Fintech CertificateFintech Certificate
Fintech – Disruptors And Enablers, Both Winners
January 2018
ATONRÂ PARTNERS SA 12, Rue Pierre Fatio – 1204 GENEVA – SWITZERLAND - Tel: + 41 22 310 15 01 http://www.atonra.ch
Fintech Certificate
➢ Record investments in Fintech over the last three years (above $100bn according to KPMG) are
about to spark a massive wave of innovative financial and banking services
➢ One of the most obvious outcomes of the Fintech revolution is the disintermediation of financial
services as nimble companies take advantage of technologies such as AI and blockchain to
develop new services or to take business away from legacy players
➢ While the emergence of mobile payment platforms has drawn much attention, other Fintech
applications ranging from robo-advisers to peer-to-peer lending are also taking off
➢ Blockchain represents the final disintermediation step: the technology has wide-ranging
applications (smart contracts, decentralized apps…) in the financial world and in many industries
➢ Against this backdrop, banks and insurers have to reinvent themselves and invest heavily in
new technologies in order to enhance customer experience and extract operating efficiencies
➢ This suggests that tech enablers (both hardware and software) should also be in the
spotlight as they are in the early stages of a secular growth cycle
Fintech Certificate details
✓ Issuing bank: Natixis, Calculation agent: Natixis SA
✓ ISIN: XS1365787230
✓ Currency: USD
✓ Fees: 1.65% management fee + 15% performance fee, high water mark
✓ Bloomberg ticker: NXSRFINT
Investment Case
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Fintech Certificate 3
Payment Processing
Biometrics & Security
FinancialSoftware
Mobile Payments
B2B Payments
Loyalty &Rewards
P2P Lending
AI & Bots
Blockchain
Fintech CertificateFintech Certificate
➢ Now that the mobile payment infrastructure is in place, widespread adoption of mobile payments by
consumers is just a question of when, not if
Mobile Payments: The Tip Of The Iceberg (I)
4
➢ Upcoming catalysts:
Loyalty programs and P2P features In-car payments Payments in virtual stores
Seamless, mobile-based checkout experience Government incentives
Fintech Certificate
➢ Asia Pacific and Africa are early and faster adopters of mobile payments with more than 100
million mobile payments users
5
8557.8
32.8 26.7
8.5 1.5
163.6
101.390.7
64
22.36
0
20
40
60
80
100
120
140
160
180
Asia/Pacific
Africa NorthAmerica
Europe LatinAmerica
MiddleEast
2012 2016
450
620
780
930
1080
2015 2016 2017 2018 2019
Annual transaction volume in US$ bn -Mobile Payments
Mobile Payments users by region (in mn)
Source: AtonRâ Partners, TrendForce, NFC World+ Source: AtonRâ Partners, Gartner Inc.
CAGR ~ 20%
Mobile Payments: The Tip Of The Iceberg (II)
➢ The annual transaction volume via mobile payments in 2015 was $450bn and is expected to exceed
$1tn in 2019
Fintech CertificateFintech Certificate
Mobile Payments: The Tip Of The Iceberg (III)
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➢ Highly scalable business models hint at significant earnings leverage
➢ Strong balance sheets and cash-flow generation give ammo for M&A in a highly
fragmented industry
➢ Payment processors are the best way to capture the volume growth of
digital transactions
Fintech Certificate 7
Infrastructure
✓ Online / P2P
lending
✓ Mortgage
✓ Auto finance
✓ Credit scoring
✓ Blockchain
✓ Artificial Intelligence, bots
✓ Cybersecurity
✓ Risk assessment
✓ Anti-money laundering
✓ Client profiling
✓ IoT and
connected
devices
✓ Analytics
✓ Mobile payments
✓ Digital wallets
✓ Payment
processing
✓ B2B payments
✓ International
remittances
✓ Point-of-sale devices
✓ Artificial
Intelligence
✓ Robo-advisors
✓ Advanced analytics
✓ Process Automation
✓ Crowdfunding
✓ Social investing
Asset and Wealth Management
Insurance
Lending
Payments
The Fintech Universe Is Much Larger
Fintech Certificate 8
BorrowerLending Platform
(e.g., Lending Club)
Partner Bank (e.g., Web Bank)
Lender/ Investor
Applies for a loan (1)
Loan repayment (10)
Loan note (8)
Commits to a borrower (2)
Gives cash to the platform (6)
Investor receives loan note (9)
Loan repayment (11)
Informs a third-party bank that borrower is verified, investors have committed (3)
Purchases the loan note using investor’s cash (7)
Loan note purchasing
Loan repayment
Loan note transfer
Initial application and funding
How peer-to-peer lending works
Online Lending Has Been A Major Area Of Development
➢ According to KPMG, non-bank startups arranged more than $36bn of loans in 2015, mainly for
