Fintech Stocks – Investing in the companies that are disrupting finance

Fintech stocks have emerged as one of the most interesting investment themes this year. Several fintech companies are now worth well over $100 billion, while many more have become publicly listed in the last 18 months. The recent rally in cryptocurrencies has also focussed attention on the broader fintech ecosystem.

Fintech Industry
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This article highlights the various types of fintech companies and the most prominent fintech stocks to consider investing in.

What is fintech?

Fintech / Mobile Phone
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Fintech, which is short for financial technology, is a term used to describe companies, platforms and applications that use technology to deliver a financial service. It’s usually implied that technology is being used to reduce costs or improve the service in some way.

Historically, the largest companies in the financial services industry have been protected from competition by regulatory regimes. Starting a bank, an insurance company or a stock broking firm requires large amounts of capital and various licences. This has prevented start-ups from competing in the industry. It also resulted in institutions having little incentive to innovate.

Advances in technology and certain regulatory changes have allowed tech focussed start-ups to slowly build a presence over the last 25 years. The first financial industry to embrace technology was retail stock broking with the introduction of online trading in the 1990s. The investment and payment industries followed, though progress was slow. Disruption of the insurance industry has only begun in the last few years.

Digital Wallet / Cryptocurrency
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Cryptocurrencies are very much a part of the fintech revolution. Most cryptocurrency and blockchain projects aim to solve the same problems that other fintech firms are trying to solve. In addition, the massive amounts of capital that have flowed into cryptocurrencies are funding fintech innovation.

Open banking and mobile phones are also enabling fintech innovation. Open banking regulations allow consumers to give third party service providers access to data related to bank accounts and investments. This allows consumers to shop around for financial services, rather than being forced to use those offered by institutions. Smartphones, and in particular fintech apps, have also emerged as an important platform for the delivery of financial services.

Types of fintech companies

Fintech Companies
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Fintech companies can be categorised in several ways, and there will always be overlap across the categories that are chosen. Nevertheless, most fintech stocks fit into the following five categories:

  • Payments and digital wallets – There are now thousands of online services around the world that provide basic banking services. Relatively few have global reach, but most countries now have several local payment platforms. Digital wallets are like bank accounts that can only be accessed using a website or a mobile app. Digital payment can easily be made from these wallets and often bypass the banking system entirely. Mobile payments and banking services have made a significant impact in emerging markets economies where very few people have access to traditional bank accounts.
  • Cryptocurrencies and blockchain technology – Blockchain technology is being used to deliver solutions to most problems in the financial sector, as well as in other parts of the economy. Cryptocurrencies are essentially “programable money” and enable entirely new financial services to emerge. Hundreds of decentralised finance (DEFI) applications that operate on various blockchains are currently being built. DEFI applications make trading, investment, lending and money market services available for cryptocurrencies, and even real-world assets. These applications operate without the control of a single entity. The crypto category overlaps with all the other categories in this list.
  • Crowdfunding and lending – Peer to peer (P2P) lending platforms facilitate loans and fundraising for individuals and small organizations and businesses. P2P lending benefits both lenders and borrowers as the margin typically earned by intermediaries is removed. These platforms can also make credit available to people who struggle to borrow from traditional lenders. Crowdfunding platforms help individuals and charities raise small donations from a large audience. Small businesses can also raise capital from these platforms.
  • Investing and financial markets – The world of investing and trading is perhaps the most vibrant category for fintech companies. Some of the world’s first fintech companies were the online trading platforms of the 1990s. Since then, fintech companies have revolutionised most parts of the investment industry. Some of these types of companies include:
    • Robo-advisors help individuals save toward financial goals. These platforms use quantitative models to optimise a customer’s asset allocation, and then use passive investment funds to implement the strategy.
    • Marketplaces for alternative financial data sets and algorithmic trading strategies.
    • Stock trading apps, like Robinhood, make investing in stocks very easy for retail investors. These companies focus on simplifying the process of investing and providing a seamless user experience.
  • Other fintech niches – Fintech companies operate in almost every area of the financial industry. Many of the first fintech apps and websites helped consumers manage their budget by consolidating information from multiple institutions. Mortgage origination platforms have also been around for some time. These platforms help users get mortgage quotes from multiple lenders with a single application process. The newest frontier for fintech is insurance. It’s taken a long time for tech companies to disrupt the insurance industry because significant critical mass is required. However, now that competition has increased in the other fintech industries, more capital may be invested in insurance focussed fintech companies.
Fintech Stocks / Nasdaq
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The following ten stocks are amongst the most prominent and interesting listed fintech stocks. Visa (NYSE: V) and Mastercard Inc (NYSE: MA) could also be included – but we are leaving them out as they are well-known and established.

