Big Trends Reshaping the Finance

Sep 8, 2021 01:03 PM ET
Big Trends Reshaping the Finance

The financial industry, like all other sectors, is seeing significant changes. This growth and disruption have been facilitated by several factors, like artificial intelligence, mobility, and the desire for decentralization. In this article, we will look at some of the top trends that are reshaping the financial sector and how you can take advantage of them.

Decentralization

For centuries, the financial industry has been known for its centralization. To begin with, the source of money in most countries is the central bank. This is an agency that sets interest rates, regulates banks, and determines the amount of money flowing through the economy. As a result, central banks are some of the most powerful institutions in the world.

Today, while central banks are incredibly important, their role is being eroded by the concept of decentralization. This trend started more than a decade ago when Bitcoin came to life. Bitcoin’s goal was to decentralize how money is created by giving power to the people. Since then, tens of thousands of cryptocurrencies have been created, and their role in the economy is growing.

This decentralization is progressing in other ways as well. For example, it is happening in the peer-to-peer lending business. The P2P industry works by allowing people to lend money to each other using a centralized platform. Behind the scenes, this is a highly centralized industry, where company owners set interest rates, set geographical boundaries, and decide on who to offer services to.

The P2P industry is being disrupted by the so-called Decentralized Finance (DeFi) platforms like Aave, Compound, and Maker. These platforms allow people from around the world to lend money to each other through blockchain. They have no boundaries, and no central figure sets interest rates. Instead, all policies in DeFi platforms are determined by the members. 

Meanwhile, the cryptocurrency brokerage industry is also being disrupted. Today, most of this exchange takes place through centralized platforms like Binance, Coinbase, and Huobi. In the past few months, popular decentralized exchanges like Uniswap, Curve Finance, and SushiSwap have come up. These platforms enable people to swap their tokens easily. Fees in this ecosystem are set by members of the network.

Stocks brokerage

Another trend that is reshaping finance is in the brokerage industry. In the past few decades, the brokerage sector has been dominated by large companies like Fidelity, Schwab, eTrade, and TD Ameritrade. These companies made their money by taking a small commission per trade and payment for order flow. 

The industry came under intense pressure a few years ago when Robinhood came into the scene. Instead of taking a small commission, the company decided to focus on user growth and payment for order flow. It also invested a lot of resources in creating a simplified way of buying stocks, exchange-traded funds (ETFs), and other assets. 

As a result, it eliminated the commissions and thus, attracted millions of customers. Robinhood went public in 2021 and is currently valued at more than $40 billion.

Robinhood's impact on the brokerage industry was a major one. Today, most brokers like Schwab and Fidelity have eliminated their commissions. Similarly, there have been mergers and acquisitions in the industry. Morgan Stanley acquired eTrade, while Schwab acquired TD Ameritrade.

At the same time, more companies attempting to disrupt the industry have come up. The most well-known of them is WeBull, a Chinese company that has accumulated more than 3 million customers. Other popular ones are MooMoo, M1 Finance, and Public. And in September 2021, PayPal announced that it was exploring adding stock trading features to its platform. 

Therefore, as an investor, it is important that you understand these trends and learn how to accumulate your resources well. 

Buy Now Pay Later (BNPL)

In 2021, Square announced a blockbuster deal to acquire AfterPay, a loss-making Australian company, in a $29 billion deal. For starters, AfterPay is a fast-growing company that enables customers to shop at key retailers and pay no money upfront. Instead, the company allows them to buy and pay for the items in interest-free installments. 

Instead, it makes its money from the commissions it charges its retailers. The commission business is similar to how credit debit companies make money. 

The Square and AfterPay deal underscored the significance of the buy now, pay later trend in the world. Another example is that Affirm, an American company that offers the same services, has become a publicly traded firm valued at more than $22 billion. And in Europe, Klarna, a company that offers the same business, is the most valuable fintech company in the region. PayPal has also moved into the industry. 

Therefore, the industry will likely keep growing and changing over time. As an investor, some of the top companies that you should focus on in this industry are Square, Zip (Australia), AfterPay, and PayPal.

Money transfer

The volume of cross-border payments is rising globally. In 2020, amid the global pandemic, the volume of remittances declined by just 4%, which is an exciting number. In the past, this industry was dominated by traditional companies like Western Union, Ria Money, and MoneyGram. 

Recently, however, a bunch of new startups has come and disrupted the industry. Some of the most popular new companies are Wise (formerly known as Transferwise), PaySend, Xoom, and WorldRemit. These companies have changed the industry by having a digital option that involves limited physical presence. They have also created simple and yet powerful mobile applications. 

This transition will continue increasing over the years. And along the way, many companies to invest in will come up. Some of the top companies that you could invest in are PayPal, Wise, and Payoneer.

Summary

The financial sector has seen significant trends in the past few years. Virtually all industries in the sector see changes. For example, the concept of initial public offering has been disrupted by Special Purpose Acquisition Companies (SPACs) and direct listings. At the same time, investment research is being changed by decentralized research. Therefore, new investment opportunities will come up along the way.


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