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Investing in Top FinTech Companies

By Matthew Frankel, CFP – Updated Jan 23, 2023 at 2:05PM

Fintech is a combination of the words finance and technology. It’s a broad category made up of companies that apply new technology to financial businesses. For example, companies that develop new digital payment-processing solutions are considered fintech, as are companies that build and operate person-to-person payment applications.

The potential of fintech is exciting. Even after the growth of the cashless payments space in recent years, most 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.

Woman holding her smartphone and a coffee
Image source: Getty Images.

Types of fintech stocks

Fintech is a broad term that refers to any company that applies technology to the world of finance. Many types of companies are under the fintech umbrella. Here are some of the products and services they offer:

  • Payment processing
  • Online and mobile banking
  • Online and peer-to-peer (P2P) lending
  • Person-to-person payments
  • Financial software
  • Financial services

Five top fintech stock investments in 2023

Many fintech stocks have been hit hard in the recent stock market downturn. Growth stocks in general have taken the worst of the decline, and most fintechs fit into this category.

However, there’s a ton of long-term potential in the fintech industry, so it can be an opportune time to look for solid companies to hold for the long term. With that in mind, here are five fintech stocks that could make great additions to your portfolio:

1. Block

Formerly known as Square, Block’s (NYSE:SQ) product suite has evolved from a way for merchants to accept credit cards using their mobile phones into a large-scale financial ecosystem for individuals and small businesses. The company now processes card payments at an annualized rate well over $200 billion, has its own banking subsidiary (Square Financial Services), and a thriving small business lending platform. Plus, it recently entered the buy-now, pay-later lending space with its acquisition of Afterpay.

Two big parts of the company's business are especially compelling. First is its Cash App, with 49 million active monthly users as of September 2022 and virtually unlimited potential to build out its consumer financial service offerings. The platform already offers direct deposits, debit cards, the ability to buy and sell Bitcoin (CRYPTO:BTC), and a user-friendly stock trading platform. The second part is Square Online, the version of the company's merchant platform that helps sellers develop an omnichannel presence, which is a potentially great way for the company to benefit from the surge in e-commerce adoption.

2. PayPal

PayPal Holdings (NASDAQ:PYPL) is the undisputed leader in online payments -- and so much more. Its Venmo person-to-person payment platform has emerged as an industry leader and continues to increase its massive user base at a breathtaking pace. PayPal has also been acquiring complementary businesses, such as e-commerce tool Honey, and has invested in several other successful businesses, including MercadoLibre (NASDAQ:MELI), Uber (NYSE:UBER), and more. With more than $1.8 billion in free cash flow generated in the most recent quarter alone, PayPal has the financial flexibility to pursue opportunities as they arise.

PayPal has 432 million active accounts in more than 200 countries around the world. While user growth has slowed down a bit lately, PayPal is doing a great job of figuring out how to increase monetization of its user base and still has massive long-term potential. In a nutshell, this is a highly profitable industry leader, and there's no reason to believe that will change anytime soon.

3. Bank of America

This one might sound odd at first. When many people think of Bank of America (NYSE:BAC), they think of old-school banking -- literally the opposite of fintech innovation.

However, there are some good reasons Bank of America is more of a fintech than it seems. In the years since the 2008-09 financial crisis, CEO Brian Moynihan and his team have done a great job of improving asset quality and focusing on efficiency. Technology has played a big role. In 2022, Bank of America was named the No. 1 bank for "Online Banking and Mobile Banking Functionality" by Javelin, as well as the "Best Consumer Digital Bank in the U.S." by Global Finance. As more customers take advantage of the bank's excellent digital channels, the more efficient the business will become. With a valuation that's cheaper than many other large banks and a 2.6% dividend yield, Bank of America is an outside-the-box fintech worth considering.

4. Adyen

Adyen (OTC:ADYE.Y) isn't exactly a household name to most U.S. investors, but it certainly belongs in the same conversations as Block and PayPal.