  • PayPal Holdings, Inc (Nasdaq: PYPL) – PayPal is arguably the most successful fintech company in the world. It is the leading online payments platform outside of China. PayPal was started by Confinity, which was then acquired by Elon Musk’s in 2000. The company was listed in 2002 but acquired by eBay a few months later. eBay spun PayPal off again in 2015 and it became a listed company for the second time. Since being relisted the stock price has risen 570%. The platform allows users to store money in their accounts and send money to other users and numerous ecommerce sites. There are currently nearly 400 million active user accounts on PayPal. More than 20 years after it was founded, PayPal continues to innovate, make strategic acquisitions and form partnerships. The company now owns Xoom, a money transfer service, and Venmo a successful P2P payments platform. Earlier this year PayPal began accepting Bitcoin for payments. PayPal has a market value of $324 billion, with revenues running at $22 billion a year. Sales are currently growing at around 25% with an operating margin of 17%.
  • Square, Inc (NYSE: SQ) – Square provides payment solutions for merchants and consumers. The company’s stock price has risen 1,744% since listing in 2015, making Square one of the most successful listed fintech companies. Square has two business segments, an ecosystem of apps for merchants, and the Cash App for consumers. Initially Square focused on helping small business clients accept credit card payments with a mobile phone. Over the last decade it has substantially expanded the services it offers merchants. These include free online stores, a small-business lending platform and business management tools. The CashApp is a digital wallet that allows consumers to make peer to peer (P2P) payments. The CashApp can also be used to buy and sell Bitcoin which has increased its popularity. Both of Square’s ecosystems benefit from network effects. Both platforms become more valuable and useful as the number of services and users increases. The company sales were $9.4 billion in 2020, up 680% from 2015. It now has a market value of $105 billion.
  • Mercado Libre Inc (Nasdaq: MELI) – Mercado Libre is an ecommerce platform based in Argentina. It is often referred to as the of Latin America, but there is a little more to the company than ecommerce. The company also operates the Mercado Pago payment platform and provides a range of fincial services to merchants and consumers. While the company is regarded as a marketplace, in 2020 it earned 65% of its revenue from payments. Furthermore, more than half the payment income came from transactions outside the ecommerce platform. Mercado Libre is also expanding the number of financial services it offers to its 20 million users. The impressive growth of the payment platform has made Mercado Libre the top fintech stock in Latin America. The company is now worth $71 billion. In 2020 revenue was $3.9 billion, having risen 510% in five years. Mercado Libre primarily operates in Argentina, Brazil and Mexico. If it can replicate its success elsewhere there will be significant upside for investors.
  • Lemonade, Inc (Nasdaq: LMND) – Lemonade is a fintech platform aiming to disrupt the insurance industry by offering customers a better user experience. Currently, individuals can buy life insurance, pet insurance and home insurance on the platform. There are plans to provide other types of insurance in the future. Lemonade uses artificial intelligence extensively to improve its customer interface and deal with claims. The platform, which was only launched in 2015 already has over a million users and 12-month revenues of just under $100 million. Having said that, the company is not yet profitable, and the business model still needs to be proven. Lemonade is one of the more speculative fintech stocks, but it has tremendous potential when you consider the size and inefficiency of the insurance industry.
  • Coinbase Global Inc (Nasdaq: COIN) – Coinbase is one of the leading cryptocurrency exchanges in the world. The company went public via a direct listing earlier this year. Coinbase is best known for its mobile app which makes buying and selling cryptocurrencies very easy. The app has over 56 million users and earns very good margins. Coinbase Pro is a more advanced cryptocurrency trading platform for professional traders and hedge funds. In addition, Coinbase provides various services to institutions including custody, listing and investments to institutions. In many ways Coinbase is fulfilling the role of an investment bank within the crypto economy. The company earned $2.5 billion in revenue in the last 12 months, and most notably has a 47% operating margin. Most of the platform’s revenue is earned from the retail market. But the company has a lot of potential in the institutional market where it is now the most established player.
  • Fiserv Inc. (Nasdaq: FISV) – Fiserv isn’t as exciting as some of the other fintech stocks listed here. However, it has an enviable track record, having grown earnings at double digits for 35 consecutive years. The company provides technology that allows banks and other financial service companies to offer online services and helps merchants accept and process payments. The company manages the third largest debit card network in US and provides the software that a lot of banks use to operate day to day. Fiserv recently acquired First Data, a merchant acquiring company that settles card payments made to merchants. Fiserv has a considerable advantage due to the very high switching costs a client would incur moving to a different provider. The company has a market value of $73 billion with annual sales of $14 billion. It has managed to grow revenue at 23% over the last five years with an operating margin of 11.4%.
  • SoFi Technologies (Nasdaq: SOFI) – SoFi is one of the more prominent companies that has come to market via a SPAC deal. In January the company announced that it was merging with one of Chamath Palihapitiya’s SPACs. The merger was completed last month. SoFi is a platform that offers a growing suite of financial products to a predominantly millennial customer base. The company started out in 2012 providing student loans. Since then, it has expanded into other types of lending, banking services, investments and trading. Recently, SoFi acquired Galileo another fintech company that provides infrastructure and software to online banks. SoFi’s growth has been phenomenal. The company now has 70 million accounts and has grown revenue 195% in the last three years. The stock has a market value of $19 billion.
  • Affirm (Nasdaq: AFRM) – Affirm makes credit available to consumers at the point of sale on ecommerce sites. Essentially it offers consumers an alternative to paying for a purchase using a credit card. Buyers also get to decide on a payment plan for each purchase. Users manage their accounts using a mobile app. The service also provides online merchants with an alternative payment solution, and the opportunity to make more sales. The company is able to offer competitive rates and lower fees by eliminating credit card processing fees. Affirm was founded in 2012 and held its IPO in January this year. The company has a market value of $17 billion with annual revenue running at just under $500 million. While Affirm is a long way from profitability, sales have increased 230% in the last two years.
  • Upstart (Nasdaq: UPST) – Upstart is a cloud-based artificial intelligence lending platform. The platform uses AI and demographic data to determine the risk for each loan, rather than the credit scores that banks typically use. Millions of people have low credit scores for various reasons but may actually be low risk borrowers. Upstart’s approach gives these people access to credit and opens up a new market for lenders. Only 2% of loans are actually on Upstart’s balance sheet, with the remainder of loans being made by third party banks. So, Upstart really acts as a sales channel for lenders but remains “capital light”. Upstart held its IPO in December last year and is now worth around $9 billion. Twelve-month revenues are around $210 million and currently growing at 100% year on year. Unlike many other new listings, the company is already profitable with an operating margin of 7.3%.
  • Adyen (Euronext: ADYEN, US OTC: ADYEY) – Adyen is a payment technology company based in the Netherlands. It provides a range of services related to processing and settling payments, whether they are made on websites, mobile apps or in-store. Essentially the company provides the technology to link merchants directly to Visa, Mastercard and other card issuers. The company started operating in 2006 making it one of the more established fintech stocks. Annual revenues are over $4.4 billion and Adyen’s operating margin is10%. Revenues are still growing at over 50% year on year, although growth has slowed in the past few years.

