Financial technology, or "fintech," has grown by leaps and bounds in recent years, and continues to do so. Electronic payments are accepted in more places than ever before, the majority of banking transactions can be accomplished without ever setting foot into a physical branch, and getting a personal loan from a bank is dramatically easier than it used to be.
With that in mind, here are two companies that are leading the charge to transform the banking industry with their innovative business models.
Most of the world's businesses don't accept card payments -- yet
Square (NYSE:SQ) has disrupted the mobile payment market, and could still be in its early innings of growth. Over the past year, Square's stock has more than doubled, thanks to its impressive and better-than-expected growth and optimistic forecast.
Over the past year alone, Square's payment volume increased by 33% to over $13.6 billion, and the company is on the verge of becoming profitable. Plus, Square's services and subscription revenue more than doubled year-over-year, and has tremendous long-term growth potential.
Speaking of the growth potential, there are a few reasons to believe Square may have just started to tap into its potential. A big area of potential growth is international expansion -- for example, Square just recently expanded into the U.K., where more than half of small businesses don't accept card payments yet despite a clear consumer preference for non-cash payments. Even with this move, Square is only in four countries so far, and has only captured a small percentage of its addressable market in each of them, including here in the U.S.
Around the world, two-thirds of businesses don't accept cards yet, and traditional systems for processing card payments are prohibitively expensive for most of them. So, the U.K. expansion could be just the tip of the iceberg. Internationally, card payment volume is expected to reach $45 trillion per year by 2025, and if Square can capture just a percent or two of that, it would translate into a big win for the company and its shareholders.
Making personal loans easier
Peer-to-peer lending has been a disruptive trend in banking for several years now, with companies like Lending Club, Prosper, and others taking unsecured loan market share away from banks. For a while, these companies experienced breathtaking growth in their business, as you can see in this chart of Lending Club's growth through 2016.
However, P2P lenders aren't the only players in the unsecured lending space anymore -- some of the biggest names in the industry are getting involved, which could certainly shake things up in the years to come.
One in particular I have my eye on is Goldman Sachs (NYSE:GS). To be clear, I love the rest of Goldman Sachs' business model, have written about the company many times, and I own the stock in my portfolio.
Goldman first announced its intention to get into the consumer lending business in 2015, and after a couple of years of development, the company recently launched Marcus (named for Marcus Goldman, one of the bank's founders), its new lending platform that offers personal loans of up to $30,000.
The bank has a few competitive advantages that could allow it to capture market share from P2P lenders and other banks. For one thing, the company's size gives it efficiency advantages, as well as virtually unlimited access to capital to lend. And if the early consumer reviews are accurate, Marcus' approval and funding process is much more painless and streamlined than the competition, and the interest rates given to customers seem to be lower as well.
Although the growth in the unsecured lending space has slowed a bit, this is still a massive market opportunity. According to a report by TransUnion, nearly 16 million people took out an unsecured loan in 2016, the highest on record. With an average balance of $7,640 and average interest rate of 12%, this translates into a billion-dollar revenue stream if Goldman can build its market share to just 7%.