Head of Research & Strategy at Global X ETFs
Welcome to Season 2, Episode 2 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Jay Jacobs, Head of Research & Strategy at Global X ETFs, to discuss the world of FinTech, cryptocurrency, and blockchain.
Having joined Global X in 2013, Jay leads the firm’s research team, which originates the firm’s unique insights on the markets and ETFs. He also guides the planning and development of the firm’s strategic direction.
Jay holds a BA from Emory University in International Studies and an MBA from Columbia Business School. He is also a CFA charterholder.
What is thematic investing?
Thematic investing refers to the process of identifying disruptive macro-level trends and the underlying investments that stand to benefit from the materialization of those trends.
Global X offers a two-pronged approach:
- Top-down, in which they identify disruptive macro-level trends
- Bottom-up, in which they find investments with high exposure to those trends
Characteristics of thematic investing include:
- Long term growth-focused strategy
- Unconstrained by arbitrary geographic and sector definitions
- Often low correlations to other growth strategies
- Relatable concepts
FinTech is one of those themes.
What is FinTech?
Broadly speaking, financial technology (‘FinTech’) terms apply technological innovations, such as advancements in software, mobile connectivity, and data & analytics, to disrupt or improve the financial services industry. Mobile and digital payments, automated investing, and online banking are all FinTech innovations.
FinTech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management. FinTech also includes the development and use of blockchain and cryptocurrencies, like Bitcoin.
FinTech enhances existing businesses by reducing costs, managing risks, and improving processes.
- Process automation software
- Risk and analytics
- Specialized data providers
- Enterprise software solutions for financial institutions
FinTech disrupts businesses by removing middle-men, expanding access, and unbundling services. For instance:
- Peer-to-peer lending
- App-based investing
- Personal finance software
Digitalization of Banks
One of the key trends we’re seeing is the digitalization of banks. Our banking industry is shifting away from the old banking model with physical branches and paper statements, toward an increasingly digital process.
There are a few major non-digitalized issues with the old banking model, including:
- Disaggregated data. Data on customers is siloed into different areas of the bank; therefore, banks are unable to provide one-stop online/mobile banking, personalized experiences, or accurate risk assessment. According to a survey by PWC, 49% of consumers now conduct their banking primarily on their desktop or smartphone.
- Loosely integrated software. There exists a patchwork of legacy software systems as a result of acquisitions, or a non-integrated approach to technology. This leads to high IT maintenance costs, limited functionality and adaptability, and the potential for breakdowns. A Tenemos survey found that 80 percent of IT spending, by banks using legacy systems, is used on maintenance.
- Manual processes. The bank relies on back office staff and local branches for basic functions. Manual processes are tied to high expenses, limited growth, and an inability to reach new customer segments. According to BCG, relying on more online functionality and automated back office processes could reduce a bank’s expenses by more than 7 percent.
Banks that are effectively digitalized have significant advantages over others in both customer experience and bank operations.
Customer experience improves with greater flexibility, a more personalized experience, and access to real-time data.
- Customers can access information and conduct banking services anywhere, from any device
- Content and product offerings are customized to each client, offering a more relevant experience
- Proprietary and third-party data is updated in real-time, giving customers more information at their fingertips
Bank operations improve due to predictive analytics, reduced operational risks, scalability, and enhanced risk management.
- Extensive centralized data allows for deeper analysis of customer profitability, loyalty, and risk
- Back office operations are more easily automated, reducing the risk of errors
- Automated back office functions and digital banking interface reduce variable costs
- Banks have a 360-degree view of firm-level risks in real time
The advantages for fully digitalized banks creates opportunities for a variety of enterprise software companies in the FinTech space that help banks undergo digital transformations.
IDC anticipates global financial services IT spend will be $440 billion this year, rising to nearly $500 billion by 2021. 70 percent of this spend is expected to be directed towards third-party firms in hardware, software, and IT services.
Some enterprise software companies that potentially stand to benefit from bank digitalization include:
- Integrated core banking software and infrastructure
- Specialty software for portfolio management, risk analytics, mortgage processing, and insurance claims
- Third party market data providers
Digitalization has enabled retailers and other businesses to accept payments in a variety of ways. For example, these are all the ways you can buy a cup of coffee at Starbucks:
- Starbucks cards and loyalty points
- Starbucks mobile app
- Chase Pay
- Apple Pay
- Google Pay
- Visa Checkout
- Credit and debit cards
- Digital currency
Why are digital payments on the rise? Customers want reliable, convenient, and secure transactions.
