Fascinated by fintech? You’re not the only one.Despite a tough 2022, the future is bright for fintech—as consumers and businesses increasingly adopt technology that saves them time and money.Read on to learn about how fintech is changing the financial industry, the benefits of investing in fintech, five fintech stocks to watch, plus tips on managing the risks of your fintech portfolio.Understanding Fintech: Revolutionizing The Financial Industry Fintech, short for financial technology, is an umbrella term describing technology solutions that streamline money management, banking and investing.
Those solutions can be targeted towards consumers or businesses.Chances are, you’re using consumer-oriented fintech regularly.Examples include mobile banking apps, peer-to-peer payment apps, automated investment portfolios, investment apps and cryptocurrency trading and wallet apps.The rise of these solutions has and will continue to transform the financial industry.
Consider this: It was only about 32 years ago that E-Trade launched online investment trading for consumers.Prior to the early 1990s, investors had to call their brokers to buy and sell stocks.Today, self-service investing is commonplace, supported by an ever-evolving set of online and mobile apps.Those investing apps and other fintech solutions have changed consumer habits and expectations around money management.It’s not surprising that many investors prefer the convenience of tapping a few buttons in a smartphone app vs.calling their broker and discussing a potential trade.These changing expectations are setting new standards for the financial industry at large.Segments Of Fintech That cycle of new tech rollout and consumer adoption followed by industry-wide implementation has affected more than the investing segment of personal finance.
Fintech spans digital payments, lending, banking, fundraising, insurance and cryptocurrency.Fintech also works behind the scenes, creating operational efficiencies for financial institutions.
Not only that, but fintech is expanding into other industries.The trend, called embedded finance, brings financial solutions to customers when they’re on social media or shopping online.As discussed in more detail below, embedded finance plus biometric security, artificial intelligence, blockchain and regtech are a few of the innovations driving fintech forward in 2023.
Benefits Of Investing In Fintech Stocks Investing in fintech stocks presents an interesting growth opportunity for investors.Several researchers predict double-digit growth for the global fintech market in the near-term: – Research and Markets concludes the worldwide fintech space will grow at 13.7% CAGR through 2026.- Mordor Intelligence predicts 11% CAGR between 2023 and 2028.- Macdonald Ventures sees 24% CAGR from 2021 to 2026.Longer-term growth rates could be more impressive.The fintech solutions that rise to the top can potentially create new markets, creating an upward spiral of adoption and rising demand over time.As an example, there was a time when people didn’t know they needed digital, peer-to-peer payments.
PayPal socialized that concept and Venmo and Cash App took it a step further.That spiraling growth potential could be very lucrative for investors who get in early.The flip side, of course, is that potential doesn’t always translate to realized returns.Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023.Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023.Click here to download it now.Exploring The Best Fintech Stocks: Key Players And Innovators I think the top fintech stocks to buy this year are Adyen (ADYEY), Fiserve (FI), Coinbase (COIN), Block (SQ) and Paypal (PYPL).
1.Adyen NV Adyen NV is a Dutch payment processing company.Business customers use the Adyen platform to accept payments across channels, currencies and geographies.Integrated channels include mobile, website and point-of-sale.The platform also includes payment analytics.
Notably, eBay (EBAY) dropped its former subsidiary Paypal in 2018 to move digital payments to Adyen instead.Financially, Adyen has shown impressive revenue growth over the past five years, averaging more than 40% annually.The company’s customers appear to be happy, as churn is low and market share keeps rising.Adyen also holds more cash than debt on its balance sheet.The bad news is that the company’s margins have been sinking.
According to leadership, the margin decline comes from the strategic decisions to add employees and invest in marketing.2.Fiserve Fiserve has a suite of financial, payment and banking solutions for businesses, financial institutions, governments and consumers.
The Wisconsin-based company has a sizable market share in business software and solutions.It’s also a global leader in merchant acquiring and digital payments.Fiserve has diversified customer groups and a consistent track record of performance.The company also produces ample cash flow and has increased profitability in recent years.There is a fair amount of debt on Fiserve’s balance sheet, but it’s being serviced comfortably.Debt service coverage should improve if Fiserv continues expanding cash flow and profits.
3.
Coinbase Coinbase runs a cryptocurrency exchange and wallet.
