Investing in Top FinTech Companies

Updated: April 22, 2020, 2:56 p.m.

Fintech is a combination of the words “finance” and “technology,” and it’s a broad category that includes companies that apply new technology to financial businesses. For example, companies that develop new digital payment-processing solutions would be considered fintech, as would companies that build and operate person-to-person payment applications.

The potential of fintech is pretty exciting. Even after the growth of the cashless payments space in recent years, the majority of payment transactions around the world are still done in cash. And even though online banking institutions offer interest rates and fee structures that are typically much better than those of traditional banks, the majority of consumers still use branch-based banking for their financial needs.

Types of fintech stocks

As mentioned, fintech is a broad term that refers to any company that applies technology to the world of finance. There are many types of companies that fall under the fintech umbrella. Just to name a few:

  • Payment processing
  • Online and mobile banking
  • Online and peer-to-peer (P2P) lenders
  • Person-to-person payments
  • Financial software
  • Financial services
A person holds their smartphone near a payment processing device.

Image Source: Getty Images

5 top fintech stock investments

There’s a ton of long-term potential in the fintech industry, so it can be tough to find the best investment opportunities. With that in mind, here are five fintech stocks that could make great additions to your portfolio.

1. Square

Over the past several years, Square (NYSE: SQ) has evolved from a way for merchants to accept credit cards using their mobile phone into a large-scale small-business and individual financial ecosystem. The company now processes card payments at an annualized rate of over $100 billion, it has a thriving small-business lending platform (Square Capital), and it has started to gain serious traction with larger merchants in addition to its core small-business clientele. Perhaps the most exciting part of Square is its Cash App, with 24 million monthly active users heading into 2020 and virtually unlimited potential to build out its service offerings.

2. PayPal

PayPal Holdings (NASDAQ: PYPL) is the undisputed leader in online payments, but it is so much more than that. For one thing, its Venmo person-to-person payment platform has emerged as an industry leader and continues to grow its massive user base at a breathtaking pace. PayPal has also been acquiring complementary businesses, such as e-commerce tool Honey, and has been building up partnerships that could greatly expand its addressable market. PayPal had just over 300 million active accounts at the end of 2019, but CEO Dan Schulman believes that the company can grow this figure to a billion in the not-too-distant future.

3. Goldman Sachs

This one might sound odd at first. When many people think of Goldman Sachs (NYSE: GS), they think of old-school Wall Street business as usual -- literally the opposite of fintech innovation. However, Goldman Sachs is in the middle of a transition to its business model that would have seemed far-fetched just a few years ago, transforming from an investment bank and wealth manager for the 1% to a full-featured consumer bank. The Marcus savings and personal loan platform was the first component, and the company expanded into the credit card business in 2019 as the exclusive issuer of Apple’s (NASDAQ: AAPL) credit card. Upcoming products include an investment platform and checking accounts, and that could be just the beginning. And Goldman is building out its consumer business in a very fintech way -- with no branch network and a tech-focused approach to maximizing efficiency and consumer value.

4. Green Dot

Green Dot (NASDAQ: GDOT) is one of the oldest fintech companies in the market, best known for pioneering the prepaid debit card two decades ago. The company’s debit card business remains a large one, but it’s losing market share to companies like Square and PayPal, which offer new and innovative solutions to the same problem. However, it’s worth keeping the company on your radar for its banking-as-a-service (BaaS) platform, which is used by companies such as Apple, Uber (NASDAQ: UBER), and Stash. In a nutshell, Green Dot lets companies offer banking products without having to become banks themselves (think of Apple Pay Cash). Green Dot essentially lets these companies use its banking infrastructure to power their products, and this could be a major growth industry going forward.

5. MercadoLibre

MercadoLibre (NASDAQ: MELI) is often referred to as the (NASDAQ: AMZN) of Latin America, and the nickname certainly makes sense -- the company has a massive e-commerce business that continues to grow at an impressive pace. However, it’s the Mercado Pago payments platform that is most exciting from a fintech perspective. The business processes billions of dollars in payment volume every quarter, and it’s growing rapidly. And most encouraging is that Mercado Pago is processing even more payments outside MercadoLibre’s e-commerce platform than on it. A partnership with PayPal and lots of runway in the Latin American payments space mean Mercado Pago’s growth could be just getting started.

Related topics

1 great fintech ETF to consider

Whenever you have a high-growth and relatively young industry, it can seem intimidating to try to choose one or two stocks to invest in. An alternative that lets you profit from the fintech boom without having to pick individual stocks is to choose an exchange-traded fund, or ETF. If this sounds good to you, consider the Global X Fintech Thematic ETF (NASDAQMKT: FINX).

The fund invests in a portfolio of fintech companies, covering more than 30 stocks as of early 2020. The portfolio includes a few of the names on our list above, as well as several others, such as Fiserv (NASDAQ: FISV), Intuit (NASDAQ: INTU), and many others of all different sizes and business models. The point is that all of the companies have excellent growth potential, but your investment won’t get crushed if one or two of them don’t quite live up to expectations.

A great arena for long-term growth investors

To be perfectly clear, investing in fintech stocks isn’t for investors with low tolerance for volatility and risk. Like any new and exciting industry, fintech stocks are likely to be a bit of a roller-coaster ride as the industry matures. However, for long-term investors with a relatively high level of risk tolerance, fintech stocks like those mentioned here can be an excellent way to capitalize on one of the most exciting growth trends in the business world.

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