Fintech ETFs

ETF Investing
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Stock picking fintech stocks can be challenging. If you don’t want to select individual stocks you can invest in ETFs (exchange traded funds) that hold fintech stocks.

  • Ark Fintech Innovation ETF (ARKF) – This ETF is one of the popular actively manged ETFs managed by Ark Invest. The fund holds 44 stocks, though some are only loosely related to Fintech. The largest holdings include Square, Shopify, Sea Ltd and Paypal. The relatively high expense ratio of 0.75% reflects the fact that the fund is actively managed.
  • Global X ETF (FINX) – The Global X fintech fund tracks the Indxx Global FinTech Thematic Index. It holds 41 stocks, including the likes of Square, Paypal, Intuit and Adyen. The expense ratio is 0.68%.
  • Amplify Transformational Data Sharing ETF (BLOK) – The Amplify fund invests in a subset of fintech stocks connected in some way to blockchain technology and cryptocurrencies. Besides purely fintech companies, the fund invests in companies like Nvidia that provide the physical infrastructure for blockchain technology.

Upcoming fintech IPOs

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The number of listed fintech stocks is expected to grow over the next few years with several keenly anticipated IPOs on the horizon. The first of these will be Robinhood which is set to go public in July. Robinhood has been one of the most successful fintech start-ups and already has 13 million users.

In China, online payments are dominated by Alipay, which is owned by Alibaba and WeChat Pay which Tencent owns. Alipay falls under Ant Group (previously Ant Financial) which was due to go public in November last year. The IPO which was expected to value the company at $315 billion was cancelled due to regulatory issues. Ant Group is now being restructured to allow an IPO at some point in the future.

One of the most successful unlisted fintech companies is Stripe. Stripe is a SaaS company that provides an API that ecommerce companies use to integrate payment processing on their websites. In March Stripe raised $600 million at a $95 billion valuation, though no other financial details have been disclosed. The company is expected to eventually become listed, though it is well funded at present.

Betterment and Wealthfront are the leading robo advisor platforms in the US. Both companies are expected to eventually become publicly traded, though there is no timeline.

Investing in fintech stocks

Trader Analyzing Data
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From an investors point of view, fintech stocks can be loosely divided between those that are profitable and those that are yet to reach profitability. Profitable companies can be compared to other tech stocks. They can be assessed based on revenue growth rates and margins and the valuations can be compared to similar growth stocks.

If you want to find potential multibagger stocks in the fintech space, you will probably need to consider the more speculative stocks. These stocks need to be assessed in a more qualitative way as they don’t have long term track records. The key is to work out if a company is gaining traction at the product level and ignore the hype that tends to get generated in the media.

Speculative fintech stocks are likely to be very volatile over the next few years. On the one hand they have tremendous potential, while on the other hand they tend to trade on very rich valuations. However, volatility will create the best opportunities to make fintech investments.

Conclusion – Investing in fintech stocks

The financial industry is ripe for disruption, and there is every chance some of the best performing stocks of the next decade will be fintech stocks. This is an industry to keep a close eye on – but as is always the case with emerging industries, it’s important to exercise caution and keep positions relatively small.

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