Financial services is one of the biggest, and oldest, industries. That latter adjective helps explain why so many companies are trying to disrupt the old way of doing things. By introducing technology into the mix, and focusing on providing a better customer experience, there's certainly lots of potential for new enterprises.
Many businesses are trying to grab a piece of the growing fintech sector, so investors can adopt a basket approach and own multiple stocks to gain exposure. Let's take a closer look.
Excelling in different areas
Investors can look at companies focusing on singular areas within the broader financial services space. So many interesting things are happening.
Take Upstart. Its credit assessment tool uses artificial intelligence (AI) and machine learning (ML) to analyze over 1,600 variables about potential borrowers. Management says this system can raise approval rates, while at the same time controlling default risk, which is a huge win for the 100 lending partners that use the tech platform.
Another business using AI and ML capabilities is Lemonade, which operates a tech-enabled, direct-to-consumer insurance service. This business is experiencing rapid growth in customers and revenue. While profits might be years away, it's encouraging to see Lemonade catch on with a younger demographic.
When thinking about fintech stocks, SoFi Technologies might be the one that comes to mind first. It's a purely online banking institution that emphasizes providing an exceptional customer experience. Some of the services SoFi offers include checking and savings accounts, credit cards, personal loans, student loan refinancing, and a brokerage service. In the digital age, this company can satisfy all of an individual's banking needs.
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The payments angle
One lucrative part of the fintech space -- and the overall financial services sector -- is payments. This aspect cannot be ignored, because there are some potentially fantastic stocks to consider.
Founded in the late 1990s, PayPal can be viewed as a mature fintech business. But that doesn't mean it should be written off.
The stock has indeed gotten hammered, primarily due to slower growth and macro headwinds. But shares are incredibly cheap, trading at a price-to-earnings ratio of 15.8 right now.
PayPal has 431 million active accounts, and the network processed $377 billion of total payment volume in the three-month period that ended June 30. This is a huge electronic payments platform that generates lots of free cash flow, too.
With a consumer-facing segment in Cash App and a merchant-focused division in Square, Block is also an interesting company. Both ecosystems are reporting strong growth, and the leadership team sees massive potential ahead, with a combined total addressable market of nearly $200 billion (in terms of gross profit).
Shares are also currently 84% below their peak price (as of Oct. 16), so investors can take advantage of the notable discount to add Block to their portfolios.
While they are more mature enterprises than all the businesses already mentioned, Visa and Mastercard are still worthy of investment consideration. They run global payments rails that all card transactions work from, collecting high-margin fees in the process. They are some of the most profitable corporations on the planet, with powerful network effects working in their favor. As the economy becomes more digital and electronic payments become more prevalent, it's easy to see these two giants registering sizable growth.
The best course of action
Instead of picking a single stock to satisfy your fintech allocation, investors might be better off simply starting a small position in all the companies discussed here. The fintech sector has lots of potential over the next decade and beyond, so gaining adequate exposure is a smart idea.
