May 2021

Bruce Glazer Portfolio Manager and Fintech innovation: Global Industry Analyst A pure play on enduring disruption

Michael O’Brien, CFA KEY POINTS Investment Specialist We believe: Now is a historically attractive time to invest in the ever-evolving fintech industry. A pure-play approach is the best way to produce additive returns over time. Our team of seasoned specialists has the experience and expertise to identify the companies driving the next generation of financial services.

TECHNOLOGY’S DISRUPTION OF FINANCIAL SERVICES CONTINUES TO THRIVE IN THE WAKE OF COVID-19. We believe the pandemic has accel- erated many of the driving forces behind our most compelling fintech themes. This crisis has forced consumers to embrace digital technology in order to adjust to the “new normal,” driving the adoption of mobile wallets, branchless banking, and “do-it-yourself” financial services. Financial insti- tutions with more modern technology have been able to respond better to an increasingly digital customer and a more remote workforce. In addition, we think recent market movements have provided historically attractive entry points for many fintech opportunities. The shift to digital is still in its early stages, with developments in areas such as data analytics, artificial intelligence (AI), cloud computing, and 1Wellington Management estimates, May 2021. machine learning just beginning to transform the sector. While industries like e-commerce and music changed rapidly and had only a few winners, we believe fintech will evolve differently. The industry’s greater complex- Any views expressed here are those of the authors as of the date ity, regulatory influence, and geographical diversity drive our expectation of publication, are based on avail- of multiple leaders emerging gradually over a longer time horizon. We able information and are subject to estimate that companies with a combined market capitalization of US$9 change without notice. Individual trillion in the banking sector and US$17 trillion in broader financial portfolio management teams may services are set to be disrupted.1 In our view, fintech innovation and the hold different views and may make resulting disruption present a vast multi-decade opportunity. different investment decisions for different clients. All investors should In this paper, we explore why fintech merits a pure-play approach, discuss consider the risks that may impact the importance of an investment team with deep industry expertise in both their capital, before investing. financial services and technology, and highlight the long-term nature of PLEASE REFER TO RISK SECTION this disruption. BELOW. A pure-play approach to fintech Despite the scale of the universe, many available fintech approaches invest in companies that do not have financial technology as the core of FOR PROFESSIONAL OR their business. INSTITUTIONAL INVESTORS ONLY 538027_A4_2 May 2021 2 Wellington Management

In our view, this secular growth story — with a universe of over 500 com- panies — is best accessed through a pure-play strategy, which offers more direct exposure to the disruption. Our approach to fintech focuses on com- panies where at least 80% of revenues are driven by financial technology sources. With such a large investable public market, we believe investors do not need to stray from the core of the opportunity. In fact, our team has identified a universe of approximately 200 companies that pass our percentage-of-revenue threshold. The areas of the fintech market driving our interest in a pure-play approach Public versus private fintech are payments, the digitization of financial services, and technology infra- We believe the opportunity set in structure (see Figure 1). In payments, 60% of total consumer payments public markets has reached critical globally are still cash-based, leaving huge potential for further digitization. mass, becoming more broad-based Similarly, in the digitization of financial services, roughly 1.5 billion adults across regions. In our view, public worldwide do not yet have access to a bank account, and the digitization fintech provides significantly greater of financial services is just beginning to address the insurance and capital transparency and liquidity relative to private fintech. We have uncovered markets. Financial technology infrastructure offers the longest runway for what we believe to be quality public growth, as most banks’ IT systems were built in the 1980s and are ripe for fintech companies with sustainable improvements and upgrades. This space has also reached an inflection point competitive advantages and durable as banks turn from defensive regulatory spending to offensive investment business models growing at attractive in growth. rates around the world. Moreover, the IPO pipeline for fintech companies is Figure 1 robust, so our investable universe is Key fintech investment opportunities2 constantly expanding.

About the authors

As a global industry analyst (GIA), The digitization of Financial technology Bruce conducts fundamental research Payments financial services infrastructure on the financial technology sector, Cash-to-card shift Enhancing customer Cloud focusing on the payments and IT experiences services industries. In addition to Software-enabled Trading platforms stand-alone fintech strategy, Bruce payments Vertical-specific Data providers software providers manages subportfolios in our analyst- Omni-channel Artificial intelligence Industry platforms managed research products, which B2B payments Process-reengineering combine the expertise of our GIAs E-commerce Online brokerage software across industries. platforms Modernizing core As an investment specialist in the systems Investment Product and Fund Strategies Group, Mike works Investment examples closely with investors to help ensure Online wealth the integrity of their investment Fuel card company management platform Software company approaches by providing oversight of portfolio positioning, performance, We believe what is thought In our view, this LATAM- Most technology used by and risk exposures. He meets regularly to be a sleepy fuel company based online brokerage insurance companies is with the investment teams, contributes in reality has distinct assets provider is making it decades old and needs to to developing new client solutions, in the travel and health easier, less expensive, be replaced. We believe and manages business issues such as care corporate payment and more efficient for this software platform capacity, fees, and guidelines. verticals, which are both its customers to invest company for property experiencing long-term their savings. This and casualty insurers is secular growth. It also company is rapidly utilizing data/analytics/AI benefits from efforts by disrupting legacy banks functionality that will make 2Figure 1 terms: Omni-channel – Combining fleet operators to control that have long stifled it increasingly valuable to offline/traditional retail experiences with costs and the move to innovation, due to earlier customers as insurance online/e-commerce electronic payments. technology advantages. companies catch up on digital transformation.

