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Wall Street can’t get enough of fintech, and neither can we. Let’s jump right in. This article will help any investor make sense of Financial Technology and its impact on consumers for years to come.
What is Fintech?
Financial technology or “fintech” are new products or services that can change the way the financial sector works.
The companies leading this innovation are focused on improving:
- Blockchain Technology
- Customer Facing Platforms
- Funding Platforms
- New Intermediaries
- Loan Origination
Companies like Square and PayPal are accelerating the adoption of digital wallets (smartphone-enabled financial instruments) across the globe.
Many believe that the digitization of money is inevitable and that regulators will turn to the banks (who will turn to Silicon Valley) to launch the digital dollar.
According to ARK’s research, digital wallets are valued between $250 and $1,900 per user today but could scale to $20,000 per user, representing a $4.6 trillion opportunity in the U.S. by 2025.
While many of these stocks have gone on quite the run, we are still in the early innings of digital wallets and payment innovation. Let’s review some of the best fintech companies.
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At a Glance: Best Financial Technology Stocks
- Square Inc.
Best FinTech Stocks
#1. Square Inc. (S.Q.
The company is famous for changing the way that small businesses operate and their popular Cash App that has more than 55 million users in the U.S. alone.
Square is Wall Street’s favorite fintech because it is positioned on both sides of the transaction. Millions of merchants use its Point-of-Sale (POS) hardware and software, and tens of millions of consumers use its Cash App.
ARK analyst Maximilian Friedrich suggests that Square could be aiming for the “holy grail of payments,” by creating a closed-loop payment system that cuts out intermediaries, giving it a larger share of the economics and the ability to cross-sell services between and among consumers and merchants without the friction associated with more traditional payments ecosystems.
Unlike a bank that may only see end-of-month or end-of-quarter income statements from a merchant, Square sees every transaction that occurs in real-time.
Square can see when the business is good or bad, its cadence of sales, and its growth prospects.
This kind of business intelligence allows Square to offer working capital loans to growing businesses that qualify, further embedding Square into the fabric of the company. Square can then offer the merchant’s payroll services to accommodate the new employees they hire.
ARK’s founder Cathie Wood believes that Square has the potential to destroy banks and turn them into a commoditized utility.
Wood adds that Square’s adoption started in the Southern, more “unbanked” areas of the U.S., and has quickly spread across the country.
This brings us to the trip that Square’s founder, Jack Dorsey, took to Africa in 2020 to meet with local entrepreneurs.
Jack realized that all of their problems had to do with payments. In an interview with Lex Fridman, he said, “We are lucky in the U.S. to not even have to think about payments.”
Jack believes that money is a foundational layer that solves so much more and that digital assets can increase the speed of innovation for the world. Enter, Cash App.
Cash App was born out of a Square hackathon and is now one of its most important assets, contributing approximately 12.5% of its revenue.
The Cash App allows users to request and transfer money to another Cash account via the app or email. It is the second-largest peer-to-peer payment application and digital wallet in the U.S.
Additionally, users can choose to withdraw the money to Square’s “Cash Card,” a Visa debit card, or transfer it to any local bank account. The Cash Card is sleek and customizable with the user’s own signature presented on the front of the card.
Starting in November 2017, users could begin buying and selling Bitcoin on the Cash App. Jack has been a public supporter of cryptocurrencies, specifically Bitcoin, for years.
“Bitcoin has the potential to solve [regulation stalling innovation] because it potentially allows Square to launch a product in every single market around the world.
They’re all using the same cryptocurrency, so there’s a constant understanding of regulation around that type of asset,” he stated in his interview with Lex Fridman.
On October 8, 2020, Square announced that it purchased approximately 4,709 bitcoin at an aggregate purchase price of $50 million. In the company’s press release, it added, “Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose.”
This investment represented approximately one percent of Square’s total assets at the time and added them to the shortlist of public companies who put bitcoin on their balance sheet.
Square Stock Snapshot
Square’s stock got off to a rocky start after its IPO in 2015 but has since rebounded and become one of the best-performing companies in the last five years.
The stock is up more than 2,700% since its inception to $260 and trades at a blistering 356x earnings.
While the stock may be a tad overextended, Square will continue to be one of the biggest winners in fintech. They’re disrupting the traditional financial sector and will likely dominate future markets that don’t even exist yet.
#2. PayPal (PYPL)
PayPal Holdings, Inc. is a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants.
It was founded in 1998 by a group of people who have achieved great things in the technology and business world.
