Fintech, an abbreviation for financial technology, is the practice of leveraging technology to better accomplish traditional financial services. Since this clearly incorporates a broad range of financial practices, a look at companies within fintech necessarily encompasses several business sectors and subsectors. After all, fintech can refer to a wide array of specific applications; everything from online bank accounts to blockchain technology to real-time fraud analysis of transactions could fall under its far-reaching umbrella.
Companies incorporating fintech practices into their services hail from different sectors and differ greatly in size and business model. For instance, a number of banks are using fintech to make their products cheaper and solve the older points of pain and friction associated with banking. Here are just a few of the companies involved in fintech.
|Company Name||Type of Company||Market Cap (billions)|
|American Express Company (AXP)||Credit card issuer and network||$85.6|
|Broadridge Financial Solutions (BR)||Financial services||$10.5|
|JPMorgan Chase & Co. (JPM)||Bank||$371.1|
|Live Oak Bancshares (LOB)||Bank||$1.1|
|Mastercard Inc (MA)||Credit card network||$151.8|
|Nasdaq Inc (NDAQ)||Stock exchange||$13.2|
|PayPal Holdings Inc (PYPL)||Online payments system||$85.3|
|Banco Santander (SAN)||Bank||$90.0|
|Square Inc (SQ)||Payment processing||$14.3|
|Visa Inc (V)||Credit card network||$243.7|
JPMorgan Chase & Co. (NYSE: JPM), the largest bank in the world with a market cap of almost $364 billion, recently acquired WePay for an undisclosed sum. WePay allows its customers, like GoFundMe, to integrate payments seamlessly into their own platforms. In the press release announcing the acquisition, JPMorgan Chase proudly stated WePay would act as the giant bank's "payments innovation incubator in Silicon Valley." On the opposite side of the banking spectrum in size, is Live Oak Bancshares Inc with a market cap of just $1.1 billion. Live Oak CEO Chip Mahan has said "banking is broken," and the company has initiated a number of fintech joint ventures to fix the industry's problems.
Banks are far from the only companies making major fintech moves. Nasdaq Inc, the world's second largest stock exchange, has used blockchain technology to issue private shares and facilitate proxy voting in foreign countries. Broadridge Financial Solutions, Inc CEO Rich Daly has called blockchain technology "incredibly innovative" and said "its promise is far-reaching". Daly believes blockchain technology will streamline the services the company performs like equity trading and proxy voting.
Of course, no discussion about fintech would be complete without discussing payment networks and credit card companies. Visa Inc has made a number of strategic partnerships and investments in up-and-coming fintech companies. American Express Company and Banco Santander, S.A. recently partnered on using the blockchain provided by Ripple, the fourth-largest cryptocurrency by market cap, for instant cross-border payments for joint account holders.
We could go on and on, highlighting companies that have in some way used fintech to make an existing service better. However, for investors looking to invest in companies right now with heavy exposure to fintech, I believe the three deserving the closest look are Mastercard Inc (MA 3.87%), PayPal Holdings Inc (PYPL 0.99%), and Square Inc (SQ 9.11%). These three companies not only appear to be innovating faster than their peers, but also have offered market-crushing returns since going public.
Mastercard's priceless innovation
Over the past couple of years, Mastercard has been one of the leaders in in making digital payments safe and secure. In 2016, the company introduced its "Selfie Pay" feature, which allows card holders to opt into a program requiring them to take a selfie before an online purchase is authorized. Later in 2016, Mastercard launched its Decision Intelligence platform, an AI-based program that helps retailers make real-time judgments on fraudulent purchases. This year, Mastercard acquired NuData Security, a company specializing in passive biometrics -- which includes things like how you type on your computer or how you hold your smartphone -- to determine if a transaction is fraudulent.
In its third-quarter conference call (this and other quotes courtesy of S&P Global Market Intelligence) Mastercard CEO Ajay Banga was pleased to announce more innovative security features the company was working on, especially in the area of recurring payments where merchants store consumers' credit card information on their site:
"We've also been working to enhance the security of digital transactions through the tokenization of cards stored on a merchant's website or in their app. When consumers keep their cards on file, as some of you probably do, checkout is faster, more convenient. Merchants can easily process recurring payments. Now when you token-ize the credentials that are kept on file, it becomes useless if a fraudster steals them and attempts to use them somewhere else..."
Banga said the company had also released an Automatic Billing Updater which is "able to keep payment credentials up to date in real-time when an expired, lost or stolen card is replaced." For both features the company already has a pretty big first customer: Netflix.
