Financial technology (fintech) companies have enjoyed substantial growth as part of the epidemic.
A World Bank survey found that most types of fintech companies recorded strong growth in the first half of 2020, and 60 percent of those surveyed said they planned to launch new products. This growth is expected to continue for the next few years. According to research and market, the global fintech market will grow at a CAGR of 26.87 percent for the forecast period 2020-2026.
This positive development in the FinTech field, however, has caught the attention of cyber criminals. Users of Fintech services are becoming more aware of cyber risks. A survey by independent market research firm Market Measurement, presented at the Money 20/20 USA Fintech Industry Conference, found that more than one-third are concerned about the risk of using one-time passwords (OTP) and knowledge-based authentication (KBA).
FinTech industry executives and stakeholders are increasingly concerned about cyber attacks that are eroding their confidence in existing security controls. In the same vein, it makes sense for investors to be more cautious about fintech.
Cyber crime problem
One of the biggest ransomware attacks in 2020-2021 involved London-based Finastra, one of the world’s largest fintech companies serving more than 8,000 customers, including the top 100 largest banks operating in 42 countries. Finastra survived a ransomware attack that went unnoticed for three days without a ransom being paid. However, the news of the incident revealed many weaknesses of the company.
Finastra’s cyber security stance reportedly leaves much to be desired. A security firm that conducts Internet-wide scans at the company says Finaster’s servers have been operating without a patch for a long time. This obviously puts the company’s system at risk for a variety of cyber attacks. In addition, the FinTech provider was using older VPN servers and older Citrix servers.
A similar ransomware attack hit Diebold Nixdorf, a retail banking technology company that controls one-third of the global ATM market. The agency claimed it had not paid any ransom, but reports of the attack had already damaged its reputation.
Another major cyber attack on the FinTech market is the data apps at Travelex, a forex firm that specializes in serving travelers worldwide. The company initially denied the attack but eventually had to admit it because it was forced to suspend their travel finance service.
In addition, more than 7 million clients’ personal information has been leaked as a result of data breaches suffered by the American stock trading platform Robinhood. The perpetrators of the attack are still unknown, and it is possible that they will never be identified.
What is the significance of this attack? In addition to the disadvantages or costs of the affected companies, they not only affect the market value of the publicly traded FinTech companies but also other businesses that use the services or solutions provided by the affected FinTech companies.
Is FinTech stock a good investment?
Considering the way FinTech companies are growing, many probably have the opinion that they have good stock to buy. However, just as it does in all other industries, generalizing a field or sector is never a good idea. Some will do well, others are not cut enough to be competitive enough to make a profit.
Matthew Frankel, a well-known financial planner, says that “Fintech stocks are usually high-growth firms that invest heavily in disruptive technology and overall, they are not the safest place to keep your money.” However, even with the wide range of risks involved in investing in FinTech, it is still possible to profit from them by assessing the risk for certain stocks.
There are five important points to keep in mind when it comes to fintech stocks. These are sales growth, balance sheets and profitability, competition, cyclicality and network impact.
Increase sales – An obvious reason to consider, investors should closely monitor the sales statistics of a fintech company. Rapid growth is good, but it should be consistent or prolonged. Some firms experience a lot of growth in the first year or the first few months, but eventually stagnate. Growth should be consistent, sustainable and somewhat predictable.
Wealth, liability and profitability – The level of cash and debt of a company says a lot about its future. A company may seem profitable but the debt is deep. This does not bode well for its future growth and sustainable profits. There are companies that are not yet profitable, but they have committed technology or systems that are worth betting on. Profitability may not be so obvious now, but the potential exists especially when the company is compared side by side with similar business models.
Competition – As mentioned, the fintech industry is growing rapidly. Many players emerge and offer something new and promising. It is inappropriate to examine potential investments in isolation. They need to be related to other companies and market development. Competitive risk should also be considered in evaluation. Being the first in the market is not a guarantee of competition. This is important considering the track record and consistency that is especially important considering what different fintech companies are offering and how they are innovating to offer something new but highly effective.
The competition factor also includes concerns about cyber attacks. FinTech companies that have been the victims of ransomware, data breaches, DDoS and other cyber attacks easily lose their credibility in conducting financial transactions. Worse, they are avoided by investors if their compromised solutions are used by other firms as an important part of their operations.
However, a single attack should not be sufficient reason to dismiss a fintech company as a potentially good investment. Many companies manage to recover even after an expensive and well-publicized security incident. SolarWinds, for example, is already recovering from the infamous attack in 2020. This recovery takes time, but it is fair to say that cyber-attacks are not a definite death sentence for a FinTech investment.
In a circle – It refers to the sensitivity of a business or industry to recessions and other economic disturbances. Some fintech companies tend to be cyclical like the loan business, which suffers losses when the economy collapses and creates liquidity problems among lenders. However, there are FinTech businesses that are not so cyclical or more resilient such as payment processors and forex and crypto exchanges. They are not affected by major changes in the economy and trends in economic activity. It is advisable to invest in fintech stocks in a short cycle.
Network effects – What’s common among the most successful media platforms, online marketplaces and social media sites? They make it easy for users to be part of their ecosystem, so they have a huge number of users. This is why many businesses have a habit of buying competitors or new players that are related to their operations or business model. The network effect facilitates a high probability of success for FinTech companies as it entices more potential users or subscribers and supports agile and uninterrupted expansion.
FinTech is a bright spot in the current epidemic-pressured economic situation. However, not every FinTech stock is the same. Not every financial technology business is likely to grow and serve as a profitable investment. Some are threatened and suppressed by various challenges including cyber attacks. Investors should examine potential investment options individually based on a variety of factors, including the five briefly discussed above.
Also, cyber attacks do not necessarily spell out a specific end for a FinTech company, although statistics show that many cyber attack victims eventually succumb. It is not impossible for them to recover and become more competitive in the future, so investors should not immediately expel some companies for fighting cyber criminals. It is not right to generalize or refuse to look at the cloud of doubt as an opportunity and to take risks when big possibilities arise.