Based in the Netherlands, Adyen provides payment processing solutions to businesses and has operations around the world (including a large U.S. presence). It offers payment solutions for in-person, online, and mobile channels. But, unlike the other major payment processing tech companies, Adyen focuses almost exclusively on large businesses. Microsoft (NASDAQ:MSFT), Uber (NYSE:UBER), and McDonald’s (NYSE:MCD) all rely on Adyen for their payment processing needs. You may recall that eBay dropped PayPal as its preferred payment processor a few years ago; it turned to Adyen.

Adyen's growth has been impressive, and the business had processed more than $700 billion in annualized payment volume as of mid-2022. Plus, Adyen is highly profitable, with a 59% EBITDA margin that could get even better as the business scales.

5. MercadoLibre

MercadoLibre (NASDAQ:MELI) is often referred to as the Amazon.com (NASDAQ:AMZN) of Latin America, and the nickname certainly makes sense. The company has a massive e-commerce business, with well over $30 billion in annualized merchandise sales volume, and it continues to grow at an impressive pace. The company also has a logistics platform (Mercado Envios) and a lending business (Mercado Credito), both of which have gained serious traction in recent years. Mercado Credito is especially interesting, with 146% year-over-year growth in the most recent quarter.

However, it’s the Mercado Pago payments platform that is most exciting from a fintech perspective. The business processes more than $120 billion in annualized payment volume and is growing at a much faster rate than the e-commerce business. Most encouraging is that Mercado Pago is growing faster when it comes to processing payments outside of MercadoLibre’s e-commerce platform. Think of Mercado Pago as an earlier-stage PayPal (remember when it was part of eBay?) that is starting to develop into an impressive business all by itself.

One great fintech ETF to consider

Whenever you have a high-growth and relatively young industry, it can seem intimidating for investors to try choosing one or two stocks. And that's especially true in a volatile and unpredictable market environment like we saw in 2022.

With that in mind, an alternative that lets you profit from the fintech boom without having to pick individual stocks can be an exchange-traded fund, or ETF. If this sounds good to you, consider the Global X Fintech ETF (NASDAQ:FINX).

The fund invests in a portfolio of fintech companies and held more than 60 stocks as of mid-2022. The portfolio includes a few of the names on the list above, as well as several others, such as top holdings Fiserv (NASDAQ:FISV) and Block (NYSE:SQ), plus many others of all different sizes and business models. The point is that all 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.

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A great arena for long-term growth investors

Investing in fintech stocks isn’t for investors with low tolerance for volatility and risk. Like any new and exciting industry, fintech is likely to be a bit of a roller-coaster ride as the industry matures. This is especially true in rough economic times, as we've seen over the past year or so.

However, for long-term investors with relatively high risk tolerance, fintech stocks such as those mentioned here can be an excellent means of capitalizing on one of the most exciting growth trends in the business world.

Fintech Stock FAQs

What is fintech?

Fintech, short for financial technology, describes technologies that are being leveraged to make financial processes easier, more efficient, and more profitable. Fintech companies develop a variety of software platforms, apps, hardware solutions, and more to achieve these goals. 

What are the best fintech companies to invest in?

These five fintech stocks could make great additions to your portfolio:

  • Block
  • PayPal
  • Bank of America
  • Adyen
  • MercadoLibre

Are fintech stocks cyclical?

Generally speaking, the answer is yes. Fintech stocks are cyclical businesses for the most part. They largely perform in correlation with consumer spending and business investment. That said, not all fintech stocks are equally cyclical. For example, companies that develop technology for insurance companies aren't inherently cyclical since insurance is a rather recession-resistant business. On the other hand, companies that develop payment technologies, which are more vulnerable to the effects of market forces, are more likely to experience significant slowdowns during recessions.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP® has positions in Amazon.com, Bank of America, Block, and MercadoLibre and has the following options: short January 2024 $200 calls on Block. The Motley Fool has positions in and recommends Adyen, Amazon.com, Bank of America, Bitcoin, Block, MercadoLibre, Microsoft, PayPal, and Uber Technologies. The Motley Fool has a disclosure policy.

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