I must admit the rise of a cohort of fintech stars over the past 24 months has largely passed me by, but that could be a costly mistake given the strength of fund administration platform providers benefiting from a couple of powerful tailwinds.
Just take a look at the rise of these three fintech shares:
Hub24 Ltd (ASX: HUB) up around 150% in 2 years to $13.06 today, with a market value of $808 million
Praemium Limited (ASX: PPS) up around 110% in 2 years to 74 cents per share today, with a market value of $294 million
Netwealth Group Ltd (ASX: NWL) up 110% to $7.72 since its November 2017 initial public offer at $3.70 per share, with a market value of $1,825 million
Before we take a look at each individually, it's worth noting how a rising tide has combined to lift all these boats. In particular a few factors are helping:
- Australia's system of compulsory superannuation is feeding a ballooning superannuation pool of funds looking for platforms through which to administer investments.
- Fintech and the rise of online technologies or scalable business models built on software has allowed these companies to carve out profitable niches for themselves.
- Finally, the strongest tailwind is that the 'big banks' are now losing market share to these independent specialists due to the fallout from the Royal Commission in particular. On the one hand the reputational damage to the banks has lead many self directed investors to simply prefer independent platforms, while on the other it seems that regulation is set to put an end to the 'vertical integration' model whereby platform providers like the banks also sell their own financial products on the platforms. If this kind of 'vertical integration' is banned or restricted a lot more money will be all but forced onto independent platforms.
- Notably groups like Netwealth still only have a low-single digit percentage market share, while the likes of Westpac Banking Corp's (ASX: WBC) BT Investments subsidiary platforms have market share around 18%. Others like the Commonwealth Bank of Australia's (ASX: CBA) Colonial First State have a comfortable double-digit market share. However, it's the regulatory problems 'vertical integration' is causing the banks that is making them look to divest their wealth planning businesses.
As noted previously though I'm not familiar enough with any of the platform businesses to pass judgement, although there are a couple of points for investors to consider.
First up is that they still appear to have long growth runways and have scalable, capital light business models in that they don't have to take on much more cost to take on more funds under administration.
This is a positive, but it should also be noted that this is a competitive space, with not especially high barriers to entry, while a lot of future growth is baked into their share prices.
Finally the competition factor could keep a lid on profit margins going forward as these businesses will struggle to command much pricing power unless they can demonstrate clear advantages over rivals.
For now then I'm keeping them on my watch list for further investigation….
