What’s Fintech? Nasdaq and KBW Offer an Answer With a New Index

By TELIS DEMOS for WSJ
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.

 

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.

First appeared at WSJ