The financial infrastructure universe comprises the digital services and software that form the backbone of the global financial economy. 

With markets transitioning to around-the-clock, around-the-globe movement of commerce, the world’s financial infrastructure needs to transform from legacy analog to digital, localized models across industries like payments, capital markets, banking technology and wealth management (see Figure 1).

Many of these businesses will require large-scale and operationally focused capital to enable automation and digitize legacy operating models—a global investment opportunity that Brookfield values at $4 trillion. Yet, unlike other industries facing rapid change and disruption, financial infrastructure assets and businesses provide critical services for their customers and tend to be highly embedded in their markets, which can benefit incumbent players.  

Here, we explore the moving parts and players in the increasingly attractive financial infrastructure universe.

Key Investment Characteristics

Financial infrastructure assets and businesses tend to be market-leading, stable and scalable. They also usually operate within a regulatory environment that creates a high barrier to entry, given the cost of compliance. Our focus in financial infrastructure is on “asset light” financial services and technology companies that operate in the middle and back office of the financial sector, avoiding direct consumer exposure.  

In our view, several key attributes help make financial infrastructure assets similar to traditional infrastructure:

• Market growth: Their addressable market (i.e., total potential revenue opportunity) is growing, with tailwinds outweighing headwinds.
   
• Essential offerings: Products drive return on investment for their customers’ operations and come with high costs to switch suppliers. 
   
• Product leadership: Products and services are well positioned or market leaders that typically outperform competitors’ offerings.
   
• Recurring revenues and cash flows: Contracts and pricing models help deliver consistent sales and recurring contracted cash flows.
   
• Distribution access: They can reach a wide range of customers by leveraging multiple distribution or retail networks.
   
• Regulatory framework: They usually operate—and often thrive—in a dynamic regulatory environment that creates high barriers to entry for potential competitors.

For example, payment platforms provide the critical infrastructure that enables digital payments between consumers, merchants and financial institutions. They have highly scalable operating models and tend to be highly cash generative. They produce strong incremental margins and require modest levels of capital investment to sustain and grow. They have also benefited from the transition to digital payments and will continue to do so.

Identifying Financial Infrastructure Opportunities

So who are the players in the financial infrastructure space? They generally fall into two categories.  

Incumbents with meaningful market share  

The financial services ecosystem is high-trust in nature because it provides critical services for their customers. Since the cost of failure is high, financial infrastructure businesses tend to be highly embedded in their markets, and regulators and customers generally prefer high consolidation.  

Financial services businesses that still use decades-old analog technology need to fundamentally change their business models so they can develop solutions to meet their customers’ needs—and operate in a rapidly evolving global economy. This will require heavy investment in areas that, for many financial services conglomerates and banks, are not part of their core businesses.  

We are beginning to see many of these assets moving off these companies’ balance sheets, creating attractive opportunities in this emerging infrastructure sector. From there, hidden value can be unlocked by separating these under-capitalized or underutilized assets to enhance their growth and profitability independently.  

New market leaders

Financial services is an inherently innovative sector; over time, new infrastructure is continually needed to keep up with these innovations. Several financial infrastructure providers have displaced incumbents with better products, technology, service and total cost. While it has taken several years for these to emerge, the data is now sufficient to underwrite the quality and durability of these businesses.

Looking Ahead

Key parts of the global financial system are in the midst of a structural transition to tech enablement, driven by rapid changes in consumer preferences, regulation, global macroeconomies and innovation. The financial infrastructure companies that serve as the backbone of the global financial system must adapt so that they can thrive.

We see increasing opportunities to invest in backbone financial infrastructure that can benefit from large-scale capital and operational expertise to help companies prepare for the next stage of transformational growth.

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