The company generates revenue from transaction fees, subscription fees and service fees.Coinbase is the largest U.S.-based crypto currency exchange.The platform is user-friendly enough for novice crypto investors to use, but still advanced enough to satisfy expert traders.Customers can trade more than 250 currencies and make quick crypto withdrawals, a popular differentiating point.
After strong revenue and income growth in 2020 and 2021, Coinbase notched declines in revenue and income in 2022, ending the year with a $2.6 billion net loss.Factors in play included an extended crypto market downturn, plus increased competition from lower-priced exchanges.Fortunately for Coinbase, the market downturn appears to be softening.
The company has also taken steps to diversify its revenues so it’s less dependent on transaction fees.Note that the SEC is suing Coinbase.The SEC also filed suit against Coinbase’s primary competitor, Binance.
Still, some analysts and fund managers believe Coinbase will rise above its current troubles and its competitors.As of July 2023, Coinbase remains a major holding in Cathie Wood’s Ark Fintech Innovation ETF (ARKF), Global X FinTech ETF (FINX) and Fidelity Crypto Industry and Digital Payments ETF (FINY).4.Block Block works in several areas of fintech.The company sells payments hardware and software to businesses, operates peer-to-peer payments application Cash App, owns buy-now-pay-later (BNPL) firm Afterpay and is developing a physical bitcoin wallet called Bitkey.Block recently announced a partnership with Coinbase to support the Bitkey initiative.
Block’s diverse and loyal customer base is an advantage.Cash App is wildly popular with consumers and generates most of the company’s revenue.Square, the payment solution sold to small and medium-sized businesses, owns a majority share in its market.Block has grown revenues from about $3.3 billion in 2018 to $17.6 billion in 2021.
2022 revenues were flat with the prior year, but Block did show 32% growth in gross profit.Block also has more cash than debt on its balance sheet.5.PayPal PayPal offers business and consumer digital payments and related services.
The company’s best-known solutions are its namesake platform, the Venmo app, coupons and rewards extension Honey and BNPL provider Paidy.Paypal has brand recognition on its side, as well as a massive user base.Some 435 million people use Paypal and 78 million use Venmo.Eclipsing those numbers would be difficult and expensive for a younger company.
That puts Paypal in a nice position to benefit from the ongoing rise in digital payments.Paypal has also grown revenues consistently for years.Operating profit would have had a similar run, if not for a dip in 2022.On the downside, the company has doubled its long-term debt balance since 2019 to $10 billion as of December, 2022.
Fintech Stock Selection Criteria And Evaluation In addition to these fintech stocks, you have many other options to build out a fintech portfolio.To identify investable assets, start by analyzing sales and margin trends, balance sheet health, competitive advantages, market size and leadership experience.1.Sales and Margin Trends Younger fintech companies may not be profitable yet, which is not necessarily a dealbreaker.
But you do want to see rising sales and expanding margins.Those two trends pave the way for future profitability.2.
Balance Sheet Health A strong balance sheet is defense against tough economic conditions and changing customer preferences.
Low debt and ample cash are especially important for fintech companies because they must invest heavily in product development.3.Competitive Advantage Success in fintech goes well beyond having a solid value proposition.The company must also have a durable competitive advantage.
Examples of competitive advantages in fintech include a proven and superior product development framework, cost efficiency that cannot be duplicated and ownership of proprietary data sets that can drive innovation.4.
Large Addressable Market The value of a competitive advantage is defined by the size of the addressable market.Look for fintech stocks that are developing solutions for large, global customer groups.
5.
Focused Leadership Success in a younger market requires vision and focus.Research the leadership team and their collective experience in designing compelling solutions and executing growth plans.Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023.https://bit.ly/3O7Wq59 Trends And Disruptive Technologies In Fintech Key trends driving fintech growth this year include: – Biometric security identifies and authenticates users by physical or behavioral characteristics, such as a fingerprint or iris.This is a much stronger authentication protocol than a password.- Artificial intelligence (AI) uses computers and algorithms to perform tasks faster and more accurately than a human could.AI has many applications in fintech, from identifying and mitigating security risks to helping customers budget and save money.