The opportunities and investment examples presented are for illustrative purposes only and are not to be viewed as investment recommendations. It should not be assumed that an investment FOR PROFESSIONAL OR in the opportunities or examples presented has been or would be profitable. INSTITUTIONAL INVESTORS ONLY 538027_A4_2 May 2021 3 Wellington Management

Deep resources in financial services and technology Figure 2 The complexity and depth of the fintech ecosystem demands a breadth of investor specializations. In creating our approach to fintech, we brought together industry experts from our global finance and global technol- ogy teams — who have fintech experience dating back to the inception of the industry — and combined them with the broad research resources of Wellington Management. Together, these investors have thousands of financial and technology company meetings each year, developing propri- etary research independent from the . We believe the key to success amid this disruption is deep collaboration to fully leverage both the capa- Digitization bilities and access to company managements of multiple research teams. Digitization in finance will probably In our view, as the fintech industry continues its disruption, the oppor- take longer to play out because: tunity set requires both research experience and long-term company • Consumer behavior is harder relationships cutting across industries, regions, and market caps, including to change. late-stage pre-IPO and other private investments. Our ability to collabo- • The strength and value of incum- rate with our private market colleagues provides critical insight into the bency is unlike other sectors. durability of public market fintech companies. We estimate that our ana- • The embedded infrastructure is lysts and investors have more meetings with both public and private fintech critical in nature. companies than any other financial institution. • Regulatory oversight results in a Additional portfolio management team members slower pace of change.

Figure 3 Long-tailed secular growth areas Jennifer Nettesheim Matt Lipton, CFA Scott Kennedy, CFA Matt Ross, CFA Berg, CFA We believe fintech investments should Global Industry Research Global Industry Global Industry focus on long-tailed secular growth Analyst Analyst Analyst Analyst areas, such as:

Artificial intelligence A multi-decade disruption The enduring nature of the fintech story is, in our view, best served by an approach with a similarly long-term perspective. We think the pace of Machine learning disruption will be moderated by the inertia created by the distinct char- acteristics of the financial services industry shown inF igure 2. In spite of E-commerce this, many approaches to fintech have high turnover. Instead of continually chasing the companies in the latest headlines and news reports, our team aims to identify the public market disrupters, enablers, and incumbents Internet of Things who we believe are positioned to win in this space over the long term. Our approach has lower turnover (approximately 20% – 30% annually) and a long-term mindset focused on key secular themes ( igure ). We believe Mobile wallets F 3 this approach has the potential to better capitalize on the sector’s multi- decade growth and, thus, compound returns over time. The cloud Investing in innovation In our view, a pure-play, public market fintech approach is a compelling Digital payments way to access this industry’s innovation and the valuable disruption it creates. We believe fintech’s complexity further warrants an investment Blockchain technology team with specialization stretching across the subsectors of financial ser- and cryptocurrencies vices and technology — importantly, with deep collaboration across those research resources. Finally, though it may have been accelerated by the current environment, the evolution of this industry is likely to be gradual but enduring. We therefore think the secular growth themes driving the fintech revolution merit a long-term approach. FOR PROFESSIONAL OR INSTITUTIONAL INVESTORS ONLY 538027_A4_2 RISKS Common – Common stock is subject to many factors, Currency – Active investments in currencies are subject to including economic conditions, government regulations, the risk that the value of a particular currency will change in market sentiment, local and international political events, relation to one or more other currencies. Active currency risk and environmental and technological issues as well as the may be taken on an absolute or a benchmark-relative basis. profitability and viability of the individual company. Equity Currency markets can be volatile, and may fluctuate over prices may decline as a result of adverse changes in these short periods of time. factors, and there is no assurance that a portfolio manager Emerging markets – Investments in emerging and frontier will be able to predict these changes. Some equity markets countries may present risks such as changes in currency are more volatile than others and may present higher risks of exchange rates; less liquid markets and less available infor- loss. Common stock represents an equity or ownership inter- mation; less government supervision of exchanges, brokers, est in an issuer. and issuers; increased social, economic, and political uncer- Concentration – Concentration risk is the risk of amplified tainty; and greater price volatility. These risks are likely to be losses that may occur from having a large percentage of greater relative to developed markets. your investments in a particular , issuer, industry, or Small- and mid-cap companies – The share prices of small- country. The investments may move in the same direction in and mid-cap companies may exhibit greater volatility than reaction to the conditions of the industries, sectors, countries, the share prices of large-cap companies. In addition, shares and regions of investment, and a single security or issuer could of small- and mid-cap companies are often less liquid than have a significant impact on the portfolio’s risk and returns. large-cap companies. WELLINGTON MANAGEMENT COMPANY LLP Boston | Chicago | Radnor, PA | San Francisco WELLINGTON MANAGEMENT AUSTRALIA PTY LTD Sydney WELLINGTON MANAGEMENT CANADA ULC Toronto WELLINGTON MANAGEMENT EUROPE GmbH Frankfurt WELLINGTON MANAGEMENT HONG KONG LTD Hong Kong | Beijing Representative Office WELLINGTON MANAGEMENT INTERNATIONAL LTD London WELLINGTON MANAGEMENT JAPAN PTE LTD Tokyo WELLINGTON MANAGEMENT SINGAPORE PTE LTD Singapore WELLINGTON MANAGEMENT SWITZERLAND GmbH Zurich WELLINGTON LUXEMBOURG S.à r.l. Luxembourg www.wellington.com

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