The world of fintech – the short term for fintech companies – can offer some exciting opportunities for investors. Fintech companies include those that create and manage peer-to-peer (P2P) payment applications as well as those that create innovative digital banking tools.
The fintech industry was valued at $110.57 billion in 2020 and is expected to grow to $698.48 billion by 2030, according to Allied Market Research. When it comes to buying stocks in such a rapidly growing industry as fintech, it’s important to understand the size of the company, how it operates, and its competitive advantages.
Investing in fintech in numbers
- The fintech industry is expected to grow to $698.48 billion by 2030, an increase of $587.91 billion from 2020.
- Digital payment services are the largest among fintech developments, accounting for over 80% of global fintech revenue.
- Companies in the Asia-Pacific region are expected to experience the fastest growth in the fintech sector.
- Since September 2018, fintech stocks have consistently outperformed other financial services stocks – after COVID-19 hit global markets, fintech stock prices rallied in just four months, while prices for traditional financial services had still not fully recovered by the end of 2020.
- US-based Visa is the largest fintech company by market capitalization, with a total value of around $383.3 billion.
- The second-largest fintech by market capitalization is China-based Ant Financial, with a valuation of around $312 billion.
- About 3 out of 4 consumers worldwide have used a fintech money transfer or payment service at least once.
- China is at the forefront of consumer adoption of fintech – in 2019, it was reported that 92% of Chinese citizens used fintech banking and payment services.
- In the United States, fintech has taken off – the proportion of American consumers who use fintech has increased from 58% to 88% between 2020 and 2021.
Sources: Allied Market Research, Deloitte, Center for Finance, Technology and Entrepreneurship (CFTE), EY and Plaid
What is fintech?
Fintech describes an industry focused on using technology to develop and improve financial services and products. Fintech companies often offer unique services to add ease and efficiency to consumers’ financial lives.
Chances are, fintech is already part of your life. If you’ve ever sent a payment through Venmo, traded stock with Robinhood, or tapped your debit card at a store that uses Block to process payments, you already know at least part of fintech’s reach. Banking services, investment applications and payment processing services are just some of the functions of fintech.
Some more specialized fintech companies have also developed financial services focused on social causes in recent years. Stretch, for example, is a fintech that offers bank accounts and financial resources to formerly incarcerated people. Meanwhile, Atmos is a fintech dedicated to fighting climate change by using its deposits to lend exclusively to renewable energy and other climate-positive initiatives.
The development of Fintech is driven by different types of technologies, in particular:
- Artificial intelligence
- cloud computing
Types of fintech companies
Some of the most common types of fintech services include, but are not limited to:
- Banking: Fintech banking services consist of a variety of apps and software that allow consumers to open accounts, protect their accounts from fraud, and receive direct deposits faster. Examples include chime and current.
- Payments: Payment services are the most common fintech offering, according to Deloitte. Digital payments allow consumers to pay bills, make purchases using contactless payment methods, and send money to peers. Some examples include Venmo, Zelle, PayPal, and Block.
- Financial direction: Fintechs in this category are designed to make it easier for consumers to manage their personal finances, providing services such as expense tracking and automated savings. Financial management fintechs include Digit, Mint and You Need a Budget.
- Invest: These fintech companies are designed to help investors grow their assets, track their investments, and use a robo-advisor. Some popular investment fintechs include SoFi, Acorns, Robinhood, and Wealthfront.
- Ready: Lending fintechs are streamlining the lending process for lenders and borrowers. They can give lenders access to information about potential borrowers to make loan decisions and provide borrowers with advance payday loans or flexible payment plans. Some examples of these fintechs include Plaid, Affirm, and Klarna.
The expansion of fintech
In 2021, the fintech industry saw an increase of $89.5 billion (168%) in funding over the previous year, totaling $131.5 billion, according to CB Insights”State of fintechreport. Strong funding growth was seen across all major fintech types, suggesting a surge in interest in the fintech industry.