This group of founders is often referred to as the “PayPal Mafia.” It includes the likes of Peter Thiel, Elon Musk, Reid Hoffman, Steve Cohen, Keith Rabois, David Sacks, and many others.
PayPal’s version of the Cash App is “Venmo,” which is the largest peer-to-peer payment application and digital wallet in the U.S. It has reached “verb status,” which puts it alongside other Silicon Valley companies like Google, Uber, and Zoom.
Venmo launched in 2009, giving it a first-mover advantage over Square’s Cash App. While Cash App has been eating away at some of Venmo’s market share, the app’s engagement metrics and YoY growth indicate Venmo is still thriving.
However, PayPal is more than just Venmo and put that on display in 2020. The company added a record 72.7 million new accounts in 2020 with 16 million in the 4Q alone. It did $936 billion in total payment volume.
This massive growth resulted from the suite of new products that PayPal added in the last year: Q.R. Code Checkout, Buy Now Pay Later, Venmo’s Credit Card, and the ability to buy, sell and hold crypto.
PayPal’s CEO, Dan Schulman, recently said, “A digital-first world is no longer our future. It’s our current reality & it will forever change the way we interact across almost all elements of our lives… The pandemic has accelerated a digital wave of change across almost every industry by 3-5 years.”
Schulman added that today’s digital reality is rapidly accelerating the need for a digital wallet that encompasses payments, financial services, and shopping.
The company will continue to expand the functionality of PayPal and Venmo wallets to facilitate and benefit from this transformation.
As you can see, Schulman’s plan for PayPal extends well beyond just payments.
The company is active in the startup space as well, investing in new fintech innovation through its PayPal Ventures division. PayPal Ventures made Q4-20 strategic investments in:
- Extend: Extended Warranty Startup
- Divvy: Corporate Card and Expense Management Software
- TAXbit: Cryptocurrency Tax Software
- Modulr: Payment-as-a-Service Platform
- Tink: European Open Banking Platform
- Paxos: Blockchain Infrastructure Platform and Buy, Hold, Sell Crypto Partner
PayPal Stock Snapshot
PayPal’s stock is up 125% in the last year and is trading at 61x earnings. It’s an expensive stock, but PayPal will continue to benefit from the next wave of financial innovation.
#3. MercadoLibre Inc (MELI)
MercadoLibre is an Argentine company incorporated in the U.S. that operates online marketplaces dedicated to e-commerce and online auctions.
It was founded in 1999 by Stanford Student Marcos Galperin and has grown into a $95 billion company with more than 320 million users.
MercadoLibre’s main focus is to deliver technological and commercial solutions to the distinctive cultural and geographic challenges of operating an online commerce and payments platform in Latin America.
The company’s main market is Brazil (which generated 68.7% of net revenues for 2019) but has operations in 18 countries.
MercadoLibre is contributing to and benefitting from Latin America’s growing e-commerce community, a region with more than 635 million people and one of the fastest-growing internet penetration rates globally.
Like the other fintech companies, MercadoLibre experienced immense growth during the pandemic.
From late February to May 2020, MercadoLibre gained over 5 million new and reactivated buyers, marking a 45% increase from the same period a year prior.
In 2019, PayPal made a strategic investment in MercadoLibre with an equity stake worth $750 million.
MercadoLibre Stock Snapshot
The stock currently trades at $1900 and is the second-largest holding in ARK’s notorious fintech innovation ETF. Bullish MELI investors may be counting on the rise of fintech in internet-emerging parts of the world.
#4. Visa (V)
Visa is a mix of legacy financial services and exciting financial technology that we’re seeing from Square and PayPal. While Visa is more of the former, they’re making strategic acquisitions and partnerships with companies that are innovating for the future.
Visa is pretty much at every electronic transaction made around the globe. So much so, that some go as far as calling Visa a monopoly.
Visa was planning on acquiring fintech startup Plaid for $5.3 billion (which was more than double Plaid’s valuation), until the US Justice Department filed a civil antitrust lawsuit to stop the merger on November 5, 2020.
The department alleged that Visa’s intentions were to eliminate a competitive threat to enhance and maintain its monopoly.
Visa is aware that their plastic cards may become obsolete in the future, so they’re teaming up with the competition, and have been for some time.
Visa made an investment in Square back in 2011, four years before the disruptor went public. Years later, Square partnered with Visa to launch their Cash Card, a debit card that connects to the Cash App balance and offers Boosts to help users save money.
Amazon partnered with Visa to launch its Amazon Prime Rewards Visa Signature Card. While the card can be used anywhere, users get 5% cashback when they use it for Amazon purchases. Amazon has become the U.S.’s largest marketplace, and it’s giving its customers another reason to choose Visa.
