The financial technology industry may be in the doldrums, but analysts at investment bank Peel Hunt have taken a bullish perspective on the sector, comparing the evolution of the space to that of the dot.com crash of 2000 and declaring "fintech is the new internet".
Analysts believe that the bursting of the fintech bubble in 2022 has helped to weed out the weak business models in the space and showed the resilience of the rest of the vendors, which are focused on profitable growth.
Gautham Pillai and Advika Jalan, Peel Hunt analysts, note: “Despite its highly compelling long-term investment thesis, the fintech sector has fallen into disfavour recently, which we believe is a myopic view of the space. We liken the development of the fintech sector to that of the Internet sector, with 2022 reactions mimicking the Dot-Com crash of 2000. However, as we saw with the Internet sector in the following two decades, we believe 2022 has helped to weed out the weaker business models in the fintech space."
They note that currently, Internet companies like Amazon, Meta, and Alphabet make up a sizable proportion of the Nasdaq. "With the current cost-of-living crisis likely to catalyse fintech usage even further, the fintech sector is expected to gain a meaningful weight in the FTSE 100 over the next decade, making it the new Internet," they argue.
The UK has a vast fintech ecosystem, with 2,500+ companies, but only a small percentage of these are public. Peel Hunt speculates that high growth categories will emerge in B2B, embedded finance, open finance and RegTech.
Additionally: "Specialised fintechs, addressing specific verticals, customer groups and functions, have the potential to dominate in their niches and use that as a springboard to expand into adjacencies."
Pilai and Jalan says: "The UK #fintech business case is characterised by a significantly better value proposition, large market opportunities, and the ability to become the dominant player in its chosen arena. This translates into hypergrowth that is likely to be sustained even in the long run, given the massive TAMs most of these fintechs operate in, usually anywhere from multi-billion pounds to multi-trillion pounds.”
Peel Hunt recommends that the best way for public investors to gain exposure to innovative, high-growth private UK fintechs is through the dedicated venture fund Augmentum Fintech. In addition, amongst the listed names, analysts hold positive views on Alfa Financial Software, Eckoh, Equals, Eurowag, Boku and Network International.