Financial technology, or fintech, is washing over Wall Street. Companies are inventing technological ways to do financial transactions, loans and banking processes that are radically changing the financial services and real estate industries.
Fintech is cutting out the middle man in a wide variety of real estate transactions, and this is causing traditional lenders, buyers and investment groups to take notice. Both lending and borrowing are now faster processes, with fewer delays and lower costs. In addition, consumers have shortcuts for financing, finding properties and closing deals.
Investing in fintech real estate companies is semi-speculative for investors. The new wave of technology must shake out the losers until there are clear winners. However, investors can find some solid companies that are set to change the real estate business forever. (See also: How Fintech Can Disrupt the $14 Trillion Mortgage Market.)
We have chosen four fintech companies that are making changes in how real estate is bought, sold and managed.
1. Zillow Group
Zillow Group (Z) claims to be the top real estate website in the United States, pulling in 173 million unique visitors each month. The company maintains an online database of 110 million homes targeting buyers, sellers and renters.
The company is undergoing a major shift in how it does business. Since its founding in Seattle in 2006, Zillow has focused primarily on selling advertising and other services to real estate professionals, a market estimated to be worth $18.8 billion. In 2018, Zillow entered into the business of buying and selling homes for itself, putting the company into direct competition with its customers. Zillow believes it can use its platform and technology to simplify the home-buying process, resulting in faster transaction times, lower costs and greater volume. Compared with advertising, the market for real estate transactions presented a far greater opportunity, recording $1.9 trillion in turnover in 2019.
The strategy shift has already begun to pay off. In 2019, Zillow recorded $2.74 billion in revenue, up significantly from $1.33 billion in 2018. Buying and selling homes accounted for nearly 50% of sales, up from 3.9% the year before. However, losses widened to $305 million, compared with $119.9 million previously.
Buying shares of Zillow at this point would be based on the conviction that Zillow can re-invent the buying and selling of homes in the near future.
Fiserv (FISV) is a technology provider for the financial services industry, facilitating millions of transactions daily between financial institutions, corporations, merchants and consumers. In the area of real estate, the company provides solutions that allow banks, credit unions and mortgage originators to underwrite and service loans more quickly. It also provides property management software services that expedite and automate payment collection and processing. Fiserv has provided technology and data solutions to the financial services industry since 1984, well before "fintech" was coined to describe the application of technology to finance.
In 2019, the company reported $10.19 billion in revenue, up significantly from $5.82 billion in 2018. Earnings came in at $893 million, down from $1.19 billion previously. The top line was helped by the $46.5 billion purchase of First Data in July 2019. First Data provides commerce-enabling technology for merchants, financial institutions and card issuers.
3. SS&C Technologies Holdings
SS&C Technologies (SSNC) describes itself as an end-to-end provider of software services for the financial services and healthcare industries. In real estate, the company's products facilitate loan origination and credit risk management. It also provides software services to commercial, residential, timeshare and resort property managers. The company was founded in 1986 and operates in North America, Europe, Asia and Australia.
In 2019, SS&C Technologies reported $4.63 billion in revenue, up from $3.42 billion in 2018. Earnings were significantly improved at $438.5 million, compared with $103.2 million it reported the year before. Software services revenue—which is contractually recurring revenue and allows the company to better manage costs and capital investments—accounted for 84% of revenue in 2019, up from 66% two years earlier.
4. Fair Isaac Corporation
Any person who has applied for a credit card, car loan, installment loan or mortgage knows the name FICO, otherwise known as the Fair Isaac Corporation (FICO). The FICO name is synonymous with credit ratings. It's hard to remember when consumers had to wait to learn their FICO score. Today, a potential buyer can walk into a bank knowing their exact FICO score and how it stacks up against other borrowers. Conversely, FICO helps lenders through its Decision Management Suite. The entire borrowing and lending cycle has been disrupted and replaced by an efficient process driven by technology.
In 2019, Fair Isaac Corporation recorded $1.16 billion in revenue, up from $1 billion in 2018. Earnings were improved at $192.12 million, compared with $126.48 million the year before.
The Bottom Line
The startups in fintech are not publicly-traded companies yet. Finding financial technology companies to invest in requires looking at those that started a few years ago, and traditional financial transaction companies that have evolved into fintech entities. (See also: What Advisors Can Expect from Fintech Next Year.)
Buying stock in these companies should not be seen as a gamble. Perform due diligence and insist on strong company fundamentals before jumping in.