The Evolving Economy

How are established global financial institutions investing in technology?

Key points:

  • Changing consumer behaviour has led to global financial institutions (GFIs) investing more in technology.
  • GFIs are improving their tech capabilities through acquisitions, partnerships and launching their own products.
  • We see opportunities for companies driving innovation in financial services, as well as companies that build the tools to create these products.

What long-term trend are we observing?

The rising demands of consumers – nowadays driven by millennials and the tech-savvy – have resulted in global financial institutions (GFIs) increasingly investing in technology, to circumvent their legacy issues and deliver digitally-friendly solutions.

Many GFIs have already committed to improving their tech capabilities to keep pace with the digital age. For example, JPMorgan Chase has increased its tech budget by $600 million to $11.4 billion for 2019, which is expected to be split between IT maintenance and innovation change (source). Meanwhile, Banco Santander plans to invest €20 billion over the next four years in digitalisation, while looking to cut costs in Europe driven by IT improvements (source). Such investments will allow GFIs to keep pace with the digital age and compete with new market entrants. But how are these types of institutions investing in technology?

One method is by acquiring fintech companies to improve their own technology infrastructure (whether directly or through private funds). A good example is BNP Paribas: in 2017, the French bank bought Compte-Nickel, a digital-only bank, which claims to open a bank account every 30 seconds, to grow its customer base in France (source). Others have partnered with established tech players to ensure they remain ahead of the digital curve. Just last year, four Indian banks, including HDFC Bank, teamed up with Google - which holds a vast amount of data on individuals in the country - to create a digital consumer loans business (source).

In addition, some established firms have taken steps towards launching their own digital products as a way of tackling the growing influence challenger banks are having on the tech-savvy and millennials. Two firms making such inroads are Goldman Sachs, through its online retail bank Marcus (source), and Banco Santander, which has developed its offering through Openbank (source), a standalone online and mobile-banking unit in Spain, and its app-only bank in Brazil, Superdigital (source).

What does this mean for investors?

Financial services firms are aware that with the market continuing to transform at a rapid rate, it’s a case of disrupt or be disrupted. This is particularly true given the emergence of challenger banks, many of whom have been able to react quicker to the digital revolution and build their technology around customers’ needs today. In fact, these newcomers – which also include non-bank payment institutions (companies which offer financial services but do not have a full banking license) and large tech companies – now command around one-third of new revenue creation in both Europe and the US. (source).

Investment in technology, therefore, remains at the forefront of many GFIs’ primary objectives, and is not showing any signs of slowing down: IT spending by banks is expected to increase by 4.2% annually, and is forecast to reach $296.5 billion worldwide by 2021 (source). We therefore see a lot of value in these companies – ‘innovative leaders’ – which use technology to serve their large, existing client base.

We also see ‘technology enablers’ – i.e. companies that provide the building blocks used by innovative leaders to build their products – as another investable area within the fintech universe.


Established GFIs are investing more capital in technology because of the fast pace of innovation, which we expect will continue and result in further investment, as they try to keep up with their customers’ ever-increasing demands. We anticipate more M&As in the fintech space, as these companies continue their shift from competition to collaboration. This is likely to lead to a significant redistribution of the financial industry’s profit pool, and will undoubtedly contribute to further widen the gap between winners and losers, creating more exciting investment opportunities in fintech.

Identifying successful ‘digital winners’ among GFIs remains challenging and requires substantial research. Stock picking GFIs that promote a culture of innovation and have demonstrated (or show potential in) using fintech solutions as both an efficiency-booster and a growth driver, is unlikely to be done well through purely quantitative screening. As such, we believe that fintech is not a theme that exchange-traded funds (ETFs) and other passive funds can capture efficiently. Within Framlington Equities, we make investments through active, fundamental, bottom-up stock selection.

Read more to discover how fintech is disrupting the future of finance:
Fintech: A chart primer
Investing in fintech’s potential

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