Sitting at his desk before class, a college student uses an online brokerage app to purchase a few shares of stock he learned about in the school’s finance club. At the front of the classroom, his professor uses a banking app to deposit her paycheck. While heading down the hallway to the lecture, one student uses their phone to transfer money to another to cover the cost of last night’s pizza and beer. What do all these folks have in common? Aside from their presence at the university, all these people are utilizing fintech — a growing industry that’s changing the finance world as we know it.
The fintech — a combination of the words “finance” and “technology” — industry may be shaking things up, and many investors are keen to find out how its innovations can improve our lives. But others aren’t so sure that this emerging industry is a smart investment. Here’s what you need to know about fintech — along with what the experts are saying about its investment potential.
What Is a Fintech Company?
Fintech is one of the fastest-growing emerging industries of the last few years. It blends the innovative nature of technology with the idea of simplifying the needs of the finance industry, which has become stagnant in some ways. Mobile banking, mobile payments, crowdfunding, cryptocurrency and blockchain are a few examples of fintech. Many of the biggest fintech companies are built on technology that makes investing, managing wealth and purchasing insurance easier and more accessible for consumers.
Despite sweeping changes in the economy, culture and the way people think about money, we’ll always need reliable ways to store, access and leverage our money. Fintech answers those changing needs by creating digital and physical products that make the financial industry easier to understand and access.
Without reducing the quality of the products and services offered to the consumer, fintech brings financial tools, products and services outside of the corporate world and into the hands of everyday people. For example, apps like Robinhood and Public have removed the middleman when it comes to stock market investing. Today, anyone with a few dollars in a bank account can trade stocks on their own. The red tape of going through a stock brokerage or maintaining minimum deposits in an investment account has been removed.
Companies like Wealthfront and Betterment use fintech to make the investment process even easier. These firms harness the power of artificial intelligence, using robo-investors to make skillful investment decisions on behalf of consumers. Fundrise is yet another fintech company, and it brings the technological trend of crowdfunding to real estate investment.
Fintech products aim to give consumers more access and fewer barriers to entry to the world of finance while facilitating flexible and diverse product offerings. And you might already actually be familiar with this industry — one of the more widely utilized examples of fintech is mobile banking apps. Gone are the days when banking had to be done in person. Now, consumers can deposit checks, transfer funds and review transactions via banking apps on their mobile devices.
What Do Experts Say About Fintech?
The fintech industry includes a mixture of startups and revolutionary offerings from some titans of the finance industry. Investing in something new presents more of a risk to investors than investing in something older. Without decades of performance to base investing decisions on, however, investors are making choices based on the fintech industry’s potential rather than its history.
But the fintech industry is certainly full of potential. Many of the companies that have become key players in the industry have risen in earnings quickly. Initial public offerings and acquisitions are extremely common in fintech, but the industry also offers opportunities for investors who are willing to buy and hold. In the short term, fintech stocks can be volatile and full of risk. In the long term, industry experts predict that the companies that are seen as disruptors today will become the norm of the finance world of the future.
Although fintech is an emerging industry, it’s still deeply tied to finance, which comes with two known circumstances. The finance industry is heavily regulated, and companies that don’t follow regulations, whether they’re new or old, can face serious consequences. Fintech frontrunner Robinhood recently faced a hefty fine from the Securities and Exchange Commission. This issue is certainly not unique to fintech; other industry stalwarts, such as Wells Fargo, have suffered similar fates in recent years. Fintech, like the finance industry, also depends heavily upon the health of the economy as a whole. When the economy suffers, any business connected to the financial industry faces some kind of impact.
Still, an investor who buys into fintech companies while the stocks are sitting at lower prices could potentially earn large returns decades from now. For the risk-averse investor who doesn’t want to miss the opportunity of the fintech industry, exchange-traded funds (ETFs) can be a great option.
Top Fintech Stocks and ETFs
If you’re thinking about investing in fintech, you might opt to add individual companies’ stocks to your portfolio or invest in ETFs to diversify your holdings a bit more.
Square (SQ): Square provides a variety of easy-to-use products that allow small businesses to accept credit card payments. One of these unique solutions is a credit card reader attachment that plugs into a smartphone, allowing businesses to accept credit cards easily from any location. In addition to selling the hardware, Square takes a portion of any money earned from sales. Square is the parent company of the widely popular Cash App, which allows people to do everything from pay a friend to invest in cryptocurrency.
Goldman Sachs (GS): Goldman Sachs is developing mobile banking apps and investment apps that are competitive in the fintech industry. The company also offers a high-yield savings account, called Marcus, with a low minimum deposit. Goldman Sachs is pursuing innovative solutions to answer consumer demand for more accessible financial services. This can be an ideal option if you’re a risk-averse investor because it offers the earning potential of fintech with the stability of a renowned company.
Global X Fintech ETF (FINX): This fund from Mirae Asset is one of the first ETFs that took fintech seriously. The fund invests in a mixture of conservative and riskier fintech offerings. Blockchain, crowdfunding and mobile payments are some of the biggest industries that this fund covers. While there are some interesting fintech options in undeveloped countries, this ETF focuses on developed nations.
ETFMG Prime Mobile Payments EFT (IPAY): Mobile payments are one of the stablest, easiest to understand aspects of the fintech industry, and this ETF focuses exclusively on that sector. Rather than investing only in the companies that offer mobile payment solutions, this ETF also invests in the companies that create and maintain the software that makes mobile payments possible.