Table of Contents
Introduction
Fintech, a combination of the words finance and technology, refers to companies that apply new technology to financial businesses. This broad category encompasses a range of companies that develop innovative digital payment-processing solutions and person-to-person payment applications. Despite the growth of the cashless payments space, a significant portion of payment transactions around the world is still conducted in cash. Additionally, many consumers continue to rely on branch-based banking for their financial needs, despite the better interest rates and fee structures offered by online banking institutions.
Types of Fintech Stocks
Fintech is a broad term that encompasses various companies that apply technology to the finance industry. These companies offer a wide range of products and services, including:
- Payment processing
- Online and mobile banking
- Online and peer-to-peer (P2P) lending
- Person-to-person payments
- Financial software
- Financial services
It is worth noting that most fintech companies fall under the category of growth stocks.
Five Top Fintech Stocks in 2023
The recent stock market downturn has adversely affected many fintech stocks, particularly growth stocks. However, the fintech industry holds significant long-term potential, making it an opportune time to identify solid companies for long-term investment. Here are five fintech stocks that could be excellent additions to your portfolio in 2023:
1. Block (formerly Square)
Block, formerly known as Square, has evolved from a mobile credit card processing solution for merchants to a comprehensive financial ecosystem for individuals and small businesses. The company processes card payments at an annualized rate exceeding $200 billion and operates its own banking subsidiary, Square Financial Services. Block also offers a thriving small business lending platform and recently entered the buy-now, pay-later lending space through its acquisition of Afterpay. Block’s Cash App, with 49 million active monthly users, offers a range of consumer financial services, including direct deposits, debit cards, Bitcoin trading, and a user-friendly stock trading platform. Additionally, Block’s Square Online platform helps sellers establish an omnichannel presence, positioning the company to benefit from the surge in e-commerce adoption.
2. PayPal Holdings
PayPal Holdings is the leader in online payments and offers much more than just a payment platform. Its Venmo person-to-person payment platform has emerged as an industry leader and continues to experience rapid user base growth. PayPal has also made strategic acquisitions, such as e-commerce tool Honey, and has invested in successful businesses like MercadoLibre and Uber. With over $1.8 billion in free cash flow generated in the most recent quarter, PayPal has the financial flexibility to pursue opportunities as they arise. The company has 432 million active accounts in over 200 countries, and while user growth has slowed down slightly, PayPal has significant long-term potential as it continues to monetize its user base.
3. Bank of America
Bank of America may seem like an odd inclusion in a list of fintech stocks, given its reputation as a traditional bank. However, the bank has embraced technology to enhance its services significantly. Bank of America has focused on improving asset quality and efficiency through technology, earning recognition as the No. 1 bank for online and mobile banking functionality. As more customers utilize the bank’s digital channels, the business becomes more efficient. With a relatively cheaper valuation compared to other large banks and a 2.6% dividend yield, Bank of America offers an outside-the-box fintech investment opportunity.
4. Adyen
Adyen, based in the Netherlands, provides payment processing solutions to businesses worldwide, with a particular focus on large enterprises. Adyen offers payment solutions for in-person, online, and mobile channels and has attracted major clients like Microsoft, Uber, and McDonald’s. The company’s impressive growth is evident in its processing of over $700 billion in annualized payment volume. Adyen’s profitability is also notable, with a 59% EBITDA margin that is expected to improve further as the business scales.
5. MercadoLibre
Often referred to as the Amazon.com of Latin America, MercadoLibre operates a massive e-commerce business with annualized merchandise sales volume exceeding $30 billion. The company continues to experience impressive growth and has expanded into logistics and lending through its platforms Mercado Envios and Mercado Credito, respectively. Mercado Credito, in particular, has achieved 146% year-over-year growth in the most recent quarter. However, it is Mercado Pago, the company’s payments platform, that holds the most significant potential from a fintech perspective. With over $120 billion in annualized payment volume and faster growth outside of the e-commerce platform, Mercado Pago is developing into a robust standalone business.
A Great Fintech ETF to Consider
Investing in individual fintech stocks can be daunting for some investors, especially in a volatile market environment. An alternative approach is to invest in an exchange-traded fund (ETF) that provides exposure to a diversified portfolio of fintech companies. The Global X Fintech ETF (FINX) is an excellent choice in this regard. The fund invests in a range of fintech companies and holds over 60 stocks. Some of the holdings include Fiserv, Block, and other companies of different sizes and business models. The Global X Fintech ETF allows investors to profit from the fintech boom without the need to select individual stocks.
Conclusion
Investing in fintech stocks can be a rewarding opportunity for long-term growth investors. While these stocks may be more volatile and carry higher risk, they offer exposure to one of the most exciting growth trends in the business world. By considering companies like Block, PayPal, Bank of America, Adyen, and MercadoLibre, investors can potentially capitalize on the long-term potential of the fintech industry. Additionally, the Global X Fintech ETF provides a diversified investment option for those looking to benefit from the fintech boom.
