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Tracking FinTech growth with the KBW Nasdaq Financial Technology Index

FinTech is clearly much more than a hype, even if there are many types of FinTechs and not all segments are equally promising.

Still, FinTech has the attention of investors from across the globe as banks also look at acquisitions of financial technology start-ups and the majority of (retail) bankers feels that a collaborative approach is best in regards with FinTech. Major research firms even advice banks to step up their FinTech partnership efforts as they fail to transform fast enough and can learn a lot from FinTech companies. We see the same happening in insurance.

Obviously, other investors are also very active in the FinTech market. And then there are stock markets. In the U.S., the KBW Nasdaq Financial Technology Index (KFTX), tracks how FinTech companies are doing. The index is an initiative of Stifel company Keefe Bruyette & Woods (KBW) and Nasdaq as the name indicates. It started on July 18th 2016 with 49 listed FinTech companies.

Stock exchange concept

FinTech: no generally accepted definition

Are there so many FinTech companies on the stock exchange? Well, it depends on how you look at it.

If by FinTech you mean those disruptive start-ups that have popped up in recent years, the answer is no. And that brings us to the question what defines a FinTech. As we mentioned on our FinTech page, FinTech used to simply stand for financial technology.

Over a decade ago the term was used for companies who were active in areas such as e-banking as we called it, mobile commerce and online payment systems such as PayPal (founded end 1998, as a reminder). It’s only in recent years that FinTech is more associated with these newcomers who want to disrupt various segments of banking and financial services.

Lending Club - the listed peer-to-peer lending company in the KBW Nasdaq Financial Technology Index - source picture - photo credit NYSE
Lending Club – the listed peer-to-peer lending company in the KBW Nasdaq Financial Technology Index – source picture – photo credit: NYSE

So, a company like PayPal is also included in the KFTX (and it should). However, on top of the more recent FinTechs, in today’s sense, there are also quite some names you might associate less or maybe even not at all with FinTech: American Express, Visa, MasterCard (OK, here the link is clear for most) but also S&P Global, Thomson Reuters and Nasdaq (think data).

When they announced the KBW Nasdaq Financial Technology Index, Keefe Bruyette & Woods and Nasdaq – rightfully – pointed out that there isn’t a generally accepted definition of FinTech.

Truism. Moreover, they emphasized that it’s not just about those many ‘disruptive start-ups’.

What makes a FinTech a FinTech according to the KFTX?

Then, what is FinTech according to KBW and Nasdaq? Let’s look at the overview page of the KBW Nasdaq Financial Technology Index or KFTX.

We quote: “Index eligibility is not limited to securities within a particular industry classification. Securities eligible for index inclusion leverage technology to deliver financial products and services”.

Read that again: leveraging technology to deliver financial products and services. But that’s not all, there are three additional conditions:

  1. Their distribution is nearly exclusively electronic,
  2. With limited to no “bricks and mortar”, and
  3. Their revenue mix is predominantly fee-based.

Nearly exclusive electronic distribution is clear, limited or no bricks and mortar as well. Maybe the last of the three conditions is most important; a predominantly fee-based revenue mix. That even excludes some companies, if they were listed to begin with, which sometimes are classified as FinTech firms but have other revenue models.

A broad mix of providers of services for finance and the finance industry

If we look at the 49 companies listed we find a few FinTechs in the sense you might see it,; most have been around for quite some time.

On top of PayPal (Holding, IPO in 2002), examples include peer-to-peer lending company Lending Club (founded in 2006, IPO end 214) and Square (credit card processing and offering a mobile point-of-sale system with Square Register).

The KBW Nasdaq Financial Technology Index - KFTX - in its first month - July 2016 - reports and updates here
The KBW Nasdaq Financial Technology Index – KFTX – in its first month – July 2016 – reports and updates here

Among the other companies, categorized as FinTech according to the KFTX: Bankrate.com, offering tools, expert analysis, and content to make better financial decisions and ACI Worldwide, delivering electronic banking and payment solutions for thousands of financial institutions, merchants, billers and processors around the world.

The index is rebalanced quarterly and members will be updated annually on the third Friday in December. To be eligible, a security must be listed on The Nasdaq Stock Market®, the New York Stock Exchange or NYSE MKT.

Good to now (with the future in mind): the KBW Nasdaq Financial Technology Index is an equal weighted index – more on methodology and eligibility in the PDF here.

Whether you agree with the definition of FinTech according to the KBW Nasdaq Financial Technology Index or not: it’s here and we’re curious if any of the FinTech start-ups, which have been popping up in recent years will go for an IPO and be included and of course, if yes, who and when. Unless the ecosystem changes so much and we see a wave of acquisitions instead, leaving space for the major players or those who carved themselves out an interesting and profitable innovative niche.

 

Top image: Shutterstock – Copyright: ESB Professional – All other images are the property of their respective mentioned owners, unless otherwise mentioned.

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