consumers, up from $11bn in 2014
➢ The boom of peer-to-peer lending platforms is mainly due to:
✓ Reduced lending by incumbents to small merchants and consumers following the 2008 financial
crisis
✓ The low rate environment, a positive for the funding of P2P platforms
✓ Increased use of online banking services by consumers
Fintech Certificate
➢ A few examples:
✓ Amazon has offered more than $1bn in small loans to third-party sellers on its site in the past
12 months, compared with $1.5bn in the 2011-2015 period. Loans range from $1,000 to
$750,000 and interest rates from 6% to 14%
✓ Square and PayPal have launched lending businesses targeting small businesses
✓ Qiwi, the Russian digital wallet and remittances company, is just launching a consumer lending
business
✓ Robinhood, which lets customers trade stocks for free, makes money thanks to margin trading
➢ Lending has become a natural extension of the services offered by many fintech and tech companies
Online Lending At The Core Of Many Fintech Offerings
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✓ They can leverage their existing relations with
consumers and merchants to develop a potentially
large and profitable lending business
✓ They can increase the stickiness of customers to
their main platform / business
Fintech Certificate
➢ Lending, and more generally financial services, fit well with tech companies’ know-how
✓ They are data-rich businesses
✓ The large amount of data that is easily
labeled makes this an interesting place
for Deep Learning (DL) methods
Online Lending And Banking: Tech Companies To Play A Major Role?
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✓ Access to detailed data on the customers’
business allows to mitigate risks
✓ Securitization suggests balance sheets
will not balloon
➢ A couple of tech companies already act de facto as banks
✓ By storing clients’ cash and allowing them to use their cash
balance through debit cards
Fintech Certificate
➢ Until now, Fintech companies have grown wild, without many restrictions
➢ The US government (through the OCC) just set up of a specific bank charter for fintech
companies that may seem at first sight as a regulatory headwind…
➢ It has actually more pros than cons:
The Bank Status Offered By The US Government Is A Major Positive
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Fintech Certificate
➢ Mobile payments offerings from Tech giants (Apple/Android Pay…) could be a Trojan horse to
develop a full financial services offering in the future
✓ Bypassing credit card companies would allow them to fully monetize mobile
transactions
✓ Leveraging huge numbers of users, unique data sets and AI skills, would then allow
them to expand into lending and banking and to find a new growth avenue
Tech Giants Likely Eager To Tap A Huge Market
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1'697.5
1'055.8
470.5
0
200
400
600
800
1'000
1'200
1'400
1'600
1'800
The 20 largest banksin US
The 20 largest banksin Europe
Credit cardscompanies (V, MA,
AXP, DFS)
In $bn
Market Capitalization (in $bn) – banks & credit cards companies
Source: Bloomberg, Banksdaily.com, Relbanks.com
Fintech Certificate
Traditional Banks Have No Choice But To Make Large Fintech Investments (I)
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ew competitors always will be emerging and
that is even truer today because of new
technologies and large changes in regulations.
The combination of these factors will have a lot of people
looking to compete with banks because they have fewer
capital and regulatory constraints and fewer legacy
systems. We also have a healthy fear of the potential
effects of an uneven playing field which may be
developing. Below are some areas that we are keeping an
eye on
NThere always will be new emerging competitors that we need to keep an eye on…
ilicon Valley is coming. There are
hundreds of startups with a lot of
brains and money working on variousSalternatives to traditional banking. The ones
you read about most are in the lending
business, whereby the firms can lend to
individuals and small business very quickly and
- these entities believe – effectively by using
Big Data to enhance credit underwriting.
JP Morgan CEO, Jamie Dimon in April 2015
hey are very good at reducing the “pain
points” in that they can make loans in
minutes, which might take banks weeks.TWe are going to work hard to make our
services as seamless and competitive as theirs.
And we also are completely comfortable with
partnering where it makes sense.
