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Money is the most widely used technology globally, and how we use it will change as our technological capabilities progress.
We have been iterating on monetary technology for the last 5,000 years.
Now we just have a cool name for it: FinTech.
What is Financial Technology (FinTech)?
Financial technology, or “FinTech”, refers to new technology that disrupts traditional financial products and services.
Corporations, business owners, and consumers adopt this innovation to make their financial operations easier, safer, and better understood.
“FinTech” is an umbrella term that describes several processes, products, and services across various industries.
You may have been using fintech without even realizing it – that little white card swiper at the farmer’s market? FinTech. “Just Venmo me.” FinTech. YOLO options on Robinhood? FinTech.
FinTech’s growth has accelerated during the pandemic as companies and individuals have been forced to digitize their finances.
People rely on financial technology applications like PayPal to receive their stimulus checks or leaned on Square to provide contactless payments.
FinTech will continue to improve as we make advancements in artificial intelligence, blockchain technology, and machine learning.
You can guarantee that the financial industry will be the first recipient of new cutting-edge tech.
How does FinTech Work?
FinTech is trying to disrupt everything we know related to our finances, from trading platforms to banking and much more.
However, there are generally four categories of FinTech users:
- B2B (business-to-business) for banks
- B2B for clients
- B2C (business-to-consumer)
As you can see, Financial Technology disrupts numerous stakeholders. Let’s look at the different types of FinTech and see how new technology is being applied to our finances.
Types of FinTech
Mobile Wallets and Digital Payments
The two super apps, powered by PayPal and Square, are among the U.S.’s most popular apps.
Venmo and Cash App benefit from the network effect – you downloaded them because your friends have them – similar to how social media apps grow.
However, this notion should come as no surprise. The PayPal Mafia (creators of PayPal) and Jack Dorsey (Founder and CEO of Twitter) are renowned entrepreneurs who have harnessed technology to shape cultures and make our lives easier.
The traditional banking industry embraces FinTech’s rise and either acquire or partner with disruptive companies to stay ahead of the curve.
For example, banks partnered with Plaid so their customers could securely connect their financial accounts to the apps they want to use, like Venmo and Betterment.
Banks are even improving their once rigid peer-to-peer payment processes by partnering with companies like Zelle.
More and more people are doing 100% of their banking on mobile devices. To maintain their market position, banks will do everything to remain the middleman.
Crypto and Blockchain
Agile FinTechs that originally provided traditional services are now offering crypto services. Just look at Square, PayPal, Visa, and Robinhood.
Bitcoin’s performance in 2021 is to blame for crypto’s rising popularity, causing many to go down the proverbial rabbit hole.
Bitcoin has several bull cases, but its most popular is a “store of value” asset that is superior to gold.
Money is already largely digitized through via layer 2 and layer 3 technology built on top of USD. Think of credit cards and previously discussed digital wallets.
Bitcoin and Ethereum are powered by blockchain, which is a database-like technology that uses cryptography to record and secure data in a decentralized fashion. It was invented by Bitcoin’s creator, Satoshi Nakamoto.
Commission-Free Investing Apps
Investing in the financial markets used to be a hassle, and high commission fees kept American’s on the sidelines.
That is no longer true because of apps like Robinhood and SoFi.
Retail investors are now able to invest with no commission fees on their mobile devices.
Some of these platforms even offer robo-advisors, which are digital services that automate your investing strategy based on your risk tolerance, goals, and time horizon.
Digital insurance companies like Lemonade (LMND) make insurance more accessible to the internet generation.
Lemonade leverages AI to expedite the process of filing claims – the company’s fastest claim was handled in three seconds.
They currently offer renters, homeowners, and pet health policies in the US, in addition to contents and liability policies in Germany, The Netherlands, and France.
Lemonade is taking aim at insurance incumbents like Geico. This is no small task, but there’s certainly upside potential in this market.
Frictionless Funding Platforms
Just like investing, it’s never been easier to get a loan. Answer a few questions on an online marketplace like LendingTree or SoFi, and you will be provided with several offers.
Affirm is a company that finances purchases by offering installment loans for consumers to use at the point of sale.
Can’t afford that new couch right now? No problem, Affirm will cover it, and you can pay it off over the next 12 months.
New intermediaries are an overly broad category of FinTech, including the institutions we mentioned above – banks and insurance companies.
However, a company like Zillow is the perfect example of FinTech creating new railways to facilitate transactions.
Zillow is an online real estate marketplace that empowers consumers with data and connects them to local professionals.
Zillow is destroying the online real estate space – it had approximately 36 million unique monthly visitors in 2020, which exceeded the second closest U.S. real estate website by 13 million users.
Best FinTech Companies
We have mentioned several of the great FinTech companies already in this article, but let’s explicitly list them to ensure we haven’t missed any.
- Square (SQ)
- PayPal (PYPL)
- MercadoLibre (MELI)
- Visa (V)
- Mastercard (MA)
- SoFi (IPOE)
- Affirm (AFRM)
- Zillow (Z)
- Green Dot (GDOT)
- Robinhood (HOOD)
- Coinbase (COIN)
Apple Pay is already in the pockets of more than 1.5 billion users. Facebook’s Libra project has stumbled, but when did a little turbulence slow them down?
Note that investing in Big Tech is an indirect way to get exposure to FinTech. Another alternative investment strategy is to buy a FinTech thematic ETF. These are our favorites:
- ARKF Fintech Innovation ETF (ARKF)
- Global X FinTech ETF (FINX)
- ETFMG Prime Mobile Payments (IPAY)
- Tortoise Digital Payments Infrastructure Fund (TPAY)
Bottom Line: What is FinTech?
“Winner take most” is often used to describe the competitive FinTech space. While network effects will certainly distinguish one company from another, we do not necessarily subscribe to this idea.
Many of these companies offer services that do directly compete, but several of them work together to provide value.
FinTech’s boom has been exciting to follow and we are just getting started.
This article is for informational purposes only. It is not intended to be investment advice.