The Covid-19 pandemic has accelerated today’s digital economy, altering the way we live, work and socialize. As a result, digital financial solutions have become essential.
For example, accepting cash payments was generally welcomed by consumers and vendors before the pandemic began. However, Accenture’s latest report entitled 10 ways COVID-19 is impacting payments
found that although cash withdrawals spiked at the beginning of the pandemic, usage has significantly declined. The report further found that tokenized payments are being encouraged more than ever before.
What is Fintech, anyway?
Given today’s digital economy, financial technology – also known as fintech – has become one of the world’s most important industries. While Ernst & Young’s Global Fintech Adoption Index 2019
found that fintech adoption was doubling every two years, experts predict that growth will skyrocket in 2021 and beyond.
For those unfamiliar with the fintech industry, it’s important to mention that fintech companies leverage technology such as artificial intelligence, machine learning, and blockchain
, to improve traditional financial services.
For instance, the payments app Venmo is an early example of a fintech company, as it allows users to easily make peer-to-peer payments via a mobile app. Statistics show that Venmo processed $159 billion in total payment volume in 2020, demonstrating a 59% year-on-year increase.
Fintech in 2021
While Venmo is a great example of a successful fintech company created in 2009, the financial services industry has greatly changed over the years.
There are currently several innovative startups and companies applying technology to expand financial inclusion, cut down on operational costs, enable digital payments, and more. Many of these companies are also developing solutions to combat issues created by the pandemic, such as handling physical cash.
With this in mind, the various traditional financial services listed below are being impacted by the fintech sector:
The trillion-dollar banking industry is transforming greatly due to today’s fintech services industry. Recent findings
from big four firm PwC show that 73% of financial sector executives surveyed perceive consumer banking to be one of the most likely sectors disrupted by fintech this year. The report notes that the simplistic nature underlying banking products and processes for savings, lending, and business services are now ripe for disruption.
Further findings from PwC’s survey show that over 90% of banks expect growth in mobile applications usage, which is much higher than any other financial sector. Web-based platforms and customer engagement via mobile devices are also expected to increase within the banking sector.
In addition, neobanks are also on the rise. Neobanks
are online-only financial institutions that typically provide users with lower costs, quick processing time, and convenience in comparison with traditional banks. Statistics show that there are 170 neobanks worldwide.
The billion-dollar payments industry is also being disrupted by fintech innovation. Much of this is due to the public health crisis triggered by COVID-19. The 2020 McKinsey Global Payments Report noted that the pandemic and its consequences have accelerated new trends in consumer and business behaviors. As such, shifts toward e-commerce, digital payments, instant payments, and cash displacement have been boosted.
Cryptocurrency and blockchain technology
and other cryptocurrencies
are also gaining traction as the world moves toward digital payments. While bitcoin is primarily viewed as an investment vehicle, some large companies like PayPal are enabling crypto payments by allowing online merchants to eventually accept cryptocurrency as a form of payment. In addition, new findings
from Elements Global Services show that 37% of Americans would accept a portion of their compensation in bitcoin if offered. Other innovative crypto startups, like Coinbase, are already paying employees in bitcoin and have allowed for retailers using their Coinbase Commerce platform to be paid in crypto.
, the underlying technology powering cryptocurrencies, is also disrupting traditional financial services. Blockchain is best known for providing trust between multiple parties, which is key for today’s increasingly digital environments. Blockchain is being applied by enterprises in several ways, such as enabling more efficient cross-border payments; banking the unbanked; creating tokenized business processes like invoices; and much more.
Fintech innovation is also bridging the gap between lenders and borrowers while ensuring that people who do not own a bank account can also apply for loans. Fintech lending platforms allow for lending to take place online and via mobile phone devices, providing access to many individuals. Fintech lending extends to consumer loans, small business loans
, and various specialty finance loans.
Machine learning and trading
It shouldn’t come as a surprise that machine learning is having a major impact on financial services. Machine learning algorithms enable financial technology to predict patterns and make intelligent decisions. For instance, retailers are leveraging machine learning algorithms to better understand consumer behavior. As a result, retailers and e-commerce platforms can ensure that products are tailored to their customer base.
Machine learning is also used for trading and investment purposes. These algorithms help individuals predict markets and execute trades at optimal times. “Robo-advisors” are financial advisers that use algorithms to automatically buy and sell stocks. Robo-advisors
can also monitor and predict the health of global financial markets by leveraging machine learning.
Finally, the insurance industry
is being disrupted by fintech innovation. As with many other industries, the COVID-19 pandemic has resulted in customers seeking mobile insurance solutions incorporated within a single platform. Fintech is making the insurance industry automatic, seamless, and accessible. As such, “Insurtech” has become a familiar term, which refers to the use of technology designed to enable savings and efficiency from traditional insurance models.
Innovative fintech companies today
While fintech extends to many different industries, the sectors listed above are being heavily impacted by technology advancements. To further demonstrate this innovation, it’s important to give examples of companies that are using specific technologies to transform traditional financial services using different fintech products:
Financial services and digital payments company Square was created in 2009 by Twitter founder Jack Dorsey and entrepreneur Jim McKelvey to make payments faster and easier. Today, Square is used by millions of businesses to accept payments from customers. Square offers some business software including point-of-sale systems, payment hardware products, and small business services. Square is unique from other payment providers in that it’s available to organizations of all sizes and offers the most comprehensive free point-of-sale systems on the market.
Square’s product line also includes Cash App, which lets users send and receive money for free via a mobile application. More importantly, in November 2017 Cash App announced a trial program that offered bitcoin trading to certain users. Cash App currently allows users to send and receive bitcoin, demonstrating ongoing innovation to meet today’s digital economy.