Visa is also integrated with PayPal. In an interview with the New York Times, Visa CEO Al Kelly said, “We work closely with PayPal, and we compete with PayPal. It’s an industry that is full of frenemies.” This suggests that Visa is open to doing business with any company that adds value.
Visa recently launched “Visa Partner” to help fintech startups “unleash their potential.” According to Visa, “we’re all in this together” when creating the digital payment solutions of tomorrow. So far, Visa Partner has worked with Chime, Airwallex, Finaxar, Nium, and many others.
Visa is even championing crypto. After partnering with 35 various bitcoin and crypto platforms in recent years, the company announced its plans to help banks launch crypto trading services with a Visa crypto software program that will launch later in 2021. Additionally, Visa partnered with crypto company BlockFi to launch the first bitcoin rewards credit card.
As you can see, Visa is embracing the wave of financial technology and will remain the king of payments for years to come.
Its values relationships with the young companies sparking change and puts its cash war chest to work.
Visa Stock Snapshot
Visa’s stock has struggled to recover from the pandemic-lows like the other fintechs we’ve covered and is up just 2% in the last year. It has a market cap of $440 billion and trades at 41x earnings.
#5. Mastercard (M.A.)
Mastercard is in the same boat as Visa when it comes to fintech. The company is taking financial disruption in stride and adopting an “if you can’t beat them, join them” strategy.
A Mastercard-sponsored study surveyed 300 senior executives at financial services companies to gauge their views on the opportunities and threats presented by up-and-coming fintech competitors.
The results may be surprising – nearly 80% do not feel an immediate threat from fintech but are learning from their efforts.
Mastercard is certainly learning, and it’s applying today’s cutting-edge technology to its payments.
For example, it recently revealed that it is applying the latest quantum-resistant technologies to develop the next generation of contactless payments.
The new Enhanced Contactless (Ecos) specifications will help ensure that contactless payments can remain convenient and secure even with the advancements made in quantum computing (for malicious use).
Remember, contactless payments won’t require a plastic credit card, yet Mastercard is facilitating this transformation. This suggests that Mastercard is accepting the changes that are coming to the financial payments sector.
Mastercard partnered with Apple and Goldman Sachs to launch the Apple Card in August 2019. Mastercard will provide the infrastructure to support Apple’s growth into the payment’s ecosystem.
Many believe that Apple Pay can reinvent the company and capture much of the digital wallet market share, given its 1.5 billion install base.
Goldman Sachs continues to choose Mastercard’s network time and time again when it pursues consumer banking opportunities. Goldman recently bought General Motors’s credit card business and chose Mastercard’s network to support the endeavor.
Mastercard Stock Snapshot
Mastercard is the second-largest payment technology company, behind Visa, and has a $335 billion market cap. The stock is up 3% in the last year to $337 and trades at 52x earnings.
Best Fintech Stocks for Growth
#6. SoFi (IPOE)
Social Finance, or SoFi, is a mobile-first service that provides a suite of financial products that includes student loan refinancing, mortgages, personal loans, credit cards, investing and banking.
SoFi was the acquisition target for Chamath Palihapitiya’s fifth special purpose acquisition company (SPAC) and went public in January 2021.
Chamath believed that the banking infrastructure was not meeting the needs of U.S. consumers, causing him to consider what was broken in banking and which company was the best representative of the solution that people wanted.
According to Chamath, people want three things when it comes to banking:
- Low to no fees
- Fair and transparent lending
- A full suite of products that is a one-stop-shop
SoFi was Chamath’s obvious choice when he evaluated the field of financial disruptors along those dimensions.
Chamath believes that there is a common theme when you look under the hood of the best companies and CEOs, something he calls the “Anatomy of Innovation.”
These companies do not rest on their heels when they develop a great product. They double down and aggressively invest in technology to drive down costs.
The next step is to deliver those savings onto consumers and launch many more products on top of that platform. Chamath says the final and most important step is to democratize access to a key resource.
This is the recipe that companies like Amazon and Tesla have employed, and Chamath is confident that SoFi is using the same playbook.
Chamath concludes that banks are ripe for disruption because they make their money on hidden and exorbitant fees. They have very restrictive lending practices to middle-income and minorities, and it is difficult for people to get access to capital to fulfil their dreams.
SoFI has fixed all of these things. The app has more than 56,000 ratings in the App Store with an average of 4.8 stars. It had more than 1.8 million unique members in 2020 and is expected to grow to 3 million unique members in 2021.
