Are you looking to add financial technology (fintech) stocks to your portfolio? That's probably a good idea. Fintech focuses on innovating the way money moves through the global economy.
The global fintech market is worth an estimated $165 billion today and is forecast to grow to $400 billion by 2027. But the industry itself is a bit messy. There are many sectors within fintech, and it's a highly competitive space that's not always easy to keep track of.
A tremendous entry point for long-term investors looking at fintech stocks is payments company Visa (V -0.41%). Let's break down Visa's role in fintech and why it deserves a place in your portfolio.
Fintech is a highway, and Visa is the toll-booth operator
The economy can be complicated. One way to make sense of how it works is to imagine it as a highway system. Like cars travel the roads to get from one destination to another, money travels on payment networks. Whenever you swipe a payment card or initiate a digital payment, information travels back and forth on these digital roadways to request, approve, and move money between merchants and the banks where your money is.
Visa and other payment companies provide specialized toll roads (secured payment networks) that the money travels on and act as the equivalent of toll-booth operators. They charge merchants fees (or tolls) for securely moving money back and forth between different places. The global economy has multiple payment networks, but Visa, Mastercard, American Express, Discover, and China's UnionPay are the largest.
It's a competitive industry, but Visa holds the largest share at 40%. As more transactions take place digitally (or cashless), Visa has benefited from this steady increase. Worldwide, noncash payments totaled just under 400 billion in 2013. By 2022, that figure grew to an estimated 1 trillion.
A wonderful business model
The rise of cashless payments directly fueled Visa's strong growth. The business grew annual revenue from $12 billion to nearly $32 billion over the past decade. Additionally, Visa's network has grown faster than the cost of its upkeep, so the company's free cash flow is growing at a fast clip too, rising from $8 billion to nearly $19 billion.
V Revenue (TTM) data by YCharts
Visa's billions in annual cash flow led to years of dividend growth and steady stock buybacks; outstanding shares were reduced by nearly 18% over the past 10 years. That helps further boost earnings per share (EPS), boosting price returns for shareholders. Visa has also kept a healthy balance sheet; it has more than $18 billion in cash and other assets to offset about $20 billion in total debt, a net debt of just $2 billion.
Woven into fintech's present and future
A company as deep-pocketed and entrenched in the economy as Visa should remain a stellar investment for the long term. Its payment network business model likely isn't going anywhere anytime soon. Despite payment cards being invented in 1950 and Visa's founding in 1958, cash is still the payment method for one in five transactions worldwide. The migration to cashless payments probably still has years left.
Additionally, Visa has proactively involved itself in fintech and emerging payment technologies. The company has a fintech unit and is partnered with dozens of companies to ensure its core business isn't cut out of the loop as new companies innovate. It tried to acquire Plaid for $5.3 billion in 2020, but the deal was scrapped due to regulatory concerns that Visa would have too much power in the payments space.
Visa's proactive approach to fintech makes it a potentially balanced investment in the present state of payment technology and the future of fintech. It's also hard to find a business model as proven and lucrative as Visa's has been. Fintech newbies should look closely at Visa as a great starting point.
