5/The Disrupted
Who stands to lose the most from the proliferation of cryptocurrencies and other financial technologies?
PayPal, Venmo, Login and Pay, Apple Pay, Google Wallet, Square, Robinhood, cryptocurrencies. It seems that there is an endless number of technologies looking to “disrupt the fintech industry” as we know it. Companies that once considered themselves to be computer & device marketers, search providers, and online marketplaces now want to be our wallets too. With these new entrants into the fray and the continued investment in the space, it stands to reason that we are due for a market correction, so-to-speak, in the way we transact and transfer value in our daily lives. The opportunity is clearly there, but who are the incumbents, what or how much do they have to lose in this struggle, and what steps have they taken to adapt?
Leading cryptocurrency news site CoinDesk’s quarterly report, categorizes the publicly traded disrupted entities into the following segments: payment processors, payment hardware, money transfer/ATM outsourcing, bank software, trust/escrow, and securities exchanges. There is of course a lot of overlap here, and new technologies and mobility have contributed to the blurring of the lines between players in this space.
Below is a representation of the major players in the financial services space and the entities that they list as competitors.
With the exception of the securities exchanges, it is easy to see that while clusters exist in the financial technology sector, most of these entities are mutually competitive. Companies like First Data for example walk the lines between payment processor and solution provider. Payment processors like Visa and hardware providers like Verifone are beginning to list tech giants like Google as competitors. Meanwhile entities like ACI Worldwide compete on multiple fronts including on the consumer money transfer, merchant services, and bank software sides. A decade ago this network would have looked a lot more disjointed, and modularity classes would be much better defined. As a result of mobile technologies, the battleground in the financial services space has flattened considerably, and the most recent wave of consumer finance products along with the proliferation of cryptocurrencies should continue this trend.
But how have these companies performed? Over the past 7 quarters the disrupted index has gained 39.1% compared to the 27.1% of the DJIA, 34.9% of the S&P 500 and the 44.4% of the NASDAQ.
On a whole the index appears to have performed average against the overall market. However, a finer segmentation of the index as organized above yields a different set of results.
It should be noted that processors represent $307B in market cap, exchanges at $30.4B, bank software at $26.6B, trust/escrow at $16.5B, payment hardware at $14.5, and money transfer at $10.2B. So, volatility in small-cap vs. large cap companies certainly factors in. It is interesting however to see that the immediately at-threat industries like money transfer, trust/escrow, and payment hardware providers trail the pack in terms of growth. The processors segment at $306B in market cap (at least 10x that of the other segments) is generally in-line with the market. Finally the exchanges and bank software segments, essentially hi-tech companies, have outperformed their peers.
This begs the question, are investors fleeing from these companies in favor of technology players like eBay, Google, Apple, and Amazon? And in today’s technology driven world, how much should we be willing to pay to simply transfer value from peer to peer?
There are obviously other factors at play here, from macroeconomic factors to individual company performance. In the following posts we take a deeper look at some the faltering segments in the disrupted index to better understand the roots of their slowed progress, the effects of emerging technologies on their business models, and the steps that they have taken to counteract an ever-changing competitive landscape.