SoFi also offers the leading Enterprise banking infrastructure platform for other fintech companies like Robinhood, Chime, Dave.com, and MoneyLion. This has caused many to call it the “AWS of FinTech.”
Another key metric is SoFi’s ability to upsell products to its existing customers. For example, 65% of Home Loan sales and 24% of all new product sales came from upsells to existing members.
The company is growing at a nauseating pace with its five-year compound annual growth rate (CAGR) forecasted to be 43%. The stock is currently trading around $23.
#7. Affirm (AFRM)
Affirm provides digital and mobile commerce through its technology-driven payments network and partnerships with existing banks. This enables its users, all 6.2 million, to pay for a purchase over time instead of one upfront payment.
Affirms prides itself on being transparent, flexible, and fair. The company tells you upfront the total amount you’ll pay, and that number will never go up.
Then you choose the payment schedule that works for you. Affirm does not charge late fees or penalties of any kind, ever.
Depending on your purchase size and where you’re shopping, your payment plan may include interest. But you’ll never owe more than the interest you agree to on day one.
Thousands of stores offer Affirm as a payment option at checkout, such as Peloton, Caspar, Adidas, and Walmart.
Affirm offers these merchants commerce solutions and product-level data and insights and is also paid by the merchant to assist in the sale.
Affirm also partnered with Shopify, allowing sellers to offer installment loans on the products they sell. Affirm will get plenty of exposure in this deal, considering that Shopify controls about 20% of the e-commerce market.
Affirm Stock Snapshot
Affirm’s stock soared 98% in its initial public offering on January 13, 2021. Affirm had priced its shares at $49 apiece, but the stock began trading at $90.90 per share and closed its first day at $97.24.
The share price is currently $131, and the company has a market cap of $33 billion. Affirm’s year over year revenue grew 93% from 2019, and it shows no signs of slowing down.
#8. Zillow (Z)
Zillow is an American online real estate database company founded in 2006 by former Microsoft executives Rich Barton and Lloyd Frink.
Zillow is the leading real estate and rental marketplace that empowers customers with data, inspiration, and knowledge around the place they call home.
Zillow’s living database has more than 110 million U.S. homes. It provides users with “Zestimates” to provide accurate pricing and other home-related information. But Zillow? A fintech?
Remember our definition of fintech from earlier: products or services that are changing the way financials work, including transactions and new intermediaries.
Zillow had approximately 36 million unique monthly visitors in 2020, which outpaced the second closest U.S. real estate website by 13 million users. More people search for “Zillow” on Google than “real estate.”
Zillow Stock Snapshot
Zillow went public in 2011 and is up more than 508% since its IPO to $168. Its $40 billion market cap will continue to grow as the next wave of homeowners turn to the internet to find their homes.
Next Steps: How to Start Investing
Fintech IPOs to Watch in 2021
Stripe is a financial service and software as a service (SaaS) that primarily offers payment processing software and application programming interfaces for e-commerce websites and mobile applications.
A recent Bloomberg report valued Stripe at $100 billion, but early auction trading at its IPO could rocket the valuation much higher.
Stripe pretty much powers every company you know and will likely be the largest IPO of 2021. Let’s look at Stripe’s biggest clients:
Stripe has been called the internet’s “toll collector” – the company charges a swipe fee of 2.9%, plus 30 cents for every transaction it processes. CNBC ranked Stripe #1 on their 2020 Disruptor 50 list.
Regardless of the scrutiny over the GameStop saga, Robinhood’s IPO is “full steam ahead” and will likely occur in the second quarter of 2021.
Robinhood raised $3.4 billion in the blink of an eye to cover their deposits with their clearinghouses, indicating how eager the smart money is for a piece of Robinhood.
While the GameStop fiasco may have affected Robinhood’s relationship with its customers, the platform’s popularity has never been higher.
The day Robinhood restricted trading turned out to be the biggest single download day in Robinhood’s history, with 440,000 unique first-time installations in the U.S.
The commission-free platform has an amazing user interface that makes trading simple and fun, which is why it’s been the app of choice for retail investors.
However, this “gamification” of investing has made some technology commentators critical of Robinhood.
Robinhood is the fastest-growing consumer app and has better engagement than social media. An IPO will flood the company with fresh capital to add new products and services.
Robinhood has hired Goldman Sachs to lead the IPO and is currently valued north of $20 billion.
Earlier, we mentioned that the US Justice Department blocked Visa’s acquisition of Plaid – but what is Plaid? Plaid helps companies build fintech solutions by making it easy, safe, and reliable for people to connect their financial data to apps and services.