Advantages of Digital Payments
- Convenience. Digital payments eliminate the need for a physical wallet, and seamlessly facilitates transactions.
- Security. Digital payments lead to potentially less risk of loss through theft or misplacement of physical cash. Additionally, the record of transactions can be audited to settle disputes.
- Data. Personal spending can be recorded, categorized, and monitored.
- Costs. Digital payments help consumers avoid or reduce traditional fees, like ATM withdrawal or money-transfer fees.
The growth of digital payments is evidenced through these statistics:
- Non-cash transactions increased 11.2 percent from 2014 to 2015—21.6 percent of which occurred in developing markets, versus 6.8 percent in mature markets.
- Growth has continued at a 10.9 percent pace annually through 2020.
- Online and mobile payments made up 31.2 percent of these payments, which is expected to grow to 45 percent by 2019.
FinTech in Emerging Markets
FinTech is uniquely suited to disrupt financial services in emerging markets given a rising consumer population entering the banking system for the first time.
Why FinTech may be poised to disrupt emerging markets
- Market size. In China and India, the number of middle-class consumers has grown at 6 percent each year, compared to just 0.5 percent growth in developed markets. Analysts estimate $380 billion in potential revenue from extending financial services to the unbanked.
- Competition. Traditional financial institutions in emerging markets tend to be very concentrated, creating opportunities for FinTech firms to compete on price or innovation through scalable technologies.
- Leapfrogging technology. Many EM consumers are using banking and non-cash payments for the first time, allowing them to be quicker adopters of new technologies and business models like mobile payments and peer-to-peer lending.
- Government support. Governments typically support FinTech development given that it can extend financial services to the unbanked, create high tech jobs, and make wealth and transactions more trackable.
What is Bitcoin?
Starting at a very high level, we must consider two things:
- What is money?
- What is value?
Our Current System: Fiat Currency
In our current monetary system, we are strong believers in the concept of fiat currency—a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed.
Fiat Currency vs. Cryptocurrency
Why would anyone consider anything other than the U.S. dollar to transact in? Some people believed there were areas of the U.S. dollar that could be improved upon.
Why does a currency need to be controlled by a central bank or a Treasury?
Should it be controlled?
Should a currency be based on something physical, like an actual dollar bill, or should it exist digitally - to reduce the cost of transactions and be less controlled by regulatory bodies?
Should you be able to track where money went? Was it acquired by legal means or illicit means?
Thus, cryptocurrency was developed to improve upon the current model of fiat currency.
Bitcoin was built on the blockchain, a ledger technology that tracks how the currency has moved through the system over time. In a blockchain, each node has a full record of the data that has been stored on the blockchain since its inception. For Bitcoin, this data includes the entire history of all Bitcoin transactions. (Conversely, a physical $20 bill holds no history.) This immutable record effectively eliminates the risk of illegal transactions.
How to reconcile data privacy and cryptocurrency
There are mounting concerns about the anonymity of early cryptocurrencies, such as Bitcoin.
However, data collection is happening across all digital payments, including retailer apps, credit cards, Apple Pay, and PayPal.
The Currency War Between Digital Money and the Dollar
There is no question about it: There is a real regulatory risk to cryptocurrencies. However, the government has not moved quickly to understand or regulate cryptocurrencies, and doesn’t appear to be moving in that direction.
Moreover, today, some of the largest global private financial institutions are backing cryptocurrency.
In addition, cryptocurrency is highly valuable in countries dealing with issues like hyperinflation—like in Zimbabwe and Venezuela. In these emerging markets, cryptocurrency could be taking the place of digital gold.
It’s important to remember that this isn’t the first threat to fiat currency. People create, store value, and transact in ways that aren’t heavily regulated, including gold, collectibles, and much more.
That means the next challenge for regulators is how to regulate cryptocurrency without also regulating other ways to store money.
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DISCLAIMER: Prosperity Financial Group and Meet the Expert® with Elliot Kallen do not make specific investment recommendations on Meet the Expert® with Elliot Kallen or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of the Meet the Expert® with Elliot Kallen guests, and not necessarily of Elliot Kallen or Prosperity Financial Group.