By Telis Demos
Here is Exhibit A for those who think "fintech" is overhyped and
for those who think it is just getting started: A new stock
index.
Investment bank Keefe, Bruyette & Woods and exchange
operator Nasdaq Inc. a day ago unveiled the KBW Nasdaq Financial
Technology Index, or KFTX, adding to their widely tracked
big-banking, regional banking and capital markets benchmarks.
It is the first major index devoted solely to U.S. publicly
traded financial technology companies.
The index kicks off tracking 49 companies, ranging from giants
such as Visa Inc. to upstarts such as LendingClub Corp. Together
they make up 18% of the total universe of U.S. financial companies
and represent $785 billion in market value, KBW said.
The bank, a unit of Stifel Financial Corp., took a broad
approach to the concept of financial technology companies, or
fintech for short. While no big banks are included, it does feature
firms that provide technology to banking giants, such as Fiserv
Inc. and Fidelity National Information Services, Inc.
KBW says it doesn't focus on startups for its fintech index.
Instead, Fred Cannon, KBW's global director of research, argued
that some big, well-established companies were doing a lot more to
enable the digital delivery of financial services, such as loans or
payments. As evidence of how important this is, he noted, many
fintech firms are increasingly seeking to partner with banks.
"Some people see [fintech] as disrupters who are going to kill
the big bad banks, but we feel it's not quite that," Mr. Cannon
said. "We feel that there are some big companies that are already
providing financial services using technology."
KBW and Nasdaq defined fintech companies in three ways. First,
the companies mainly sell financial services. This excludes
software firms such as Microsoft Corp. that often sell tools used
by banks but don't specialize in banking services.
Second, they aren't primarily brick-and-mortar oriented. That
doesn't mean they have no physical presence. One holding,
Intercontinental Exchange Inc., owns the floor of the New York
Stock Exchange, for example. But that is just a small part of the
company's vast electronic trading and data business.
And third, the companies generate most of their income from fees
rather than interest on loans or deposits. This is a popular
talking point with some stock analysts, who have been critical of
venture-funded online lenders who want to portray themselves as
high-tech internet companies but more closely resemble traditional
nonbank lenders.
The criteria could someday keep out some companies that aren't
yet public, such as Social Finance Inc., or Avant Inc., who make
loans online but hold many of them on their own balance sheet. That
is not the case for LendingClub, which only recently began holding
a tiny portion of its loans. Before that, it sold every loan it
made.
"Some of these [venture-funded startups] are taking on more
traditional financial company risks that have been perceived
earlier," said Mr. Cannon.
A broader definition of fintech, beyond startups, will be
heartening to some established companies, who have been fighting
the view that Silicon Valley upstarts have stolen the fintech
moniker and are poised to disrupt and displace them.
It may also be good news for investors, as established
banking-technology firms' shares have outperformed many of the
internet upstarts in general in 2016.
Through Monday, the top performers of the companies now in the
index so far in 2016 are prepaid card provider Green Dot Corp. (up
45%), bond trading network MarketAxess Holdings Inc. (up 34%), and
ATM services provider Cardtronics PLC (up 28%).
At the other end are LendingClub (down 58%) and
comparison-shopping website Bankrate (down 39%). Mobile payments
company Square is down 29%.
Getting an index can help boost smaller stocks that are
included, if the index takes off as a benchmark for investors in
this sector. It also is typically a first step toward building
exchange-traded funds, which could bring additional capital to the
firms too.
For the biggest stocks included, such as Visa, MasterCard Inc.,
American Express Co., or PayPal Holdings Inc., representation in
the KFTX index probably won't move the needle in terms of market
cap.
And each company in the index is weighted equally, so the
smallest firms have the same impact on the index's movement as the
giants. They could also gain more if a big exchange-traded fund
starts tracking the index and buying shares.
Write to Telis Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
July 19, 2016 14:02 ET (18:02 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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