If you invest in financial technology firms -- from LendingClub (LC) - Get Report and PayPal (PYPL) - Get Report to more venerable names like MasterCard (MA) - Get Report -- then you may want to take a look at a new industry barometer.
The KBW Nasdaq Financial Technology Index, introduced by brokerage Keefe, Bruyette & Woods last week, tracks the performance of those three companies as well as 46 others that "leverage technology to deliver financial products and services," the firm said.
Creation of the gauge, whose ticker is KFTX, demonstrates the growing importance of so-called fintech companies that specialize in products from mobile payments to marketplace lending, which connects third-party investors with borrowers while using digital algorithms to provide rapid loan approval. Investment in such companies has ballooned from $1.8 billion in 2010 to $19 billion in 2015, according to a recent Citigroupreport.
"Technology is changing the way financial services are both created and delivered to the market, and our launch of the KBW Nasdaq Financial Technology Index reflects the investment community's growing interest," said Fred Cannon, global research director at Keefe Bruyette. It "provides a relevant benchmark within the fintech space, which will be valuable to the increasing number of investors closely watching this area," he said.
Among the criteria for inclusion in the index is that a company's primary business isn't balance-sheet lending, the traditional practice of funding loans with a bank's own money. Rather, members must use technology to deliver financial services, Cannon said.
The index, which represented $785 billion in market capitalization or one-fifth of the "investable domestic financial universe" at its creation, has climbed 9.9% over the past year, easily outperforming a 4.2% gain on the S&P 500 and a 5.9% drop by the S&P 500 Financial Index.
Innovations in consumer-payment methods in-store, via smartphones and between individuals are taking place across industry boundaries, with Apple (AAPL) - Get Report Pay and Alphabet's (GOOGL) - Get ReportAndroid Pay representing the technology sector while payment processors have contributed products like MasterCard's Masterpass and Visa's (V) - Get ReportCheckout.
MasterCard, in fact, recently announced that it was expanding its MasterPass functionality to be used across all digital channels through a partnership with card issuers.
"We see the Masterpass expansion as a significant step forward and supporting of our expectation that the key digital payment/wallet solutions will eventually have similar functionality across all channels," Jason Deleeuw, a Piper Jaffray analyst, wrote in a note to clients. MasterCard, Visa and American Express will benefit from more electronic payments flowing through their networks, he said, but that could hurt PayPal, which is currently the "digital payments solutions leader."
Visa, which had been quarreling which PayPal over the latter's efforts to push customers to fund PayPal accounts directly from their checking accounts rather than using Visa cards, reached an agreement with PayPal last week to end that practice and team in other areas.
Traditional banks are also moving quickly to meet the competitive threats, with innovations such as JPMorgan's (JPM) - Get Report Chase Pay and the Wells Fargo's (WFC) - Get Report Wallet. Starting Aug. 1, Wells Fargo mobile customers will be able to make real time person-to-person payments via ClearXchange, the bank said on its second-quarter earnings call.
Wells and large financial firms like Bank of America, BB&T, Capital One, JPMorgan, PNC and U.S. Bank collaborated in 2011 to create ClearXchange, allowing customers to make move money between accounts at any bank in the network.
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Despite the intense interest in digital payments and potential cost savings, only 1% of North American consumer banking revenue has shifted to digital sources so far, Citigroup's report found. As of March, China was the biggest peer-to-peer lending market in the world, the report highlighted.
"Although fintech companies have the advantage of new innovation, incumbent financial institutions still have the upper hand in terms of scale, and we have not yet reached the tipping point of digital disruption in either the U.S. or Europe," the report found.
KBW's new index seeks to accommodate investors interested in all aspects of the fledgling industry, with subcategories from payments, processors and financial data to exchanges and automatic trading.
"A lot of the companies in financial technology are still not public companies," Cannon said in a phone interview. "We also think it's going to provide some important information to companies that are thinking about going public and what kind of valuations and the direction they might be able to think about for their stock prices when and if they do become public."
In the meantime, as investment increases, stiffer competition and the likelihood of additional scrutiny from regulators will keep the growing industry on its toes.
"The laws of innovation often mirror the laws of physics: For every great stride, there is an equal and opposite risk," San Francisco Federal Reserve Bank President John Williams said in April. "It's not that regulators are here to call the cops on the party; we're here to make sure no one jumps off the roof. And while we see the potential in innovation, we're also looking at the other side of the coin."
Already, peer-to-peer lending firm LendingClub caused investors and the government to take a closer look at how loans are funded when its CEO abruptly resigned this year after irregularities with the sale of a small portion of the company's loans to investors.