One of the fastest growing fintech categories is digital lending, which grew by 220%, or nearly $15 billion, between 2020 and 2021, according to CB Insights. The market intelligence firm also reports that the United States leads the world in fintech funding, accounting for approximately $62.9 billion in global fintech funding, a 171% increase from compared to the previous year.
The best fintech companies
When choosing stocks to invest in, it’s important to do your research. Examine the company’s business model and history, what’s driving the industry, and emerging trends in the world of fintech.
KPMG, an accounting firm, notes a few trends to watch in 2022:
- Increase in mergers and acquisitions, with more fintech companies seeking to expand into different markets
- Focus more on the social and environmental impact of companies
- Increased demand for banking alternatives and new banking technologies
The major fintech companies listed on the market include:
|MasterCard||Payments||$291.2 billion||NYSE: MA|
|Intuitive||Financial direction||$115.8 billion||NASDAQ: INTU|
|PayPal||Payments||$107.1 billion||NASDAQ: PYPL|
|Fiserv||Banking||$63.1 billion||NASDAQ: FISV|
|Adyen||Payments||$43.5 billion||OTCMKTS: ADYEY|
|Block, Inc.||Payments||$36.6 billion||NYSE: SQ|
|Coinbase||Invest||$16.5 billion||NASDAQ: CURRENCY|
|Bill.com||Payments||$15.7 billion||NYSE: BIL|
|Xero||Financial direction||$7.4 billion||OTCMKTS: XROLF|
* Market capitalization data sourced from CFTE.
The best fintech ETFs
An exchange-traded fund (ETF) is a type of investment in which the investor holds a small portion of the holdings of many different assets. Investing in an ETF is a great way to diversify a portfolio and reduce risk.
ETFs are publicly traded like stocks and charge a low fee based on a percentage of the money invested in the fund.
With a growing fintech market, several ETFs focus specifically on investing in frontline fintech companies. These funds allow investors to hold stakes in the fintech industry without having to pick individual stocks to determine which ones will win. Adopting a passive investment strategy with a fintech ETF can generate high returns.
Fintech ETFs that can give you exposure to cutting-edge advances in finance include:
- Ark Fintech Innovation ETF: The fund is a leader in fintech ETFs, and its top holdings include Shopify and Block, Inc.
- Global X Fintech ETF: One of the oldest and most established fintech funds, top Global X Fintech ETF holdings include Intuit and Fiserv.
- ETFMG Prime Mobile Payments ETF: This fund focuses on mobile payment companies, with top holdings including Paypal and Visa.
- Amplify Emerging Markets Fintech ETF: The Amplify Emerging Markets Fintech ETF carries more risk due to its focus on emerging markets, which tend to be more volatile. Its major holdings include PagSeguro, a Brazil-based digital payment company, and MercadoLibre, Inc.
The future of fintech
Fintech has seen a significant upsurge in recent years, and it’s not expected to slow down anytime soon, with Allied Market Research predicting that the global fintech industry will represent a $698.48 billion market by 2030.
Although digital payment fintechs represent the largest portion of global fintech revenue, other categories that have seen rapid growth include digital lending and basic banking replacements. Affirm, Klarna and SoFi are among the leaders in digital lending, while Thought Machine and Temenos are the main core banking fintechs.
KPMG also expects businesses focused on climate change and sustainability to see significant growth in the years to come. Investors may want to keep an eye out for companies that appeal to these global issues.
Meanwhile, many fintechs are closing more deals in underdeveloped regions. For example, funding in Latin America hit an all-time high in 2021 of $13 billion, up 269% from the previous year, according to CB Insights. These emerging markets could prove to be very lucrative in the years to come.
At the end of the line
Fintech is one of the fastest growing and exciting industries, offering services that help both consumers and businesses manage their finances, access loans and make payments.
As technology continues to change the way we live and impact different areas of finance, it will be necessary to regularly evaluate investments and consider the competitive advantages of each fintech. Fintech ETFs could be a good opportunity for investors who want to access the growth potential of cutting-edge innovative technology companies with a little lower risk.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Further, investors are cautioned that past performance of investment products does not guarantee future price appreciation.