Investing in the Finance Sector
In this article, we’ll examine three key areas of the finance sector: how it provides the base of the UK economy, how the Bank of England keeps it strong, and how FinTech start-ups are revolutionising the market.
The financial services sector plays a crucial role in modern economies by providing consumers with cash and delivering loans to businesses. Financial services stocks can play a valuable part in a diversified portfolio. We break down the key components that you need to know and think about before making your first financial services investment.
What is the financial services industry?
When we think of banks, we typically think of our main interaction points with it: withdrawing cash, paying in our wages, maybe even taking out a mortgage or arranging for a credit card.
Despite operating quietly in the background, they power our economy by providing a sound financial system. Banks provide consumers with the money that allows them to run their day-to-day lives, enabling consumer spending and saving.
Banks are similarly crucial to businesses, allowing them to make deposits, take loans, or seek lines of credit.
Another important area is the Bank of England, which is the central bank of the UK. This Bank holds responsibility for monetary policy in the UK and is essentially charged with overseeing the health of the country’s financial system.
The mission of the Bank of England is to keep the economy strong by maintaining low inflation and healthy employment levels with its suite of policy tools (mainly adjusting interest rates and lending money to other banks).
Who are the key players?
A few very large banks dominate the UK banking sector, including the Lloyds Group, Barclays, the Royal Bank of Scotland (RBS), and HSBC, with combined revenue at a staggering £126.3bn. The largest of these, the Lloyds Group, holds a whopping 27% of all personal current accounts.
While these commercial banks and the Bank of England from the traditional financial services industry, new technology in the shape of FinTech start-ups is beginning to shake up the sector.
Today, many new and fast-growing companies are changing the way we save, spend, lend money, take payment, get loans, apply for mortgages, and more.
New financial services products don’t have to come from completely new companies. Large tech companies such as Apple have offered features including Apple Pay, encroaching on traditional payment platforms.
Bankers weren’t exactly everybody’s darlings following the 2008 financial crisis. Scandals including RBS and Barclays in the following years didn’t much help with their public image.
The impact on consumer trust was felt at the banks – and they’ve been working hard to regain it, in the public image at least, ever since. This won’t be an overnight thing, but as the economy comes back onto stable ground, progress is being made.
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.” - Warren Buffett, Billionaire Investor
In an attempt to avoid another economic crash, the UK and EU governments imposed strict new controls on banks. The most important of these were around capital requirements, meaning that banks had to hold much more capital in reserve (rather than speculate with it) in case they needed to access it in times of need.
There’s a large opportunity for new or existing banks to tap new customers, as the number of adults remaining unbanked in the UK today stands of 1.5 million. This typically includes single pensioners, migrants, the long-term sick, or households headed by students. Niche product offerings tailored to these customers’ needs could unlock further sources of value in the industry.
Investing in the finance sector
There are a few different ways to invest in finance companies, should you choose to do so. Firstly, you could buy company shares of UK-listed companies, or even shares of a fund that offers exposure to such companies.
If you buy a single stock, you’ll be buying a share of ownership in that company. This could be for banks such as Barclays, RBS, or the Lloyds Group.
If you choose to invest via funds, then you’ll be investing in a collection of stocks that are bundled as a single investment. Each fund will have different levels of exposure to different companies. For example, one fund might have a higher focus on traditional banks, whereas others might be more high risk and focus more on challenger banks.
Funds have become popular as they allow investors to invest in a range of stocks without having to buy each individual one. This means you can quickly and easily diversify your portfolio just by accessing one fund.
Wombat’s finance sector themes
If the finance industry is the one for you, then you can check out Wombat’s finance Theme - “The Money-Maker”, to invest in some of the world’s largest and most profitable financial services brands in the world.