategic Partnerships
- Are they using Customer-Centric Solutions
- Is there a resilience to Market Volatility
- Who are other (equity) partners or investors
If you have an idea about these characteristics of the company it will help to attach a value to the company and its plans, and help with your decision to invest or not. The Fintech world is an exciting world to be a part of as an investor!
