When I was growing up, I remember the trips to the drive-through bank teller my mom would make every Friday. She'd deposit that week's paycheck and take out enough cash to last us the week. The only technological innovations about that trip: not having to get out of the car to wait in a long line inside, and the pneumatic tube that magically zipped my mom's driver's license and checks to the teller inside the bank.
Without remembering how things used to be, it's easy to forget exactly how much technology has shaped the financial world. This intersection, where finances meet technological innovation, is called fintech, short for financial technology. The term is commonly used to describe how technology has made financial services cheaper, faster, and more convenient.
What is fintech?
Just a few years ago, at the dawn of online banking, it seemed revolutionary that you might never need to enter your bank's local branch to do your banking. You are now able to do almost all your banking from wherever you are, whenever you feel like it. This broad definition encompasses everything from mobile banking apps and direct deposit to P2P payments and AI-powered banking platforms.
The 2017 Total System Services U.S. Consumer Payment Study shows many of the latest financial trends. Among other things, the study points out consumers' increasing levels of comfort with using a smartphone to manage their finances. According to the study, the following percentage of consumers are interested in using their phones for the following tasks:
- 80% for halting payments for fraudulent transaction
- 72% for reviewing recent card transactions
- 56% for transferring money to family and friends
- 51% for making payments for purchases at the checkout's point-of-sale (POS)
But that's not all. A sizable majority (63%) are now using banking apps, up from 46% in 2015. Two-thirds of consumers are familiar with in-app payments, and that percentage jumps to more than 80% for the respondents under the age of 34.
How to invest in fintech
With these trends taking off, it is easy to see why it might be advantageous to invest in this sector. The Global X Fintech Thematic ETF (NASDAQ:FINX) is an ETF dedicated to the fintech theme, and not surprisingly, it has trounced the S&P 500 index since its inception in late 2016. This is to be expected when some of its top holdings, such as Intuit, PayPal Holdings, and Square, have been some of the hottest stocks in the stock market over the past few years. This is probably the easiest way to invest in the sector, as it comes with instant diversification and and does not require intense study of individual companies.
The sector is risky because it is changing fast, with disruption and innovation coming from every direction. This translates into big banks offering new mobile offerings, complete with P2P payment and investing capabilities, while newer upstarts are offering legacy services such as personal loans and mortgages. Case in point: Fintech start-ups originated 38% of personal loans in 2018. This makes it hard to know which companies to invest in, even when the right trend is identified.
In the table below that lists the best fintech stocks to buy now, you will find some that are suitable for every type of investor -- from value to income to growth. Value and income investors will probably be more interested in financial legacy companies, such as big banks and insurance companies, experimenting with different technological offerings to improve their existing services. Growth investors will undoubtedly be attracted to the disruptors, the fintech start-ups that are shaking up the financial industry with innovative solutions to age-old pain points. These companies usually come with sky-high revenue growth rates and a valuation to match.
Top 10 fintech stocks
|Company Name||Type of Company|
|Alibaba Group Holding (NYSE:BABA)||Chinese e-commerce|
|Blackline (NASDAQ:BL)||Accounting software|
|Goldman Sachs Group (NYSE:GS)||Investment bank|
|Guidewire Software(NYSE:GWRE)||Insurance software|
|JPMorgan Chase & Co. (NYSE:JPM)||Bank|
|Mastercard (NYSE:MA)||Payments network|
|PayPal Holdings (NASDAQ:PYPL)||Digital payments platform|
|Q2 Holdings (NYSE:QTWO)||Bank technology|
|Square (NYSE:SQ)||Payment processing|
|SS&C Technologies Holdings (NASDAQ:SSNC)||Financial institution software|
Let's take a closer look at each of these, counting down to what I think is the best fintech investment today, to see what they are doing to leverage technology in financial services and why they all might be stocks to buy.
