The Israeli fintech is hot, with about ten new unicorns (a private company valued at about $ 1 billion or more) created during the first half of the year. However, national pride still does not take fintech companies off the fringes of the global financial innovation in which they are located, but in the face of industry giants such as Visa, PayPal, and SQUARE.
This is because in the international financial world the term “fintech” still connects to the activities of banks, credit cards and digital payment companies – mainly American ones – which also lead it on stock exchanges.
The five largest public companies in the world in the vague definition of the global financial system for fintech are Visa, MasterCard, PayPal, American Express, and SQUARE, and they are traded on Wall Street USA at values ranging from $ 97.4 billion recently to $ 426.4 billion for the first time (see Chart).
“Fintech is a concept that expresses a large market that within international eyes contains the entire financial system,” explains Sergei Vaschonok, a senior analyst at Oppenheimer Investment House. “And Israel does not have a leading foothold in it. Israeli companies, including those that have reached a value of about $ 10 billion, are still small. There is room in this system for small players as well, but the leading companies in the world remain American companies, including Visa, MasterCard and PayPal. Each in its own direction. “
“After them, in terms of market value, American Express, which in the American view is a financial institution of its own and actually functions as a bank, and the mobile payment giant SQUARE. All five are traded on Wall Street.”
The financial system is desperate for solutions, but unlike the small state of Israel, where it is relatively easy to make pilots in the field, international giants make it more difficult for changes to enter the field, and it is not certain that Israeli fintech companies will justify themselves in the near future.
“On the one hand, there is great potential for innovation in the financial systems,” Vaschunok continues, “especially in the United States, since its financial payments market lags far behind Israel or Singapore. Even in the internal work of the banks themselves there are still many paperwork transfers. So even some of the big companies in the US are the ones that take care of check scanning and deposit systems, for example.
“On the other hand, it is difficult to implement new systems in American banks, since these are huge entities, some of which are spread over hundreds and thousands of branches around the world. If you look at a body like the Bank of America, To the culture of cash transactions that still dominates the US.
“Another thing to keep in mind is that the fintech industry is ultimately still just a kind of interface for banks. To illustrate, then in a market like China, most payments today are made via mobile phones. The strongest players are Alibay, Alipay and Tencent. , Via WeChat.
“They both each own half of the Chinese market, but they are still just an interface to the banks, which are the ones that do all the actual clearing and transfer of payments, and where the accounts are still.”
Global price decline
While Israeli companies receive a perpetual cash infusion after arousing the dream of return among investors, four of the five international giants in the field have experienced an average decline of about 10.6% since the beginning of the year. Most of the declines occurred during last October, against the background of the publication of the financial statements for the third quarter of the year. This is when the S & P500 index, for example, rose by 24.7% during the same period.
The sharpest decline is attributed to the share of digital payments giant PayPal, which fell 19.1% from the beginning of the year to the last trading day examined (see table). Alongside it, the credit giants Visa and Satarkard also fell by 10.6% and 10% for the same period, respectively.
“PayPal has weakened greatly, especially in recent months,” Verschonok details. “This is after a series of disappointments in the results of its operations, especially in the context of the corona. After all, in Corona, PayPal’s activity grew as a result of an increase in Internet consumption, which led to an increase in the need for a payment platform.
“As a result, it experienced an increase in the volume of transactions from which it charged a commission, along with an increase in the volume of customers. But with the return to routine, the volume of transactions, as well as the volume of new customers joining, decreased.
“Between Visa and MasterCard the corona worked the other way around. During the epidemic their activity declined due to a lack of physical transactions in stores and markets. In addition there were fewer trips abroad, which led to at least currency exchange fees, which is very profitable among American credit card companies. These credit.
“With the return to routine, the volume and amount of transactions is steadily rising among the two credit giants leading the fintech business in the US, and if we take Visa as an example, we will see it show profitability rates of about 50%, alongside an almost risk-free business model. “It is also a company that receives rewards from the banks for using its credit card, along with income for all ironing out of the businesses and receiving the same currency conversion fees, which led its share to moderate the declines it experienced during the corona.”
In contrast, the stock of another credit card company – American Express – leads the table of five American public fintech giants, after a jump of 41.3% in its share price since the beginning of the year.
“American Express operates as a financial institution for everything and is supervised by the central bank,” Verschonok explains, “so its business model is more risky and includes credit risks. However, because it operates as a bank alongside activity as a credit company, it grows faster than a bank.” “This probably led to the launch of its share upwards. In this context, it is important to raise the issue of risk among the fintech industry, including the Israeli unicorns. The problem does not begin with the value of the companies, but with the level of risk in their operations.”
“Take, for example, a fintech company that works with artificial intelligence to handle risky loans. After all, most of the information is only in the hands of banks, while that company is only beginning to study the market and its risks through its first customers, and has no credit history data.
“Banks will not give a loan without a credit history, but fintech companies do, and if we learn the lesson from 2008, then there is a high risk in lending – which is much more risky than a high multiplier, as it is a possibility of the whole business collapsing. “In 2008, which caused the collapse of the entire financial world. But as long as the economy grows and interest rates are low, it works.”
“True, banks are losing market share to other companies, but it’s mostly to those with problematic credit history, and companies that give loans that focus on market segments such as buying cars or student loans.”
What does the future hold for the Israeli fintech industry and will the rate of recruitment built on yield dreams soon materialize? Capital market sources believe that the global financial system will have to operate primarily against strong competitors such as retail giants, for parts that were previously reserved only for them. In addition, banks and other entities in the financial system will have to adapt to the nature of the conduct of Generation Y consumers, who require transparent, accessible, fast, simple, and digital services.