Many companies in the fintech sector, which focuses on digitizing banking, payments, peer-to-peer lending, and other financial services with apps, generated robust growth throughout 2020 as the pandemic throttled visits to banks and in-person payments. As a result, the Global X Fintech Thematic ETF (FINX 1.05%), which holds a basket of top fintech stocks, has rallied more than 50% over the past 12 months as the NASDAQ advanced just over 40%.
Some investors might be wondering if it's time to take profits in their high-flying fintech stocks as 2021 begins. On the contrary, I believe it should be your New Year's resolution to buy more fintech stocks, for four simple reasons.
1. It's still a secular growth story
The shift from traditional banking services to versatile mobile apps has only just begun, and this secular growth story should continue over the next decade.
Allied Market Research expects the global mobile payment market to grow at a whopping compound annual growth rate of 30.1% between 2020 and 2027 to become a $12.06 trillion market. The firm expects rising smartphone penetration rates, the growth of mobile e-commerce platforms, and the expansion of contactless payments to drive that expansion.
In late 2019, McKinsey's Digital Payments Survey found that 77% of respondents had used mobile payments over the past year. The firm noted, "consumers are starting to treat digital wallets like a leather wallet."
Companies like PayPal (PYPL 1.44%) and Square (SQ 3.19%) are benefiting from that shift. PayPal's total payment volume rose 36% year over year in constant currency terms last quarter, marking its strongest growth rate ever. Square's Cash App also hit 30 million active users in June, up 25% from 24 million at the end of 2019.
2. It's a millennial and Gen Z story
The McKinsey survey found that 91% of millennials had used mobile payments within the past year, compared to just 80% of Generation Xers and 64% of baby boomers.
Older Gen Z consumers, many of whom are in college, also favor mobile payments. A study by Sallie Mae and Ipsos in 2019 found that 86% of college students use mobile payments, up from 77% in 2016.
The usage of mobile wallets from companies like PayPal and Square is also rising among younger consumers. A recent study by Paysafe also found that 34% of Gen Z consumers have used mobile wallets -- a full eight percentage points higher than non-Gen Z respondents.
Those numbers clearly indicate the "war on cash" has just started, and will likely intensify as younger users grow more accustomed to doing everything on their phones.
3. It's the future of banking
Roughly 1.7 billion people are still unbanked worldwide, according to the World Bank. Many of those people are in developing countries, which are skipping over PCs and traditional banking accounts to smartphones and mobile apps.
That big jump, which sparked the growth of China's mobile payments market over the past decade, is creating a major growth opportunity for fintech companies. That's why PayPal allows consumers to directly charge their accounts with cash at retailers, and why it started working with smaller banks to provide prepaid debit cards to unbanked individuals.
Many institutional investors also likely consider fintech companies to be better investments than traditional banks, which are being squeezed by low interest rates worldwide.
That's why the Financial Select Sector SPDR Fund (XLF 2.18%), one of the market's leading "big bank" ETFs, dipped about 5% over the past 12 months as fintech stocks skyrocketed. That trend should continue throughout 2021 as the world's leading economies keep interest rates low to offset the pandemic's economic aftershocks.
4. They're passive cryptocurrency plays
The value of many cryptocurrencies soared in 2020. The price of bitcoin, the world's most well-known cryptocurrency, more than quadrupled as it gained traction as a safe haven against weakening fiat currencies. Interest from younger investors, as well as support from more fintech platforms, amplified those gains.
Square added bitcoin trades to its Cash App in 2018. PayPal followed suit in late 2020 by letting its users store bitcoin and other cryptocurrencies in their digital wallets. PayPal also allows its users to make purchases via cryptocurrencies, which are then converted to a merchant's local currency.
Square, PayPal, and other fintech platforms that process cryptocurrency trades and purchases should continue to attract investors who want passive exposure to the crypto market without directly buying the volatile coins from murky exchanges.
The key takeaways
Fintech stocks aren't for queasy investors, since many of them trade at frothy valuations and face ever-rising expectations from analysts. However, investors should still buy a few promising plays in this booming market -- which could generate massive multi-bagger returns over the long term.