Because hey, if the machines are going to take over, we might as well make some cash in the process. And then the machines will take it and we will be their servants.
Fintech is the new buzz word in finance, apparently replacing the old one, “terrible mortgages that will never be paid back.” Yes, Italics Man, I know that’s more than one word.
The sector is taking on a few different forms. The first (and as far as I can tell, the biggest) is doing loans online. There are at least a half dozen players who will lend people like you money without seeing your shifty eyes in person. Grow and Borrowell are two of the leaders in this space.
I once did a review of Grow, back when it called itself Grouplend. I would very much like to invest in those loans, but, alas, I can’t.
The second big push from fintech is the ol’ robo-advisor, which is essentially software that invests in a portfolio of ETFs on your behalf. There are a number of small players in this space joined by Bank of Montreal, which calls their offering Smartfolio.
Finally, there’s the comparison websites. These places let you compare rates from dozens of different sources, hooking you up with the cheapest or best one for a cut of the action. Lowest Rates is such a site, which continues to ask me to write for them. I’m not sure why either.
There are some I’m forgetting, like payment processors and whatnot, but those are the main categories.
Aside: This graphic from OMERS shows a bunch of the fintech companies and where they’re located. I like how there’s two in Calgary and one in Edmonton. Go Alberta!
You’d think there would be ample opportunities for guys like you or me to invest in fintech, but that’s just not the case. Most of the 100+ companies identified by OMERS are privately-held, turning to angel investors when they’re strapped for cash.
There are still some ways for you to invest in fintech, however. Here are a few ways to do it, some more directly than others.
The direct way to invest in fintech
There’s one Canadian publicly-traded fintech company. It’s called Mogo and it trades under the ticker TSX:GO.
Mogo is trying to be everything to everyone. It started out offering loans that weren’t much better than payday loans, with only a moderate amount of success. Their rates were high, but so were their write-offs.
It’s now focusing on increasing users anyway possible, because of course it is. ALL THE USERS, YO. Current offerings include a free credit score checker, a pre-paid VISA card, a physical location that gives away condoms (yes, really), and a mortgage product.
They also have this graphic in their investor presentation, which cracked me up. Aw, they’re trying.
One of these is not like the others.
The big problem with an investment in Mogo is the company is losing money hand over fist. It lost $4.6 million in the second quarter alone, almost all of it coming from loan write-offs. Mogo has a market cap of $30 million. That’s a pretty significant loss.
I don’t want to criticize Mogo too much, because they’re certainly onto something. They have 300,000 members and are growing like crazy. It’s just not an investment I’d be interested in making.
I should note there are at least a few different ways to invest in the sector in the U.S. market, like Lendingtree, Bankrate, TheStreet, and so on.
The indirect way
Many of Canada’s larger financial companies are taking the opportunity to invest in fintech. Thus, we can indirectly invest in the sector by buying these traditional companies.
Power Financial (TSX:PWF) announced back in 2015 it was going to invest $30 million in Wealthsimple, which is one of the major robo-advisors. Power Financial’s website says it now owns 59.5% of the company.
The problem? $30 million is basically a rounding error for Power Financial. It has a market cap of $22.2 billion. To really put it into perspective, it’s like somebody with $22,000 to their name making an investment worth $30.
Power Financial also owns 61.5% of IGM Financial, the parent company of Investors Group. That stake is worth $5.22 billion. IGM Financial is pretty much the opposite of a fintech company.
The really indirect way
If Power Financial has just a little too much exposure for you, here’s an even more indirect way to invest in fintech. But here’s the kicker. I think it’ll actually end up being the most profitable of all the investments.
Put your cash into bank shares.
Here’s my logic. Canada’s banks are large, in charge, and they dominate the market. And they’ve already invested billions in fintech. You can easily bank online. They process payments for many online businesses. You don’t need to go into a branch to qualify for a mortgage any longer, even though you still gotta call some woman sitting at home in her underwear. Even wealth management firms will send documents via email.
Once some of the smaller players figure out how totake full loan applications online and so on, the banks will either pick out the change in one pocket to buy the new technology or just copy it.
Canada’s six largest banks (you’re welcome, National Bank) have a collective market capitalization of $428 billion. Good luck competing against that.
It’s not easy to invest in fintech. There’s only one pure play on the Canadian market right now, although there are certainly many more if you’re looking to look to the United States.
I think the best long-term way to get access to the sector is to just buy the banks, which will inevitably innovate whenever fintech stumbles upon something cool that can actually make money. We saw it with BMO’s entry into the robo-advisor space, and we’ll see it again and again.