What Is Fintech? Intro to Financial Tech

What is Fintech? Intro to Financial Tech

By Matthew Frankel, CFP – Updated Dec 18, 2024 at 9:37 AM EST

Key Points

Fintech improves financial tasks' efficiency and profitability through diverse tech solutions.
Rapid fintech evolution offers major growth opportunities despite the prevalence of cash transactions.
Active M&A and VC funding in fintech indicate a dynamic market with emerging large-scale public companies.
CEO says this is worth 18 Nvidias. Will this make the world's first trillionaire? ›

There are few growth trends more exciting and more potentially transformative than financial technology, or fintech for short. In this article we'll discuss what financial technology is, how it is applied, and where we see fintech going in the future, and we'll tell you about some of the fintech stocks you should put on your radar.

An infographic outlining various applications of fintech, including budgeting apps, mobile payments and robo-advisors. — Image source: The Motley Fool

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.

In the rest of this article, we'll take a closer look at the real-world applications of financial technology, why fintech is so important to the financial industry, the future potential of fintech, and some excellent publicly traded fintech companies you might want to put on your radar.

Publicly Traded Company

A company that issues shares that are publicly traded, meaning the shares are available for anyone to buy and sell on the stock market.

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Top Fintech Stocks	Bullish Elevator Pitch
Bank of America (NYSE:BAC)	Of the large-cap U.S. banks, Bank of America has done perhaps the best job of embracing new banking technologies and using them to improve efficiency.
Global Payments (NYSE:GPN)	This payment processing company is embedding its services into vertical software stacks serving niche industries.
Green Dot (NYSE:GDOT)	Green Dot is a leading issuer of prepaid debit cards, but the most exciting part of its business is its banking-as-a-service (BaaS) platform, which allows companies to offer their own customized financial services to customers.
MarketAxess Holdings (NASDAQ:MKTX)	This company operates the world's largest electronic fixed-income investment trading platform.
Mastercard (NYSE:MA)	The world's second-largest payments network has made a number of acquisitions to build out its supplemental services in areas such as AI-powered fraud prevention and data analytics.
MercadoLibre (NASDAQ:MELI)	This Latin American powerhouse is much more than an e-commerce platform, with a fast-growing digital payments platform that can be used off-site and even a new asset management platform in Argentina.
nCino (NASDAQ:NCNO)	This company's Bank Operating System is designed to improve efficiency and consumer experiences for banks of all sizes.
PayPal Holdings (NASDAQ:PYPL)	This digital wallet platform has more than 267 million user accounts, including 21 million merchants.
Square (NYSE:SQ)	Square is a financial ecosystem for small businesses and individuals, with operations in payment processing, lending, consumer payments, and more.
Visa (NYSE:V)	The world's largest payments network is showing a renewed interest in making sure it stays ahead of the times after making a key acquisition.

Investing in fintech

Technology is changing every industry, and its mark on the financial industry will be profound. Fintech is important, as it opens crucial financial services to the world's underbanked population and makes it less expensive for global consumers to move and manage their own money. These companies are not only offering catalysts for these changes, they also offer investors the best chance to profit from them.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

TMFMattFrankel

@MattFrankelCFP

Bank of America is an advertising partner of Motley Fool Money. Matt Frankel has positions in Bank of America, Block, Lemonade, MercadoLibre, and PayPal. The Motley Fool has positions in and recommends Bank of America, Bill Holdings, Block, Lemonade, Mastercard, MercadoLibre, PayPal, Visa, and nCino. The Motley Fool recommends MarketAxess and recommends the following options: long January 2025 $370 calls on Mastercard, long January 2027 $42.50 calls on PayPal, short December 2024 $70 calls on PayPal, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

Outlook on the fintech sector

The fintech industry is evolving rapidly. And despite the massive growth we've seen in fintech, there is still an incredible opportunity ahead for fintech firms of all sizes. Here's what to know about the opportunities that remain in fintech, and the industry trends that we've been seeing in mergers and acquisitions, initial public offerings, and more.

A massive opportunity lies ahead

It might seem as if society has become fairly cashless over the past decade or so, and it's not surprising that many investors (especially in the U.S.) feel this way. After all, cashless payments are more widely accepted than ever before. It wasn't too long ago that you couldn't go to a local craft market, festival, or even sporting event without making a stop at an ATM on the way, and now that simply isn't the case.

However, you might be surprised at how many transactions around the world still involve cash, especially outside the United States. Mastercard has estimated that over 80% of payment transactions around the world were still cash-based as of 2017, and while this percentage has certainly fallen somewhat since then, it's still a huge market opportunity for payment processors, money-transfer apps, and more. In Latin America, for example, just 9% of payment transactions are cashless, and this number is even lower in the emerging markets in the Asia-Pacific region. And don't think there isn't any opportunity here -- in North America, about 70% of people say they still use cash at least weekly.

In all, card payments alone are expected to reach $45 trillion in annualized volume by 2025. And if you include things like person-to-person (P2P) and business-to-business (B2B) payments, as well as cross-border money transfers, the worldwide payments market is about $185 trillion in size already, according to Visa. That's a huge market that fintech companies can go after.

Fintech industry trends

The fintech sector has undergone a great deal of growth and disruption, and it's being funded more from venture capital (VC) investment rounds than initial public offerings (IPOs). In 2018, according to CB Insights, VC-backed fintech companies raised a record $39.75 billion over 1,707 deals, more than twice the amount that was raised through similar deals in 2017. Because venture capital has played such a large role in early investing for these fintech companies, investors can likely expect that companies will be much larger, on average, when they eventually go public, leaving less upside for individual investors. This influx of private capital has created a number of unicorns (private companies valued at $1 billion or more) in this space.

But that's not to say that there hasn't been significant IPO activity in fintech. In 2020 alone, business payments solutions company Bill.com (BILL +1.77%), insurance technology company Lemonade (LMND +1.23%), and Rocket (RKT +0.17%), parent company of the largest U.S. mortgage lender, have all entered the public markets.

There's also been quite a bit of M&A activity in the fintech space, and this is likely to continue. In 2019, two of the three largest fintech deals ever have occurred, with Fiserv (FISV -0.07%) acquiring First Data for approximately $21.8 billion and Fidelity National Information Services (FIS -0.48%), commonly referred to as FIS, acquiring Worldpay for $35.3 billion. In addition, Ultimate Software Group, a company that provides a cloud-based, software-as-a-service (SaaS) human capital management platform, was gobbled up by a private investment group for just under $11 billion. Major fintechs like PayPal, Mastercard, Visa, and more have all made several bolt-on acquisitions in the past few years as well. And it would be surprising if we didn't see significant consolidation in the fintech industry continue for years to come.

In short, the outlook for fintech is that this will be a rapidly evolving industry over the next few decades. Smaller disruptors will continue to shake up the industry, IPOs and M&A activity will likely continue at elevated levels, and existing fintechs will race to grow their market share and capitalize on untapped opportunities.