January 2020

The future of financial services

The Scottish Mortgage Team

In this series of articles, we highlight companies in the Scottish Mortgage portfolio that are taking technological advances to the next level, a new generation of companies who will reshape our world and what is possible in the years to come.

The value of shares in Scottish Mortgage, and any income from them, can fall as well as rise and investors may not get back the amount invested.

For the past two decades, digital services have been changing how people live across the globe – we can book a taxi, order food, connect with friends or even make a haircut appointment, all at the click of a button. One industry that has been slower to embrace this immigration to online servicing is banking. In many countries, it is still the norm to visit your local bank branch and queue to pay money in or apply for a loan. China, however, is leading the charge to bring banking and financial services into the digital future. Over 500 million people make mobile banking payments in China, compared to 29 million in the US and 4 million in the UK.

Scottish Mortgage holds shares in a number of the global leaders in this field of “fin-tech” or financial service providers whose businesses utilise the advantages of the digital technological advances.  Ant Financial’s Alipay is China’s biggest payment platform and, with over 1 billion users, has completely altered how Chinese people deal with their finances. Alipay, was created by the ecommerce giant Alibaba, in which Scottish Mortgage invested as a private company in 2012 at a $45 billion valuation.

Today, Ant Financial offers five areas of financial services to Chinese businesses and individuals. Its inter-connected financial ecosystem encompasses wealth management (Ant Fortune), credit scoring (Zhima Credit), online small business banking (MYbank) and financial cloud services (Ant Financial Cloud), as well as Alipay. The proportion of customers using all five of these services is increasing each year, reinforcing Ant Financial’s extraordinary advantage. Through all the data gathered on Ant’s platform, it knows who is buying what, and whether they pay their bills on time. If it’s a small business customer, the company knows what their turnover and cash flow look like and whether their credit score makes them a good customer for a microloan. So solid is Ant’s knowledge of its customer base that it can claim a capital loss from defaults of 0.001 per cent. (By way of comparison, ratio for Chinese banks is 1.81 per cent.)

Moving to the west, Scottish Mortgage invested in TransferWise in 2016. TransferWise is a private UK company, founded in 2011, to tackle the problem of high fees and low transparency for consumers who wish to send money internationally. Its approach is to match flows within countries at the prevailing market exchange rate, rather than moving funds through bank networks every time a transfer is instructed. This enables TransferWise to reduce its costs significantly, which it passes on to consumers by offering them a much better exchange rate than its competitors. Today, the fees TransferWise charges are often a fraction of those levied by banks. The company is also transparent: it will even tell a customer if they can get a better deal elsewhere. In order to ensure its platform is safe for its customers, the company has been using machine learning. By using the data gathered from any fraudulent payments that have been made previously, the machine learns these behaviours and automatically detects and deters similar patterns or activities that may arise again.

More recently Scottish Mortgage invested in US private company Affirm, a consumer finance provider created by Max Levchin, one of the founders of PayPal. It seeks to empower consumers to enhance their financial well-being through its offering of ‘honest’ products. This means utilising technology so as to offer a simple, transparent range of products. It avowedly eschews common practices, such as hidden or late fees, that create a misalignment of interests between the lender and the consumer. The company’s initial focus is on providing transparent point of sale credit facilities through online merchants. This is a cost-effective way to acquire customers, giving Affirm a platform to build its brand while spending almost nothing on marketing. Once consumers are approved for finance, they’re assigned a virtual card, which is compatible with Apple Pay, to make payments. Net promoter scores are used by companies to gauge customers’ satisfaction and their loyalty to its brand. In 2018 Affirm achieved a score of 83, which is exceptionally high for any company, suggesting it has a strong foundation from which to integrate itself deeper into the financial lives of its customers and merchants.


Risk factors

The trust has a significant investment in private companies. The trust’s risk could be increased as these assets may be more difficult to sell, so changes in their prices may be greater.

The trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

About the author - The Scottish Mortgage Team

The Scottish Mortgage team are dedicated to servicing existing and prospective shareholders of the trust.

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