Fintech vs banking stocks: Where should you invest?

So what does the future hold for investors in fintech vs banking space?

Arun Malhotra, founding partner, and portfolio manager, CapGrow Capital Advisors, says the future lies in digitalisation and investors should definitely have a pie of fintech and digital platforms in their portfolio.

“We may not see the profitability right now. But few of these business models will become very big. And the nonlinear nature of revenue and profitability is something that is difficult to comprehend for analysts,” Malhotra told CNBCTV18.com.

Earlier this month, Dolat Capital Market Pvt. Ltd, gave Paytm shares a ‘buy’ rating despite its weak debut. It is the only brokerage to do so, out of the three that have initiated coverage on the digital payments platform. Similar to CapGrow Capital’s view, Dolat analysts see Paytm as sustainable as they think it is the most impactful and real-economy internet business.

Nonetheless, Malhotra noted that traditional banking stocks are not going to go away, especially the ones that are technology savvy. Large private sector banks like ICICI, HDFC Bank and Kotak have been heavily investing in technology and their relationships with high net-worth individuals (HNIs) and wealthy clients place them in an advantageous position, he said.

Such past relationships are existing based on trust, which will drive business volume and transactions for them, he said, adding that the newer fintech companies will cater to youngsters where the relationship (value-wise) may be smaller, to begin with, and establishing trust will take some time.

Gurmeet Chadha, co-founder and chief executive officer (CEO) at Complete Circle Consultants finds the debate fintech versus traditional players a little overrated. According to him, we are the entering age of more collaboration.

“If you can call Paytm as fintech play, Bajaj Finance originally is the fintech play. I always call this a consumption company in the NBFC space. I think the valuations have been a little stretched. So, if I were to prefer, if I were to pick banking and financials, I think ICICI Bank takes the cake,” he told CNBC-TV18.

According to him, on a risk-reward basis considering the market is still at higher levels, some of the private banks at around one and a half to book value make more sense from an incremental capital.

While fintech companies are becoming increasingly popular, Hemali Dhame, Associate Vice-President Research, Kotak Securities, says the familiarity of fintech names is on account of the advertisement spend for customer acquisition and brand building, which may not be directly aimed at markets.

She is of the view that in stock markets, the company’s performance is likely to depend on the investor’s belief in their business models and successful fundamental achievement. Even the traditional banks are held to the same expectations. The markets will reward successful execution and profitability for any company, she said.

Most experts believe investors with a higher risk appetite must invest in fintechs while safe capital is likely to stay with traditional banks.

Vinit Bolinjkar, Head of Research, Ventura Securities Ltd said the fintech ecosystem is currently in the developing stage and hence risk-averse investors should continue to stick with marquee private banks while investors who can take extra risks can definitely look to invest in fintech companies but with a long term horizon in mind.

“While the business model for fintechs promise scale and we do not discount the success of an enterprise that serves a customer proposition that may be disruptive, the mainstay product for most of them – payments – despite convenient and enabling financial inclusion is not profitable. There is, therefore, a longer timeline to profitability from allied services, implying lower profit visibility in near years and higher risks to assumptions,” Dhambe of Kotak Securities said.