My 12-year-old son’s room tends to be a bit of a mess. But there’s something that pleases me. A large jar filled with cash.
It’s not so much the jar. Or the money waiting to get banked. It’s the sentiment.
We’ve refused to buy him an Xbox. He can’t sell his shares. And he’s not to touch his education savings.
But he wants to play Forza Motorsport. (So do I, if the truth be told).
He’s decided to take matters in hand. And is now on a crusade to earn and save the $400 or so he’ll need for the machine.
This puts into practice new streams of thinking: ‘How can I earn and save $400?’
So he plays his violin for money. Helps in the garden. Finds things to sell.
Soon enough, he will have the money. And gain a reward far greater than the Xbox itself — the ability to gain something from your own efforts.
Unfortunately, saving before you spend is becoming more and more old-fashioned
Much better to buy now what you want, even if you don’t have the money. That’s what feels good. And that’s what everyone is doing.
So it’s interesting to see that one of the hottest financial fintech stocks out there right now is in the BNPL (buy-now-pay-later) space.
This is unsurprising at a consumer level. Our entire economy is now built on people spending money they don’t have.
At its highest level, in the home mortgage market, debt becomes an arms race.
Who can borrow the most to buy the nicest house?
Like a nuclear arsenal, stored-up debt becomes dangerous. If prices are not maintained and banks begin to wobble, the trigger can get pulled.
Here in Auckland, we now need mass migration to keep house prices high just to maintain gearing ratios. If prices were to drop 25% or more, many people would be insolvent.
But for younger people, it’s getting harder to even get a mortgage. So ever-capricious lenders are looking for other opportunities.
The emerging space of Fintech is providing a way to make money on money
Fintech — Financial Technology — is one sector that could disrupt a day-to-day commodity we all use: banking and finance.
On the lookout for new stocks to recommend and invest in, I’ve been following some of the developments in fintech.
But I’ve yet to find a great fintech company that offers anything revolutionary. Or offers to improve the world in some way.
Well, at least until now. I’ll get to that business in a moment…
Fintech businesses break down into 4 main categories
- Paytech — finding simpler and more economic ways to pay or receive money
- Lendtech — developing new ways to provide lending and finance
- Wealthtech — creating new models for investment and wealth management
- Currencytech — building new currencies and exchange services
As I mentioned, some of the hottest listed fintech stocks right now cut across Paytech and Lendtech. Existing in the new category of ‘BNPL’ — Buy Now Pay Later.
In particular, AfterPay [ASX:APT], Sezzle [ASX:SZL] and Splitit [ASX:SPT].
These businesses allow people to buy mostly retail goods on an instalment programme, usually without any interest. They make their money from merchant fees paid by stores using their system, as well as late fees charged to shoppers.
AfterPay is the standout. With a market cap of around 6.86 billion (at time of writing), it’s accelerated from A$2.95 in June 2017 to the high of around A$37 seen in September 2019.
Fintech is a hot space and a growing one. Especially with millennials.
The millennial problem
We know millennials have less wealth than previous generations at the same age and stage. Despite being better educated, many are unable to get on the property ladder. They’re burdened with student debt that shaves future earnings. And many will be unlikely to get a mortgage anytime soon.
So spending on what you desire is appealing. Even if you don’t have the money this month, it can be paid off over the next. And the next.
Investors who have missed out on the rapid rise of Afterpay are no doubt looking at newer entrants Sezzle (market cap circa $190m) and Splitit (circa $300m).
Sezzle and Splitit have yet to show any meaningful share price surge. None of these 3 BNPL businesses seem to have made a profit yet. And Afterpay has admitted that 24% of its total income comes from charging customers late-payment fees.
A sector that isn’t as attractive as it looks
Personally, I don’t plan on touching these businesses. Afterpay’s rapid run-up may be over — but I do acknowledge it’s been steep, producing returns of over 1,250% in just a few years.
The Australian financial regulator, ASIC, has already indicated that it’s looking into law reform in this space. And the Australian government is planning on broadening credit regulations so it covers the sector.
Even beyond that, these types of businesses may have a predatory nature about them. They encourage younger people to enter into debt. The sort of debt that will not usually produce a financial return. In other words, the wrong kind of debt.
For example, a young woman sees a delightful handbag she has to have. No need to wait! She loads it up on a BNPL service. She’s now in debt for the next few months. And if she can’t pay from future income, she’ll get slapped with late fees.
I visited the university recently. I recall the main billboard advertising BNPL in the public areas. For young people in a place trying to set up their future, with minimal income or asset base, the last thing they need is more encouragement to get into debt.
Potentially, debt that does not increase your wealth is a hazard. And as such, advertising for it should have similar warnings to smoking.
So these services have had their rise. Will it continue? Their offer is undoubtedly attractive. But they don’t meet my investing criteria. Afterpay was the one that got away. I’m not sure copycats will have the same road. All companies in this space may soon face tighter regulation.
Where are the opportunities in Fintech?
I’m not seeing major disruption in Lendtech or Wealthtech. Partly because many of these services are commoditised. A loan is a loan. One fund manager or broker can do what another fund manager or broker may do.
So the competitive advantages come from size, scale and technology. And that is why many of the large bank and brokerage firms are getting larger.
The dynamic nature of these industries mean the prices of large bank and broker stocks oscillate seasonally. Get in at a low point and you can enjoy some growth and often an attractive dividend.
Paytech is one area where smart technology and simplification is creating new, fast-growing businesses.
One of my favourites is Stripe. We use it here at Wealth Morning to process global payments. The company is worth about $35 billion as of last valuation in September.
They were successful because they made a single-step change. While other payment providers focused on the end customer, Stripe focused on what the developer — the merchant — needed to get payment done.
By providing a simple system, they grew their merchant base fast through word of mouth. And they succeeded in building the competitive advantage of a large network by recognising that the payment process is simply a function.
I see Stripe continuing to prevail, so long as they retain this simplicity, developer focus and low fees.
The next big IPO to watch out for
So the billion-dollar question is this: when will they IPO?
This is another great business with a moat and the potential for a very promising public offer — like Airbnb.
By valuation, Stripe is larger than Airbnb. And, in fact, Stripe is the payments processor for Airbnb.
Right now, there is no announcement of a firm plan for a Stripe IPO. But I’m sure it will be in the pipeline at some point.
We need more great businesses to choose from on the exchanges. Stripe and Airbnb are good ones in my book. Particularly since — by their numbers — they could be cash profitable. As opposed to some of the revenue-burning tech options that have previously come to market.
We’ll keep you posted. All good things come to those who wait…