Fintech Certificate
Traditional Banks Have No Choice But To Make Large Fintech Investments (II)
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RBC wants 40% of total technology budget
devoted to innovation
JPMorgan Chase pumped $600mn into fintech in 2016
What JPMorgan is doing with that $9.5bn tech spend
French Bank BNP Paribas is spending €3bn to “build the bank of tomorrow”
Credit Suisse further enhances digital banking with Fintech Partnership;
launches regional industry’s first digital client onboarding application
Fintech Certificate
➢ Robo-advisory start-ups (Betterment, Wealthfront…) have been making the buzz lately
✓ Taking over traditional financial advisors, they offer asset allocation services to users based on their personal and employment situation, assets and liabilities, savings and retirement targets…
➢ Their success so far is limited (roughly $100bn in AUM) as brand is key and client acquisitioncostly
➢ While it’s highly unlikely to see a high number of start-ups thriving in this low-margin business,traditional banks are expected to capitalize on bots to reduce costs
✓ From portfolio allocation in wealth management
✓ To customer service (chatbots) and process automation
Robo-Advisory And Bots: A Major Cost Saving Opportunity For Banks
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Fintech Certificate
Software Solutions: The Picks And Shovels of Banks’ Fintech Revolution
16
• Customer analytics
• Portfolio analytics
• Automated compliance checks
Analytics & regulatory compliance
• Consumer lending
• Mortgage
• Auto
• Credit cards
• Customer loyalty programs
• Direct marketing services
• Analytics
Marketing. Credit scoring
• Bill presentment
• Automatic invoice processing
• Payment forms on web or mobile apps
• Integration with mobile payment platforms and digital wallets
• Currency conversions
• Dispute management
• Fraud detection
Electronic payments
• Online and mobile platforms
• Online account opening
• Financial document automation
• Electronic payments
• Compliance and fraud prevention
• Financial messaging
• Front - trading, asset allocation, portfolio construction, investment products…
• Middle - performance reporting, due diligence, tax optimization…
• Back office -reconciliation, account administration, processing, clearing…
• Functions
Asset & wealth managementDigital banking
Electronics payments
Fintech Certificate
Software Solutions: Outsourcing A secular Trend
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➢ Keeping up with the latest fintech developments proves difficult
➢ Rising interest rate environment a positive for banks’ revenue and capex/IT spending outlook
➢ Regulatory burden on financial institutions is a driver of continued outsourcing
✓ According to IDC, 79% of bank IT spending is still in-house!
Banks
Convenience -multi channel
(mobile, internet)
Personalizedbanking
Ease of useReliability
Basel II and III
MIFID II
PSD II
TelcosFintech
Technologygiants
Poor ROEs
Weakrevenue
momentum
New CompetitorsFast-changing Technologies
Increasing Regulations Financial Metrics Under Pressure
Fintech Certificate 18
Blockchain 1.0 CryptoCurrencies
Blockchain 2.0+ Smart ContractsDecentralized Apps…
The building block of Web 3.0 and Industry 4.0
Blockchain: The Most Disruptive Technology Of The Past 10 Years
Fintech Certificate
Blockchain: It’s Just Getting Started (I)
19
Blockchain looks like the Internet back in 1994…
➢ The decentralized software market value is $100B+
➢ ~20M crypto accounts in the world today or 0.3%
1994/1995
0.3% 0.4% 0.8% 1.3% 2.0%3.1%
4.6%6.8%
8.1%
10.6%12.3%
14.2%15.8%
17.6%
20.6%
23.3%
25.8%
29.2%
31.8%
35.1%
38.0%
40.7%
43.4%
46.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
500
1'000
1'500
2'000
2'500
3'000
3'500
4'000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Wo
rld
Po
pu
lati
on
Pen
etra
tio
n
Internet Users (Millions) World Population Penetration
We are here
2014
2012
2013
2004
1995
1996
1997
19981992
Source: scribblrs.com
➢ In 1995, the entire internet sector (public & private) was ~$70B
➢ In 1994, the entire global internet population was ~20M or 0.4%
Today
Fintech Certificate 20
Blockchain Disrupting Old And New Business Models
OLD (centralized) NEW (decentralized)
Data Storage
E-commerce
Social Media
Sharing Economy
Fintech Certificate
ICO: $1,327VS.