– Blockchain is a shared, decentralized and permanent ledger of transactions.It’s best known for its role in cryptocurrency, but the technology has several important business applications, too.Examples include self-executing contracts, tracking and managing supply chains and sending global payments.- RegTech is technology that manages compliance and regulatory processes for companies in the financial industry.This can involve monitoring complex data for risk and fraud detection or streamlining the creation and submission of regulatory reports.- Embedded finance is the adoption of financial solutions by non-financial companies.One well-known implementation is the integration of BNPL offers into ecommerce checkout pages.
Some ecommerce retailers, including Amazon, are also prompting customers to buy product insurance as they check out.
To explore more up-and-coming fintech technologies, see the Fintech 50 , a list of the most innovative private fintech companies of 20223.Risk Management And Portfolio Diversification In Fintech Investments Things change quickly in the fintech space, so it’s important to manage your portfolio carefully.Below are four strategies that can help you mitigate the risk of investing in a fast-moving space.1.Allocate And Diversify Start by deciding how much of your portfolio you will devote to fintech.
This number should be small to start—less than 5%.You can increase your exposure as you grow comfortable with the segment’s behavior and the workload required to monitor these stocks.The other 95% of your portfolio should be diversified into other industries, company sizes and asset classes.Dedicating a larger percentage to mature and successful stocks provides a baseline stability to counter the volatility you may see in fintech.As well, exposure to U.S.
Treasury debt and/or real estate can offer some shelter from broader stock market volatility.2.
Stay Informed Define a process for staying current with industry trends.That process should involve regular review of news and updates from multiple sources.3.Monitor Your Holdings Closely Keep up with earnings reports and press releases from your fintech stocks.Listen to management’s commentary on performance and read what analysts are saying.As you gain knowledge in the space, you’ll get better at reaching your own conclusions about where your stocks are headed.
4.Be Patient, But Willing To Act It takes time for new tech to gain traction.
Famous disruptive tech investor Cathie Wood recommends an investment timeline of at least five years.While it’s smart to be patient with your fintech stocks, you also must be willing to trade—to cut losses or take profits.Do your best to define your exit parameters early on; this encourages you to make logical decisions, rather than emotional ones.Best Fintech Stocks FAQs What are the key drivers of growth in the fintech sector? Several factors are driving fintech growth.
On the consumer side, smartphone usage continues to rise, as does the demand for convenient banking, investing and payments solutions.On the business side, fintech solutions can generate efficiencies through automation as well as new revenue streams through embedded finance offerings.Fintech companies can develop those solutions faster than traditional banks, thanks to lower regulatory hurdles and a technology-first mindset.What are some risks associated with investing in fintech stocks? Fintech stocks do present added risks for investors.
The lack of regulation that helps them deploy solutions faster also creates uncertainty for shareholders.With lesser regulation, fintech companies can suffer from poor internal discipline around customer identity verification among other things.
This raises the risk of fraudulent activity and potentially exposes fintech to increased regulation going forward.Fintech companies must also manage competition from small and large companies, ongoing threats of cyberattack and the risk of technological failure.How can investors evaluate the financial health of fintech companies? Investors can evaluate the financial health of fintech companies by reviewing the balance sheet, sales growth and profitability trends.The safest investments will have manageable debt levels, ample cash, increasing sales and a record of profitability.Savvy leadership plus a strong and enduring competitive advantage can help protect those qualities.Are there any government regulations impacting fintech companies? In the U.S., fintech companies must comply with consumer protection and data privacy laws enforced by the Consumer Financial Protection Bureau, the Federal Trade Commission and the Department of Justice.
Some fintech companies may also be subject to the Bank Secrecy Act/Anti-Money Laundering regulations enforced by the Financial Crimes Enforcement Network and the U.S.Treasury Office of Foreign Assets Control.Other countries have their own regulatory requirements.The World Bank maintains a database of global fintech regulations.
How can investors stay updated on the latest trends and developments in the fintech sector? To stay updated on the latest trends and developments in fintech, read industry reports from consultants like KPMG, Boston Consulting Group and FT Partners.You can also follow financial regulators in larger markets and subscribe to reputable fintech blogs and podcasts.There are also fintech conferences happening around the world, some of which are appropriate for investors to attend.Be sure to read Forbes’ https://www.forbes.com/lists/fintech50/?sh=168e6be618d3 list each year.
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