Plaid connects to 11,000 financial institutions across the US, Canada, and Europe to power thousands of the apps that people rely on to manage their financial lives, such as Venmo, Betterment, Chime, and Square Cash.
Plaid puts users in control of their data by allowing them to choose whom their data is shared with, for what purpose, and how long. So how does Plaid make money?
When users connect their financial data to an app or service, they pay Plaid. It’s that simple, which is why Plaid is free for everyone who uses a Plaid-powered app.
Prior to the blocked merger with Visa, Plaid was valued below $3 billion. However, a surge of investor interest has caused some to believe its next round of funding may exceed $15 billion.
Coinbase is the largest cryptocurrency exchange in the U.S., recently disclosing that it has more than 43 million users and $90 billion in platform assets. This means that Coinbase has more users than Vanguard and Charles Schwab.
Coinbase’s plan to go public could not come at a better time given Bitcoin‘s latest bull market. The cryptocurrency has been on a tear since its last halving, up more than 337% in the past year, reaching an all-time high of $48,201 per bitcoin on February 8, 2021.
Coinbase makes money by charging users fees and commissions when they buy and cryptocurrency.
While Coinbase offers some of the lowest fees amongst crypto exchanges, it still pockets 0.50% for purchases and sales, plus a commission that depends on the location and the total amount of the user’s transaction.
Coinbase will go public via a direct listing, skipping the typical IPO route powered by big investment banks.
This means that the current owners of Coinbase will convert their shares to stock, and then public investors can buy shares on the exchange.
Learn More: Bitcoin Stock
Alternatives to Fintech Stocks
You better believe Big Tech is keeping an eye on the rise of fintech companies. From Apple Pay to Facebook Diem and their growing Marketplace, Big Tech will leverage the work being done by these new innovative companies and continue to grow with them.
We believe that Apple specifically has a unique opportunity to benefit from the rise of digital wallets. Apple already has more than 1.5 billion potential digital wallets in the pockets of its users.
Additionally, Apple prioritizes privacy and security more than the other tech titans. Its users recognize this and may contribute to them trusting Apple with their finances.
- ARKF Fintech Innovation ETF (ARKF)
- Global X FinTech ETF (FINX)
- ETFMG Prime Mobile Payments (IPAY)
- Tortoise Digital Payments Infrastructure Fund (TPAY)
Many crypto enthusiasts believe that blockchain has the potential to disrupt, well… pretty much everything. But one of blockchain’s main, and probably first, mainstream applications will impact the financial sector.
Since competition in the blockchain space is fierce, we recommend buying a blockchain ETF to diversify into the sector.
The best blockchain ETFs are Amplify Transformational Data Sharing ETF (BLOK) and Siren’s Nasdaq NextGen Economy ETF (BLCN).
Related: Best Blockchain ETFs
How to Research Fintech Stocks
We recommend researching fintech stocks on the Motley Fool because they provide up to date commentary on the financial technology space.
Also, the Motley Fool is not afraid to share their honest opinions on specific stocks – they have conviction.
The Motley Fool has been early to some of the best-performing stocks in the history of the market, from Tesla to Netflix. Don’t miss out on their next fintech winner.
Learn More: How to Research Stocks
FinTech Stocks FAQs
What is the number 1 FinTech company?
Many consider Square to be the most innovative fintech company on the market. Square offers several products from point-of-sale software and hardware to the ability to buy and sell crypto on their famous Cash App.
Square stock has been red hot in the past year, up more than 220%.
What is the best financial stock to buy right now?
PayPal is one of the best financial stocks to buy right now because of their strong, yet growing user base, and their exciting streak of innovation during 2020.
In addition to Square, PayPal will be one of the biggest financial winners from the rise of digital wallet adoption.
Is Robinhood a Fintech?
Yes, Robinhood is a fintech because it is disrupting the way that retail investors trade stocks. The company was the first to offer commission-free trading, which forced the rest of the exchanges to follow suit. Robinhood plans to go public in the second quarter of 2021.
Is PayPal a FinTech?
Yes, PayPal is a fintech and one of the leading companies in the space. It offers a suite of financial products, including Venmo, PayPal Credit, Buy Now Pay Later, and the ability to buy, hold, and sell crypto.
Bottom Line: Best FinTech Stocks
Financial disruption is happening, and the companies in this article are leading the charge. While many of these stocks are pricey, their thirst for innovation is unmatched. Fintech appears to be one of the hottest trends of the next decade.
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Sean Graytok owns shares of Square, Inc., PayPal Holdings, Inc., Visa Inc., Mastercard Inc., and Zillow Group, Inc.