10. Goldman Sachs
Goldman Sachs, founded in 1869, is one of America's largest and oldest banks. The financial institution has been able to replace many of its human traders with complex computer algorithms, some backed by machine learning and computer engineers. CFO Martin Chavez has said that the investment bank generally can replace four traders with one computer engineer. By early 2017, about one-third of Goldman's personnel, or approximately 9,000 employees, were computer engineers. Chavez said that most trades are now automated, even in opaque currency markets, where human trading was once thought to be essential.
The change in the investment bank is obvious. It mapped out 146 distinct steps that needed to be taken in an IPO and discovered most could be automated. It launched a new platform, Marcus by Goldman Sachs, which management said now offers three products to U.S. customers: consumer personal loans, savings accounts, and a personal finance app.
Guidewire provides property and casualty (P&C) insurers with software platforms that allow them to run their businesses effectively. Guidewire's platforms enable insurance companies to accomplish seemingly all of their core services, from data analytics and digital engagement to underwriting and claims management. As of early 2019, Guidewire served more than 350 companies in 32 different countries, including Farmers Insurance and Nationwide.
A quick glance at the company's recent results might hide the real progress the company is making. While the headline numbers might appear lumpy, they hide the change taking place within the company as it transitions to subscription-based cloud platforms. In a conference call, CEO Marcus Ryu stated:
Cloud-based core systems and a delivery model in which the solution is delivered the vendor in production are still relatively new concepts for P&C insurers, but we are seeing broad interest in all regions and from all segments of our market ... Cloud implementation should enable us over time to reduce the total cost of ownership for our customers through more standard implementation and integration and the leverage of cloud-native architectures.
While the results might not reflect the company's real growth for a while as the company makes its way through this transition, Guidewire should provide patient shareholders with superior long-term returns.
8. SS&C Technologies Holdings
SS&C Technologies provides software platforms to financial institutions, asset managers, and trusts that enable the manager to integrate their daily tasks, such as trading and portfolio management, with back-office functions, such as accounting and regulatory compliance. Most of these software platforms are subscription-based, requiring contract terms of one to five years and can come with maintenance support provided by SS&C for additional fees.
While the company's results were distorted due to its $5.4 billion acquisition of DST Systems in 2018, the overall trend is undeniably positive. One of the most attractive characteristics of SS&C's business model is that it features a diversified client base of more than 12,000 customers, and 95% of its revenue is contractually recurring.
Founded in 1999, Alibaba is a Chinese e-commerce juggernaut with its hands in a variety of technological services -- such as cloud computing offerings, an internet shopping search engine, and even the movie business -- all beyond its core online marketplace platform. From 2015 to 2018, Alibaba's full-year revenue grew from $12.3 billion to almost $40.0 billion, good for a 225% increase. That's an eye-popping number for one of the world's largest companies. Even better, the company stated it expects to again grow revenue by at least 60% in its 2019 fiscal year. When the share price lags, it is primarily because its heavy investments in other ventures are dragging down its operating margin.
One of these big investments that makes Alibaba especially attractive to fintech investors, however, is its 33% stake in Ant Financial, an extremely popular mobile payments platform in China and other parts of Asia. Ant Financial, formerly known as Alipay, serves 860 million active users through its core platform and joint ventures. In addition, it offers lending, cash management, and insurance to 15 million businesses.
According to the company, whose large stake in Ant Financial it thinks is justified, "We believe deepening our relationship through an equity stake in Ant Financial would bring key strategic benefits to us, including advancing our New Retail strategy with mobile payments, increasing user acquisition and retention through collaboration with the Alipay digital wallet, and enhancing the execution of our international expansion."
Industry experts say Ant Financial is currently preparing for an IPO and current private investments give it a valuation between $100-150 billion.
6. JPMorgan Chase
JPMorgan Chase is the second large bank to make the list. While it offers a diversified array of traditional financial services to consumers and businesses, it has also made a number of investments in the fintech sector. Last year, the bank acquired WePay for at least $220 million, stating in its press release that it wanted WePay to act "as Chase's payments innovation incubator in Silicon Valley." WePay is a payments ecosystem that allows platforms to integrate payment solutions, such as GoFundMe, one of WePay's largest customers.
