The tech industry has a new target

Mobile banking: the next big thing

It’s funny, you sometimes don’t realise how much things have changed in the world of technology until you stop and take stock.

The way I wrote this issue of The Right Side would’ve seemed almost unbelievable a few years ago. It started at the end of last week, with some rough ideas tapped into my smartphone. Then in the middle of this week I picked up my tablet, opened my notes app, and started to turn those rough ideas in to a fully formed piece.

Then perhaps it’s all edited and uploaded from my Chromebook, while the missus watches a soppy film in bed. All the way through, the workings stay right up there in the cloud.

The cloudy future certainly hasn’t evaded the radar of canny investors. A little while back, I suggested hopping aboard cloud computing specialist Iomart (LSE: IOM).

Latecomers may have missed the boat on this one. IOM now looks likely to get gobbled up by private equity group Cinven. It’s right in the middle of a consolidating industry and the private equity boys want to pay a premium that’s getting on for 40% on the price I suggested readers get in. Well, we’ll take that, and say thank you very much.

And so we move on to the next thing. For me, the logical continuation of the theme is mobile commerce – specifically, mobile banking. It’s all well and good using the web for socialising and work, but the logical next step is to use it for monetary transactions.

Of course, this is nothing new. But it’s the sheer scale of the growth in mobile commerce that suggests we should get some financial exposure. What’s more, the banks are way behind the curve on mobile commerce.

An avant-garde of niche operatives are stealing market share in what’s set to be a massive, and very lucrative market.

This is a theme worthy of some considerable attention. So let’s make a start!

The internet princes can’t get aboard just yet

You can’t help but have noticed the big consolidation moves made in tech industry. Last week’s news that Amazon is to gobble up the games video website Twitch came hard on the heels of Facebook’s acquisition of WhatsApp, and Apple’s move on Beats. And of course, Google’s move on music-streaming service Songza, as well as a host of other tech newbies.

This is all about securing eyeballs. Google, Apple, Facebook, LinkedIn, Amazon – they’re all fighting for market share. Though the valuations of these businesses look stretched on traditional metrics, it’s the future that counts. And make no mistake; these guys will increasingly focus on converting eye-balls to cash.

And that will mean homing in on web/cloud/mobile transaction technology. In a traditional economy, the banks had all this sewn up. Queues of people handling cash, cheques, or even waiting in line to make a money transfer – all you did was pop over to ‘the bank that likes to say yes’.

But in tomorrow’s world, the flow of money will almost certainly circumvent the antiquated, expensive banking system. I mean, to look at the likes of bitcoin, it may not even involve traditional money at all… (more on that soon!)

Consider a future that includes FaceBank, Linked-Bank, or maybe Google-moola, or rivers of Amazonian gold. And yet, these guys aren’t there in the foray right now. And you’ve got to ask yourself… why not?

Well, this has a lot to do with regulation and the status quo. These technology companies have been destructive enough for other industries, like telecoms and music and recruiting – we all know that! But they’re not yet ready to take on the banking industry.

An industry as profitable and highly entrenched as the banking industry puts up considerable barriers to entry.

None of the aforementioned tech giants are ready for that battle yet. And that leaves plenty of opportunity.

The minnows set to bring down Goliath

Economist Joseph Schumpeter suggested that economies move forward in a seemingly paradoxical way of creative destruction.

He meant that the economy only grows when entrepreneurs destroy the old systems, and come up with better ways of doing things. And I believe that’s exactly what’s happening now in the world of mobile, or cloud, banking.

Now, whether these disruptive entrepreneurs ultimately get taken over by the big boys remains to be seen. I’m talking about businesses that currently have fewer than a hundred employees getting taken out for billions.

But the point is, there are plenty of opportunities in this market. The tech giants aren’t quite ready to take on the traditional banking industry.

And so it’s left to a group of specialised, destructive minnows to do the work. And though most of these enterprises are privately owned, there’s a surprisingly large number of players available for investment.

In the next Right Side, I’ll take a look at a couple of promising companies in this space.

But in the meantime, if you want to get in on this trend now, my colleague David Thornton – a specialist in small cap investing – has put together a compelling case for the rise of what he calls “the mBank Collective”. You can read his research on the future on the banking industry here.

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