Fintech has moved from an emerging category into a full-blown growth industry. It's gone from being dominated by one and then two giants to being covered by a broad spectrum of both large and small companies providing a range of services.
Investors who want to get in on its growth may put in some time and effort attempting to weigh the advantages and disadvantages of each player among that large swarm of competitors. But the good news is that you don't have to pick a winner in fintech to make a winning call on the industry.
More than digital payments
Fintech, or financial technology, refers to technology-driven financial services, usually digital. PayPal was the original fintech giant, offering online payment solutions for merchants and peer-to-peer digital payments. It now offers an expanded suite of services for both merchant and individual accounts.
NASDAQ: PYPL
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It was joined by Block, at that time called Square, with its innovative solutions for sellers and its Cash App peer-to-peer payments app. It, too, has expanded its offerings into a full suite of digital solutions.
At this point, both of these companies offer some very similar services, although each one has its particular niche and differentiating points.
Competition is heating up
Companies like Visa and American Express precede the concept of fintech by decades, but they also offer an array of fintech services. Visa has been expanding its Visa Direct products, which comprise alternative payment options, and Visa Direct is now one of its fastest-growing categories. It has agreements with Block, for example, to power its Cash App services. Most credit cards now feature embedded chips that allow for contactless payment solutions, another fintech function.
There are several fintech specialists, such as buy now, pay later company Affirm, and many of them also offer ancillary services. Marqeta is another fintech enterprise that provides customizable credit card solutions for business-to-business clients.
Finally, many top tech companies are launching their own fintech services -- for example, Alphabet has Google Pay, and many of Shopify's merchant solutions certainly fit under the fintech heading.
And so is fintech overall
Fintech services underpin much of e-commerce, itself an explosive industry. E-commerce can't operate without digital payment options and processing networks, and its share of the retail world is expected to keep growing.
Image source: Statista.
But it's also a lot more than e-commerce. Fintech services comprise other services like online banking, investing, and insurance products. Companies like SoFi Technologies and Nu Holdings offer popular banking services for different populations, and both are posting incredible growth rates.
According to Bankrate, 27% of Americans use an online-only bank, but 60% of people say they are "very or somewhat interested" in using a digital bank in the coming year. Among digital bank users, 88% say they're satisfied with the service, compared to only 66% for traditional bank users. That all suggests that there's a huge population of consumers that digital banks could engage with better services.
NASDAQ: SOFI
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Which is the right fintech stock for you?
Most of these fintech companies are demonstrating growth and have large market opportunities. What's left is for you to decide which ones make the most sense for your portfolio. Although there are no guarantees with any stock, industry tailwinds mean that fintech as an industry has huge growth opportunities, and most of these companies will benefit.
If you favor safe stocks or dividend stocks -- and those that fit one of those descriptions often fit both of them -- you might want to invest in a company like Visa or American Express. If you're willing to take a risk on a company that has long-term opportunities and whose share price is down right now, you might want to look into PayPal or Block -- their stocks are down by 20% and 30%, respectively, year to date.
Then, there are plenty of fintech upstarts that are still unprofitable but have compelling growth potential. SoFi is a great example of this. Revenue is growing by double-digit percentages, profitability is improving, and it's gaining members at a high rate.
Like investing in general, diversification is key
Still, not all of these stocks will become multibaggers, and some could tank despite industry tailwinds. There's a lot more to a great company than external catalysts, and it's important to evaluate the pros and cons of any stock you consider buying. Indeed, some of these companies are struggling right now and could be risky to own.
Owning a few stocks in a high-growth industry gives you some diversification, so you can own a bundle of fintech stocks to offer maximum growth opportunities while minimizing risk. Another avenue to do that easily is to buy a fintech-focused fund, such as an exchange-traded fund (ETF), like Ark Invest's Fintech Innovation (ARKF 0.24%) ETF. It features stocks like Shopify, Block, and MercadoLibre. It's up 32% this year, or almost triple the S&P 500's gain. That gives you access to industry tailwinds and reduces the risk of a specific stock losing value.
