Fintech: The Rise of Super Apps
I have published several posts with a cautious view on the Nasdaq given record valuations and excessive speculation on the stock market. However, it does not change the structural story and my positive long-term opinion on technology. But timing is everything, and one should take into account the fact that tech investing is constrained by expectations cycles.
Fintech and the Information Age
I do believe that the digital revolution, that started with personal computers in the 1980’s, and then literally took off with the spread of the World Wide Web at the end of the 1990’s, is a deep and durable transformation of our economy and our world. Some authors (like Viktor Shvets, global strategist at Macquarie) suggest that humankind has just entered a new era, “the information age”, that would mark a “great rupture” with the industrial age.
I tend to agree with that, and in my opinion the rise of fintech is the new big driver of this structural revolution. From an investment perspective, I just think that consistent long-term opportunities will appear when tech stocks correct and reach more reasonable levels.
Given we what we have seen with the media industry and with the consumer space, we have all reasons to be both enthusiast and afraid of what is coming in finance.
Though it is difficult to precisely estimate the weight of financial services in the world GDP, there is no doubt that banks, insurers, or asset managers, have played a major role in developed economies for the past thirty years. Whether you like or not. Therefore, the impact of the fintech revolution is likely to be significant.
Even if, it is still an early-stage transformation, things have already accelerated in Asia, and especially in China with the rise of Alipay and WeChat Pay super apps.
Super Apps, E-Wallets, and Covid-19
“Super apps” are a brand-new type of applications. They could be defined as mobile wallets that connect the users with several and various external services, taking care of deposits, payment and back-office tasks. Services can be a wide range of financial applications (e.g. Alipay, WeChat, Square), but also non-financial services like ride-hailing, micro-jobbing, food delivery, etc. (e.g. GoJek).
All those companies have one important in common: the main pillar of their business model is the payment activity, and one should regard them as pure e-wallet firms. Somehow, a super app is equivalent to a mini operating system wrapped into an application, giving access to numerous sub-applications deployed by third-party providers.
From that perspective, a company like Uber has the potential to become a super app. However, it is unclear whether Uber will survive to the coronavirus crisis, and what could be their strategy after that severe economic shock.
In Europe, the pandemic is also a major hurdle for one of the most famous fintech unicorns, Revolut. In my opinion, Revolut is one of the most promising companies in Europe. While the rise of Chinese financial super apps has been favored by the fact that credit card adoption was still low in China in comparison to Western countries, American and European fintech startups have had to deal with a more complex situation.
Consumers are older and are already used to paying with cards, cheques or bank transfers. Thus, why would people their mobile, when their credit card is already perfectly doing the job?
To enter the market, Revolut smart idea was to tackle the problem of cross-border payments in Europe. Thanks to the development of low-cost airlines, every European Millennial like myself has enjoyed the possibility of travelling to other cities and visiting neighbor countries. However, we all know how expensive a payment or a cash withdrawal in a foreign European city was before Revolut.
Capturing users that way was a great idea to lay the ground for a future e-wallet application that would be a leader in the EU. Unfortunately, as many people have not left their country since the beginning of the pandemic, the situation has become dramatic for a company with a huge cash burn.
The objective for Revolut is to survive to this dramatic environment, while being able to continue the transition towards a super app model.
Disrupting the Almighty Financial Industry
Super apps are very different from current big tech application (e.g. Facebook, Instagram, Google, YouTube, Amazon). In my opinion, they will drive the mass adoption of other fintech services, and also the adoption of blockchain technology (see Blockchain, the Silent Revolution). Once again, this is what we already see in China with the Blockchain Service Network project (i.e. China’s future stablecoin).
The fintech sector is fascinating. It is about to change the way we process money, how we store it and how we use to pay. And also change the access to many services like borrowing, insurance, or wealth management.
Everyone should bear in mind that the financial industry is full of inefficiencies, from payment to capital markets. Intermediaries are everywhere, leading to excessive transactions costs and useless delays. Like internet companies did with retail, fintech has the potential to change that and enhance user experience.
Said differently, the digital revolution will force every financial services provider to reinvent itself, focusing on its real value proposition. While middle and back office tasks are likely to be heavily challenged by process automation and distributed-ledger technologies, front office activities will also be more and more disrupted by the adoption of machine learning algorithms.
What could be the reverse side of the coin? At this stage, we can not be sure of anything. But, the example of China already shows that the e-wallet industry is evolving towards a duopoly, raising new concerns about the future of the internet. But once again, nothing is certain and some people argue that the domination of the FAANGs reduces the chances of “winner take all” possibilities for current unicorns (I read an interesting post about that: “Winner Take All” Will Not Save the Unicorns).
Beyond the Nasdaq Bubble
Nevertheless, I firmly believe that the fintech revolution is the next giant step of this digital revolution. When tech valuations come back to Earth (and they will), either on listed markets or on the private-equity side, it will be the perfect moment to start considering this thematic as an investment opportunity on a ten to twenty years horizon.
As for now, I remain focus on the tech bubble, to document the mania, as a peak of expectations is also an important moment of investment cycles.