WePay is far from Chase's only investment in the fintech space. New software and computer capabilities have allowed it to eliminate countless man-hours from administrative and legal processes. In an earnings release, CEO Jamie Dimon talked about several of the bank's efforts, including its new all-mobile bank, Finn:
Our strong, diversified franchise generates significant capital to invest in technology, bankers, products and markets. This quarter alone we announced new card products, the national rollout of our all-mobile bank, Finn ... and plans for a more significant investment in China ... Our highest and best use of capital is to reinvest it in the growth of our clients around the world. We are confident that we will continue to drive long-term value for our clients, communities and shareholders.
Blackline is a cloud-based software platform that allows businesses to automate burdensome and tedious accounting tasks, such as reconciling financial data, in real time. These tasks traditionally take lots of man-hours and are only done at the end of each month or even quarter. Blackline's platform allows businesses with several product lines in different geographical markets to accumulate this data instantaneously, giving companies the confidence needed to make quicker strategic decisions all while dramatically reducing accounting and back-office costs.
The company's growth doesn't appear as if it will be slowing down anytime soon. As fellow Foolish contributor Brian Feroldi points out, from 2016 to 2018, Blackline's revenue more than doubled while its global customers increased by 65% -- that's some heady growth.
Blackline's net revenue retention rate is consistently over 100%, meaning its existing customers from the previous year are spending more every year. This demonstrates that its customers, including Coca-Cola, Under Armour, and eBay, are finding value in its services and ways to spend more with Blackline each year.
4. Q2 Holdings
Q2 Holdings is a technology company that helps smaller banks and credit unions offer cloud-based platforms so their account holders can enjoy good experiences across all digital channels. These smaller banks often do not have the IT expertise or the necessary in-house resources to compete with the virtual offerings of bigger rivals. Q2 Open, an open application programming interface (API), allows banks and other fintech companies to create more customized applications on top of Q2's core platforms.
CEO Matt Flake is passionate about Q2's mission of putting these local financial institutions on equal technological footing with the titans of the finance industry. In an interview with The Motley Fool, Flake said:
Technology is a great equalizer. We can level the playing field. When you think about, that's what we're trying to do, we put the mission around it, which is strengthening communities by building stronger community financial institutions. That drives our culture ... We believe that financial choice is critical. Financial empowerment is based on having a lot of options. You can go to one credit union if you don't like your rate and go to another one ... [Our employees] don't want there to be four banks left in this country that determine who gets a loan and who gets a checking account. Every day, we build things, solve problems, try to create things that allow community financial institutions to compete.
Many might know Square as the credit card reader used by their local farmer's market or favorite food truck. Indeed, that's how the company started, offering payment processing services to smaller businesses that could not traditionally afford card acceptance services. But today, under CEO Jack Dorsey's leadership, the company is so much more. Square is a place where small businesses can go to meet nearly all their administrative needs. These include:
- Square Capital, a microloan platform for small businesses. As of mid-2018, CFO Sarah Friar said the program had originated $3 billion in loan since its inception, proving it is tapping an unmet need in the small-business community. The best part is that Square utilizes machine learning and advanced algorithms to keep loan losses at a minimum and well below the national average for business loans.
- As of 2019, roughly 85% of Square's clients were in the restaurant, retail, or service industries, so Square designed a specific point-of-sale (POS )platform for each of them. Square for Restaurants, is a holistic POS platform that enables restaurants to manage tickets and tables while reporting costs and revenue for the back office all from one place. It also incorporates Caviar, Square's food delivery and order-ahead platform, giving smaller restaurants the same bells and whistles available to larger peers.
- Square's Cash App is a digital wallet that has now been downloaded more times than Venmo, PayPal's competing platform. Cash App offers a number of features many of its users find attractive, including assigning a virtual account number so users can accept direct deposits, seamlessly send P2P payments, use a debit card linked to the account, and even buy and sell bitcoin.