VC: $259
Blockchain: It’s Just Getting Started (II)
21
In 2017 alone, $4bn has been raised through ICOs (Initial Coin Offerings)
Source: CB Insights, BI Intelligence
$179 $161$122
$83$130
$248 $259
$12 $21 $21 $39 $38
$757
$1327
$0
$200
$400
$600
$800
$1000
$1200
$1400
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Conventional VC Funding To Blockchain Firms Vs. ICO FundingGlobal, Millions ($), Q1 2016-Q3 2017
VC funding ICO Funding
Q3 2017:
ratio of 5 to 1
Fintech Certificate 22
➢ A Blockchain (2.0+) is a distributed database of transactions (and computer code) recorded and
verified across a network of participants
Someone requests a
transaction
How blockchain works:
The first block is created
online and represents the
transaction
The requested transaction is broadcast to a P2P
network consisting of computers, known as nodes
The network of nodes
validates the transaction
and the user’s status using
known algorithms
A verified transaction can
involve cryptocurrency,
contracts, records or other
information
Once verified, the
transaction is combined
with other transactions to
create a new block of
data for the ledgerThe new block is then added to the existing blockchain, in a
way that is permanent and unalterable
The transaction
is now complete
Validation
Blockchain: The Ultimate Disintermediation
Fintech Certificate 23
Streamlining compliance procedures (AML, client onboarding…), hence reducing manual
intervention
Smart contracts allow the performance of trackable and irreversible transactions without third
parties. This level of automation and security has the power to revolutionize the management of
traditional contractual engagements across all industries.
Use cases
lockchain technology isn't just a more efficient way to settle securities. It will
fundamentally change market structures, and maybe even the architecture of the
Internet itself.”Abigail Johnson, CEO Fidelity Investments
Bitcoin is a remarkable cryptographic achievement…The ability to create something
which is not duplicable in the digital world has enormous value… Lots of people will
build businesses on top of thatEric Schmidt, Executive Chairman of Google
B
Improving and speeding the post-trade clearing and settlement processes
Blockchain: Wide-Ranging Applications
Fintech Certificate 24
WEALTH MANAGEMENT
PAYMENTS
LENDING
A rich newsflow ahead in Fintech: expected IPOs and M&A targets
$60 bn
Lufax
$4 bnSoFi
$4 bnCommonbond
$3.5 bnCredit Karma
$1 bn
Kabbage
$70 bnest. valuation
Ant Financial
$10 bn
Stripe
$1.3 bn
Robinhood
$2.3 bn
Adyen
$7.5 bn
$2.3 bn
$1.6 bn
Transferwise
$700 mn
WealthFront
$800 mn
Betterment
Fintech Certificate
M&A frenzy in sight: many Fintech businesses are highly fragmented and
scalable
Conclusion
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A major positive impact on GDP growth (greater efficiency of the banking
system)
A huge revenue opportunity in lending and payments
Many cost savings opportunities at stake for traditional financial institutions
Financial software a sweet spot
Blockchain to have a massive impact as it represents the ultimate
disintermediation
DISCLAIMER
This report has been produced by the organizational unit responsible for investment research (Research
unit) of AtonRâ Partners and sent to you by the company sales representatives.
As an internationally active company, AtonRâ Partners SA may be subject to a number of provisions in
drawing up and distributing its investment research documents. These regulations include the Directives
on the Independence of Financial Research issued by the Swiss Bankers Association.
Although AtonRâ Partners SA believes that the information provided in this document is based onreliable sources, it cannot assume responsibility for the quality, correctness, timeliness or completenessof the information contained in this report.
The information contained in these publications is exclusively intended for a client base consisting ofprofessionals or qualified investors. It is sent to you by way of information and cannot be divulged to athird party without the prior consent of AtonRâ Partners.
While all reasonable effort has been made to ensure that the information contained is not untrue ormisleading at the time of publication, no representation is made as to its accuracy or completeness and itshould not be relied upon as such.
Past performance is not indicative or a guarantee of future results. Investment losses may occur, andinvestors could lose some or all of their investment.
Any indices cited herein are provided only as examples of general market performance and no index isdirectly comparable to the past or future performance of the Certificate.
It should not be assumed that the Certificate will invest in any specific securities that comprise any index,nor should it be understood to mean that there is a correlation between the Certificate’s returns and anyindex returns.
Any material provided to you is intended only for discussion purposes and is not intended as an offer orsolicitation with respect to the purchase or sale of any security and should not be relied upon by you inevaluating the merits of investing in any securities.
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