By Matthew Frankel, CFP, contributing analyst at The Motley Fool
You might be surprised at how many different ways you can get in on the fintech revolution.
Fintech, short for financial technology, is a broad term that describes technologies that affect the ways we spend, save, and use money. Some fintech companies develop software to help move money around the world. Others design apps that help people track how much they’re saving and spending. Others aim to make banking more efficient and profitable.
We could go on, but you get the idea. The point is that there are a lot of ways that technology can be applied to the financial industry, and, as a result, there are a lot of different ways to invest in the fintech revolution.
Why invest in fintech?
The world is in the midst of a digital transformation, and, when it comes to money, we still have a long way to go. Cash is still widely used around the world, particularly in some of the most highly populated areas. Globally, 18% of all transactions still take place in cash, and the cash usage rate is at least double this percentage in Latin America, the Middle East, and Africa. Even in North America, which many people think of as essentially a cashless economy, cash makes up 11% of payments.
What’s more, according to the World Bank, there were about 1.7 billion people worldwide without access to banking services in 2017, the date of the most recent data. The number may have shrunk a little by the time you’re reading this, but there are still a lot of people in this group.
Last, but certainly not least, it isn’t just about cash versus electronic payments and banking. There’s an ever-evolving need for the various platforms, apps, and other technologies that power our finances. Think about how much contactless payment technology has developed in just the past few years, or how much easier it is to buy a stock than it was a decade ago. The pace of innovation in the fintech world has never been faster or more exciting.
The worldwide payment market is estimated to be about $185 trillion in size already, according to Visa, and it is expected to grow significantly in the years ahead.
Ways to invest in fintech
As mentioned, fintech is a broad category, so there are quite a few ways to invest in it. Just to name some of the biggest trends you may want to consider:
Payment processing: These are companies that develop and operate platforms that move payments from the payor to the payee. Examples include Block (SQ), which operates the Square business payments ecosystem as well as the popular Cash App, along with companies such as PayPal (PYPL), Shift4 (FOUR), and Adyen (ADYEY), just to name a few.
Online and mobile banking: Branch-based banking is full of inefficiencies, and several promising companies are leveraging technology to improve the customer experience. SoFi (SOFI) is a great example of that, and others include Axos Financial (AX) and Green Dot (GDOT).
Online and peer-to-peer (P2P) lending: The personal lending space has grown tremendously in recent years, and now there are online-based companies that offer auto loans, small business loans, and mortgage loans as well. Ally Financial (ALLY) is a good example of a technology-focused lender, and Rocket Companies (RKT) is another.
Financial software: As the financial world gets more complicated, the need for innovative software solutions is growing. Bill.com (BILL) is an example of a company whose main product is a software-as-a-service (SaaS) platform, and Paycom Software (PAYC) is another.
Blockchain technology and cryptocurrencies: Regardless of what you might think about Bitcoin, Ether, and other digital currencies, they’re here to stay, and so is the blockchain technology that powers most of them. Companies such as cryptocurrency exchange Coinbase (COIN), as well as financial companies with major blockchain operations such as Block (SQ), could be worth a look if you’re interested in this area.
Insurance technology: Insurance is a business that has been begging to be disrupted. The processes for buying insurance and submitting claims are clunky at best, and several companies are trying to find a better way. Lemonade (LMND) is an example of a company that is leveraging artificial intelligence technology to improve the insurance industry, and there are several others as well.
Don’t want to pick individual fintech stocks?
As with any up-and-coming technology trends, investing in individual companies comes with quite a bit of risk. Sure, the businesses that successfully capitalize on their opportunities could be home runs for patient and risk-tolerant investors, but even the most successful companies can be quite volatile. And there’s a good chance that fintech growth stocks won’t be able to gain traction and won’t be great investments.
This isn’t to try to discourage anyone from investing in the fintech space. There are certainly some excellent companies with solid risk-reward dynamics to consider, but it’s important to know what you’re getting into.
Alternatively, if you aren’t comfortable trying to pick winners, you could choose to invest in the overall fintech industry through the exchange-traded fund (ETF) route. The Global X FinTech ETF (FINX) is one excellent example with a diverse portfolio and reasonable investment fees. Top holdings include PayPal, Fiserv, Intuit, and Block, and since no company makes up more than 7.4% of the fund’s assets, no individual stock’s performance will make or break your long-term returns.
The bottom line is that there is no shortage of ways to invest in the fintech space. But it’s important to do your research before adding shares of any fintech growth companies to your portfolio, or to choose a more diversified approach if you’re not comfortable with the potential for large swings in your portfolio.
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