These types of services give Square a sticky ecosystem and help Square sell its core payment processing service to more customers.
PayPal, for all intents and purposes, was the world's first digital wallet. The service gained significant traction as eBay's early buyers and sellers sought a safe and fast way to make transactions. PayPal has more than 260 million active user accounts, meaning those customers now use their accounts more than three times per month. That user engagement for the platform is the highest since the company was spun off from eBay.
PayPal's real growth and innovation lies in the area of mobile commerce. Mobile payments represent more than 40% of PayPal's total payment volume. The primary driver of this incredible growth is PayPal's One Touch, the platform that allows users to register a device from which they make online transactions, such as a desktop or smartphone, and then forevermore be able to make payments from that device with just one touch.
The platform is beloved by consumers and merchants alike. I can attest that the platform makes buying things online amazingly simple and easy, but I am far from its only fan. An incredible 91% of consumers gave One Touch a rating of very good or better in a 2018 comScore study. More than half of mobile consumers (52%) made more online purchases because PayPal was offered at checkout. And a third of customers said they would not make a purchase at all if PayPal were not offered as a checkout option.
Merchants love PayPal because its successful sales conversion rate is much higher than competitor offerings. Sales conversion rate is defined as the percentage of customers who begin the checkout process that actually complete it. A problem that has plagued e-commerce retailers for quite some time is the number of customers who place something in a virtual shopping cart but end up abandoning the purchase before finalizing it. This can be due to a number of things, like the length of time it takes to enter the tedious information required for purchases, such as their name, billing and shipping addresses, credit card number, and other personal information. One Touch elegantly solves this problem.
Even as major credit card companies develop a universal checkout standard that sounds like it will accomplish many of these same things, One Touch's momentum could be too great to stop. As of the end of 2018, PayPal management reported that One Touch had more than 120 million consumers and 10 million merchants registered on the platform.
This selection might surprise some investors. After all, isn't Mastercard just a boring payments network, offering a virtual highway for your funds to travel as your money leaves your bank account to go to a retailer's account? While that highly profitable network is its core business, the company is doing several things to supplement this payment network with additional services that are innovating payments, making them more convenient and secure. While it obviously innovates from within, it has also made a series of smart acquisitions that are beginning to differentiate Mastercard from the competition. These acquisitions include:
- APT, which stands for Applied Predictive Technologies, is a cloud-based analytical tool set that allows companies to roll out small trials and make informed decisions about how these changes might affect the entire business.
- NuData Security creates digital identities for consumers based on passive biometrics -- characteristics such as how one holds a smartphone or types. This type of data helps financial institutions and retailers to determine which transactions are legitimate.
- Brighterion is an AI-powered platform that helps detect fraudulent transactions in real time.
- Oltio is a South African mobile payments start-up that allows users to authenticate mobile transactions by entering a PIN on their phones.
- Vocalink is a company that powers Fast ACH transactions in a number of different geographical markets. Its infrastructure is used by other third-party apps, including PromptPay, a mobile payments app in Thailand, and the U.K.'s Pay by Bank app, which allows users to make payments at the POS using their own bank's mobile app.
The services these acquisitions offer Mastercard's clients are bundled with other supplemental features, such as loyalty program management, fraud detection programs, and data analytics, which are accounted for in Mastercard's "other revenues" segment. As of the end of 2018, these services represented almost $1 billion in quarterly revenue, and they were expected to grow faster than its core payment business segments. More than that, however, these services are helping Mastercard win new deals and deepen its relationship with its card-issuing clients. As those deals expire, these banks and other financial institutions will be less likely to leave Mastercard for a competitor.
Fintech is not going away
Technology is going to continue to infiltrate the financial sector, just as it has our entire economy. The ultimate winners are consumers, as services get cheaper, more secure, and more convenient. Given that fintech is a trend that will continue to rise as technological innovations pour into the market, I believe the 10 companies listed above are the best ways for investors to profit from this movement.