Mastercard reports revenue for its security features, as well as other products and services beyond its payment network like data analytics, loyalty program management, and consulting services, under what it refers to as its "Other Revenues". In Mastercard's third quarter, its Other Revenues segment had grown to $747 million, a 21% year over year increase. With Mastercard finding new customers for its security services and showing robust growth in its Other Revenues segment, the company's stock could easily continue to give shareholders market-beating returns long into the future.
PayPal is the big winner of mobile commerce
Mobile commerce, also known as m-commerce, is the act of purchasing goods and services via mobile devices, such as smartphones or tablets. Earlier this year, the consulting group comScore found that people spend more time shopping on mobile devices over PCs by a 2-to-1 margin. Business Insider predicts m-commerce to reach $284 billion by 2020, good for a projected 45% of e-commerce.
There may be no company better positioned to capitalize on this growing trend than PayPal Holdings. In the company's third quarter, its mobile payment volume rose to about $40 billion, a 54% increase year over year. CEO Dan Schulman certainly understands the importance of the trend. In the conference call following PayPal's most recently reported quarter he said, "Mobile is becoming the defining force in digital payments. It is rapidly blurring the distinction between online and offline and accelerating the adoption of digital payments."
PayPal's One Touch platform certainly deserves the lion's share of the credit for PayPal's growth in this area. One Touch allows users to essentially register a device and then complete purchases on that device -- through websites and apps that accept PayPal as a method of payment -- with one click. The platform has seen explosive growth and more than 70 million consumers and six million merchants now participate in One Touch. The feature works so well that it sports a sales conversion rate twice as high as the industry average. This means that once a consumer starts a shopping experience they are twice as likely to complete the transaction using One Touch than another payment method.
PayPal's growth in mobile commerce is unlikely to slow down anytime soon. This quarter Venmo users will be able to use PayPal's popular P2P app to make purchases at vendors wherever PayPal is accepted. PayPal investors should be able to enjoy the ride as the company rides the m-commerce wave to more market-beating returns.
Loan growth Squared
In fintech, not only do you get banks turning to tech to solve problems but you have tech companies filing for applications to become banks! That's right, earlier this year Square applied for a bank charter in Utah. While Square has developed many successful extra services that deepen its payment processing ecosystem, none has been as successful as Square Capital, Square's business loan platform.
Square Capital's growth cannot be questioned. The revenue the platform generates is accounted for in Square's subscription and services-based revenue segment where the company's third-quarter revenue was reported at $65 million, a whopping 84% increase year over year. During the quarter, Square Capital facilitated 47,000 business loans for a total of $303 million, a 45% increase year-over-year. That puts the average loan at close to $6,500. The small amount of the average loan and the platform's explosive growth indicate that Square may have found a niche overlooked by most banks.
Square Capital's most successful metric, however, is its eerily small default rate. In the company's conference calls, CFO Sarah Friar has consistently said the default rate is right around 4%, almost half the rate of the average business loan. How does Square manage to keep default rates so low? Friar credits the software algorithms, machine learning, and sophisticated models that the company uses to determine risk:
"So Square was born using, at the time, what we call, software algorithms. Now we talk about machine learning and even deep learning. We have clearly moved on that continuum, and those models help us to really manage the risk prudently. And the models get better and better as the cohorts mature and we get more and more data on that. So no change to the core business on loss rates. As we think about a new business like Installments, it's just business as usual, right? It's exactly the same approach of making sure that we're utilizing the data that we have."
With almost half the risk of the average business loan, explosive growth, and an underserved market, it's hard for shareholders not to get excited about Square's big move into banking. Combined with its omnichannel payment processing capabilities, Square has developed quite a sticky ecosystem, one that will be hard for its business clients to leave. Even though its stock price is up 169% year-to-date, this company still has the chance to be a winning investment for years to come.
Think about it this way
Investing in hot areas such as fintech can often be an overwhelming experience. Like a kid in a candy store, it's difficult to know where to start and when it's a good time to call it quits before the inevitable sugar-induced tummy ache. By identifying large trends, investors can focus on companies excelling in those specific areas. Payment security, mobile commerce, and tech companies encroaching on traditional banks' territories are trends that are not going away any time soon and Mastercard, PayPal Holdings, and Square look poised to capitalize on these trends for years to come. These companies crushed the market this year and I suspect this trend to continue well into the foreseeable future.