Fintech: The deregulatory advantage

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Understanding Fintech

Thanks to fintech companies, democratizing financial services to the masses is becoming a reality. Our strategy focuses on identifying the leaders of this revolution across four verticals: financial software, next-generation financial services, the payment industry, and blockchain technology. By targeting disruptors and enablers of digital transformation, we aim to capitalize on long-term trends reshaping the financial services sector. Our focus is on "new fintech" companies—those founded post-Great Financial Crisis, when traditional banks shed non-core activities, leaving a gap for innovators to fill.

While all verticals are interconnected, separate reviews are available for our Blockchain & Digital Assets and Mobile Payments strategies. This note focuses primarily on financial software and next-generation financial services.

Macro environment and positioning evolution

Diverse macroeconomic forces shape the fintech ecosystem. Neobanks, much like traditional banks, are sensitive to interest rate movements. Software providers and payment companies exhibit cyclical trends driven by IT budget and consumer spending. Meanwhile, blockchain-related firms correlate closely with cryptocurrency market dynamics, thriving when liquidity flows into the financial system.

This year, these macroeconomic conditions created significant tailwinds for fintech. Elevated interest rates in developed markets allowed deposit-rich firms to achieve high net interest margins while resilient U.S. consumer spending supported the payment industry. Financial software companies helped banks, insurers, and small- and mid-sized businesses digitize and automate tasks, ushering in a new demand-driven growth cycle. Finally, the approval of Bitcoin ETFs institutionalized cryptocurrencies as a new asset class, extending the bull market.

As a result, all verticals contributed positively to our strategy’s performance. Beyond top-down allocation, we observed a significant transition among fintech firms from revenue-driven to earnings-driven growth. This shift is reflected in our portfolio’s metrics, with a forward revenue 3Y CAGR of “only” ~18% alongside an earnings 3Y CAGR of >50%, far outpacing the broad equity market.

Fintech is not a relic of the pandemic era but a vibrant, high-growth, innovative market offering compelling risk-reward opportunities. We expect this momentum to accelerate under a deregulatory framework in the U.S.

Hot topics

A new deregulatory era in the United States

President-elect Trump is expected to revive his deregulatory agenda, which will benefit the financial industry significantly. In particular, capital rules for banks (and neobanks) should be eased. Capital requirements impact not only the return on equity but also constraints on the lending activity.

Specific rules of the Consumer Financial Protection Bureau (CFPB), an independent agency responsible for consumer protection in the financial sector, might be set for a change. In particular, open banking rules could be overturned; they aimed at giving individuals more control over their personal financial data and eventually reducing interest rates on loans. Similarly, buy now, pay later firms were asked to follow the same rules as credit cards, but the new administration could target them too.

These changes could streamline operations for fintech disruptors, allowing them to expand market share more aggressively.

A new credit cycle

Lending platforms are well-positioned to benefit from reduced regulatory hurdles and favorable monetary policy. Market consensus anticipates further rate cuts in 2025, which are expected to expand lending eligibility and create a virtuous funding cycle as investors chase higher yields. 

Fintech companies, already leaders in personal loans, are expected to capture greater market share in segments such as auto loans and residential mortgages. Trump will inherit a series of court battles over Biden’s plan to forgive student loans. As Trump has never supported the forgiveness plans, we expect renewed growth opportunities for student debt intermediaries.

Monetization of GenAI

Generative AI is no longer a novelty but is becoming a cornerstone of innovation across the financial sector. Even at AtonRâ, we leverage GenAI to enhance our investment process (feel free to contact us to learn more about our implementations). Financial software companies that do not massively include GenAI features to automate tasks, improve reporting, and assist users should be strong short candidates.

The next phase in this revolution will be its monetization. With the surge of cloud-based software, software developers have transitioned from perpetual licenses to subscription models. Will they provide access to GenAI features as part of their standard plans, or will this be charged an extra fee based on the actual usage of the service? Some companies (e.g., Thomson Reuters Corp) have started providing investors with new metrics to track revenue from GenAI and have already begun reporting GenAI-specific revenue metrics. Investors will closely monitor these developments as firms seek to justify development costs and improve profitability. Even when GenAI features are bundled into existing offerings, providers could justify price hikes of 7-10%, supported by the enhanced service quality these tools deliver.

Catalysts

• Basel 3 endgame. The EU will implement the Basel 3 regulatory framework on 1 January 2025. If the Trump administration does not apply (or only partially) the Basel 3 risk-weighted capital requirements, U.S. banks will have a serious competitive advantage.

• Reformed capital tax gains. While Trump has promised lower corporate taxes, it is less clear what changes will happen to personal taxes. Calls to repeal estate and gift taxes by replacing them with reformed capital gain taxes emerge. This would be supportive of one of the main long-term drivers of the strategy, the great wealth transfer.

• China stimuli. The Chinese government aims to boost internal consumption and revive GDP growth. A sustained equity market rebound will result in higher customer engagement (trading) and assets under management for Chinese brokers.

Risks

• Failed IPO. 2025 should be marked by a new wave of fintech IPOs, starting with market leaders like Klarna in buy now, pay later and Revolut in digital banking. If these firms fail their IPO, the entire fintech industry may suffer.

• Sticky inflation. If inflation comes back, lower consumer sentiment may deteriorate consumer spending and retail participation in the financial markets.

• DeFi competitive threat. As the U.S. aims to become the crypto capital of the world and promote innovation, how far will they let decentralized finance develop?