3 Fintech Companies on the Rise
A new generation of financial technology (known as "fintech") companies are taking aim at the heart of the banking industry. From payment technologies to wealth management, the fintech industry has grown by 201% globally in the past year, attracting more than $12 billion in investment. Many of these companies are well past their experimental phases and well on their way to disrupting the entire industry. The growth of capital being invested in fintech companies underscores how technology and the Internet are radically changing the nature of money and financial services.
The primary areas of rapid development are payments, lending and wealth management. Here are three stocks to buy, one in each area, to take advantage of this rapid growth:
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1. Payments: Paypal (PYPL) - Get Report
The online payments space is more popular than ever, with Squaregearing up for its IPO and PayPal splitting from eBay. However, the majority of industry conversations continue to focus heavily on big players like Apple and Google.
Unlike PayPal, though, these companies generate revenue from areas other than mobile payments, whereas PayPal is the only pure play for the payments industry. It is usually the less discussed industry players like PayPal that are challenging the financial sector, but what specifically makes it such a hot investment?
PayPal in particular has many growth opportunities in its near future and the company just ended its third quarter with 173 million users, up 16 million from the year before. Posting a 29% jump in profit and a 14% revenue increase in the first financial report since PayPal's split with eBay, it is clear from earnings that the company can thrive on its own.
PayPal has worked to shift from desktop to mobile and to simplify the mobile payments process for its users.
According to PayPal's CEO Dan Schulman, roughly one third of PayPal transactions occur on mobile devices today, compared to just 1% in 2010, with that number expected to increase. PayPal also showed its adaptability early on by incorporating their platform into popular startups like Uber and Airbnb who are currently using the company to process in-app payments. The great opportunity for Paypal comes from its unique positioning as the first global bank by number of clients and merchants using it. It also operates at a layer of trust between the user and merchant by leveraging other services such as financing at checkout, making it incredibly well positioned to enter the financing world. Users receive quality financing in a smooth experience, and merchants can sell more. This is similar to what Affirm is doing but PayPal already has key competitive advantages in the field due to its domination of the checkout space. So, Paypal will definitely be a company to watch especially if it continues to thrive without the attachment of eBay.
2. Deposits & Lending- Lending Club
The process of how consumers borrow and repay loans is undergoing massive disruption. Automated credit scoring has replaced traditional interview procedures and loan pricing is becoming increasingly sophisticated. Platforms like Lending Club have become relevant due to their efficient, transparent, and customer-friendly ways to process transactions between a lender and a borrower. The platform connects buyers and lenders directly, bypassing the middleman similar to how Amazon's Kindle bypasses publishing houses. Not only do companies like Lending Club remove the middleman, but they keep structure costs low compared to brick-and-mortar businesses. They also use more technology than manpower when determining creditworthiness. In the same manner, bookstores struggle to compete with Amazon.com, banks will eventually find it difficult to compete with technologically advanced lending companies.
3. Wealth Management- Betterment
Technology is also having a huge impact on the wealth management industry. Because markets are so unpredictable, clients are looking for more control of and transparency around their wealth. This is why robo-advisors are replacing traditional wealth advisors with one company at the forefront. Betterment's technology solutions are redefining wealth management in the U.S. by crafting personalized portfolios for clients in exchange for a small fee. The company has over 100,000 customers and $3 billion in assets under management. While there is limited evidence to prove robo-advisors like Betterment are actually taking a large volume of clients away from human advisors, the overall business model demonstrates how strategic portfolios can be customized for a low cost. As Millennials get older and have more money to save, robo-advisors will achieve a larger market share and squeeze margins for the industry. At the same time, they will save considerable money for consumers.
This is just a snapshot of the companies driving major changes within the financial services industry. Large, well-established institutions remain dominant, but maybe it's time to look into the newer, fresher fintech companies already making a big impact.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.