Founded in 2007, Credit Karma
is a personal finance company that offers users free credit monitoring services. Credit Karma lets users receive alerts from two credit bureau reports –– TransUnion and Equifax. Based on these credit reports, Credit Karma creates its own VantageScore 3.0 that provides a number and range to help users determine if their score is “good,” “very good” or somewhere in between.
Credit Karma ultimately allows users to easily track their credit score changes over time. This is important for several reasons, including generating awareness for identity theft. Credit Karma users no longer have to wait once a year to check reports for credit scores, as these are generated instantly. The website also breaks down a user’s credit report to pinpoint certain problems, while offering advice on how to fix certain issues.
The cryptocurrency exchange platform Coinbase is one of today’s most innovative fintech startups. Founded in 2012, Coinbase launched services to buy and sell bitcoin through bank transfers. Today, Coinbase has grown into one of the largest crypto exchanges in the world, operating a digital wallet service that allows U.S.-based users to trade almost 50 different cryptocurrencies. Coinbase also recently went public at an evaluation of nearly $100 billion, demonstrating a major milestone for cryptocurrency growth.
The online payments provider PayPal caters to over 300 million customers, allowing users across the world to easily make online and in-person payments. PayPal users can easily pay merchants or send money to friends and family or businesses. In a nutshell, PayPal makes payments faster, easier, and more efficient. Recent statistics show that PayPal’s annual revenue increased by 20% year-on-year in 2020.
Like many fintech companies in the payments space, PayPal has also offered support for cryptocurrencies, allowing users to buy, sell and hold Bitcoin
, and Bitcoin Cash. PayPal will soon allow merchants to accept crypto payments.
Often referred to as the Amazon of Latin America, MercadoLibre is a successful Argentinian e-commerce business. But from a fintech perspective, Mercado Pago is the real innovation behind MercadoLibre, as this is the payments platform that powers MercadoLibre. Mercado Pago has seen impressive growth with 149% year-over-year. Moreover, a big investment from PayPal in 2019 will ensure future growth and innovation for Mercado Pago.
Based in Shanghai, Lufax is an online peer-to-peer lending service that focuses on providing loans to small-to-medium enterprises and individuals. The company was founded in 2011 and is currently the second-largest peer-to-peer lender
in China. Lufax partners with financial institutions to offer small business loans and wealth management products. The company is reportedly planning for international expansion.
The American neobank company Chime provides fee-free financial services through a mobile application. As a neobank, Chime does not have any physical branches but has seen impressive growth over the past years with over 800 million account holders. Chime offers several personal banking options including a checking account, a savings account while providing users with a secured credit card. Everything can be accessed via Chime’s mobile app. Chime makes it easy for unbanked or underbanked individuals to have access to capital.
Popular fintech stocks
Given fintech’s impact on traditional financial services –- along with today’s digital economy –- there are many fintech ETFs (FINX) that should be considered. Yet determining which fintech stocks make for good investments can be tricky given the amount of innovation.
Fortunately, a few fintech stocks stand out from the rest:
As mentioned above, Square (NYSE: SQ) has been listed multiple times by numerous sources as one of the best fintech companies and stocks in 2021. With a market cap of over $111 billion, the shares of the financial services firm have been on the rise as the digital economy increases.
Payments giant PayPal (NASDAQ: PYPL) is also one of the top-performing fintech stocks this year. With a market cap of over $312 billion, PayPal’s growth is sure to continue, especially as its crypto services advance.
MercadoLibre (NASDAQ: MELI) is another fintech stock to watch. The company has a market cap of over $77 billion and it’s been reported that Wall Street will be looking for positivity from MELI as it approaches its next earnings report.
Pros and cons of investing in fintech
Knowing that the COVID19 pandemic has accelerated today’s digital economy, investing in technology has shown to be an excellent option. The benefit of fintech ETFs is that they enable investors to access high growth potential through innovative companies that are improving financial services. However, there are also risks involved when it comes to fintech stocks.
For instance, many fintech companies are not yet profitable or may lose profit over time. At the beginning of the pandemic, Square’s stock exposure to small businesses and restaurants was in danger. Fortunately, Square’s Cash App has been key to its ongoing growth. The company’s gross profits soared 45% in 2020, while its Cash App and other seller ecosystems generated respective gross profit increases of 168% and 8%.
Competitive risk should also be considered when adding stocks to your investment portfolio. It’s always best to think whether or not a few companies dominate the market or if it's large and fragmented.
Similarly, a competitive advantage can help even out the playing field when it comes to small, disruptive fintech startups competing against large companies. While PayPal has become synonymous for online payments, many innovative startups like Square’s Cash App are entering the scene with a ton of potential. When it comes to the fintech space, technology, patents and intellectual property also make for competitive advantages. Coinbase, for example, was one of the first startups to offer crypto payments. Now, payments giants like PayPal are following in their footsteps.
The bottom line
While it wouldn’t be fair to label all fintech stocks either safe or risky, it’s become apparent that the digitization of the financial industry has accelerated. In turn, investment in fintech has become a wealth-building opportunity for eager investors.
However, it’s important to point out that while the Covid19 pandemic has accelerated the need for fintech innovation, global investments in fintech companies were down in 2020 compared to 2019. According to findings from KPMG, global investment in fintech totaled $25.6 billion in the first half of 2020 but reached $37.9 billion in investment in the first half of 2019.
Although this is the case, fintech investments in 2021 are expected to soar, especially as more venture capitalists continue to invest in fintech platforms. While encouraging, it’s still best to evaluate each stock’s risks and rewards before investing.