Believe it or not, many young people in the world today have never stepped foot inside a bank and may never do so.
Thanks to the ubiquity of smartphones, the internet, and financial technology (fintech), these people have a whole new set of options for how to manage their finances and grow their investment portfolios.
The key is emerging financial technology, which is driving the evolution of traditional financial services as companies and countries attempt to adapt to evolving consumer expectations regarding choice, costs, convenience, and security.
Today, I will briefly summarize the trends in fintech, introduce seven fintech stocks, cover key fintech applications, and then present you with our best specific stock recommendation that plays into these trends.
Three Trends Driving Fintech
- Digital Transformation
Physical financial infrastructure requires significant investment in people, buildings, aging technology systems and even older paper-based processes. This dated foundation places incumbents at a disadvantage in terms of both cost structure and user convenience.
In contrast, new companies have the advantage of a clean slate and can begin with a state-of-the-art technology platform from the get-go.
This dynamic is playing out in virtually every arena of financial services, including banking, capital markets, real estate, insurance, payments, asset management, and wealth management.
- Artificial Intelligence (AI)
Artificial intelligence is simply the ability of machines to think like an intelligent human but perhaps 1,000 times faster and at a higher level.
The ability to gain actionable insights from data using AI is driving fintech and creating frictionless and personalized consumer experiences that are predictive, personal, and efficient.
Taking a page from the playbooks of Amazon and Netflix, incumbent financial firms are seeking to move from a “search-and-browse” to “curate-and-deliver” model, where they anticipate client needs utilizing data and machine learning.
Emerging fintech companies are helping consumers gain access to small business loans and home mortgages, “intelligent” automated savings and investment plans based on a customer’s data profile.
You might think of blockchain as a secure, flexible ledger in the cloud, which offers tamper-proof, transparent tracking of transactions. This allows any process to be streamlined and settlement times can be greatly shortened. Not only does this greatly reduce costs for financial services firms, but it also saves capital, which is increasingly important given the decline in fees and returns, plus the increase in regulatory costs.
America and China Lead in Fintech
Because of their size and technology base, America and China lead in fintech though China perhaps has the edge because of its ability to scale up over a population more than four times that in America.
Increasingly, banks and other financial services companies will need to acquire new customers and interact with ongoing customers through digital ecosystems, requiring new approaches to branding and relationship management as well as changes in business models and technology.
In recent years, however, Asia has tilted the scale, delivering game-changing growth and innovations in banking services.
This reflects not only the increasingly central role of diverse Asian economies in global trade and economic growth, but also Asia’s renewed leadership in scaling innovative technologies and new business models.
For example, in China’s larger cities (113 cities have a population of over one million), cash is largely a thing of the past, as are credit cards. People in those cities make their purchases by scanning QR (quick response) codes with a smartphone, using them everywhere from traditional stores to street vendors.
As you can see from the above chart, China has two dominant payment systems: Alipay and WeChat, both of which the Chinese government can access.
You can see that fintech is centered on collecting and analyzing data.
Google, Apple, Amazon, Samsung, and Facebook all have bespoke e-payment initiatives and data that can indicate who our friends are, what our exact location is, and what we search for on the internet. They are especially after payments data because it lets them know how we spend our money.
With that in mind, here are seven companies taking advantage of the trend.
Seven Leading Fintech Stocks
Goldman Sachs (GS)
Goldman Sachs, founded in 1869, is one of America’s largest and oldest banks. The financial institution has been able to replace many of its human traders with complex computer algorithms, some backed by machine learning and computer engineers. The investment bank generally can replace four traders with one computer engineer. More than one-third of Goldman’s personnel, or approximately 9,000 employees, are computer engineers and most trades are now automated, even in opaque currency markets, where human trading was once thought to be essential.
SS&C Technologies Holdings (SSNC)
SS&C Technologies provides software platforms to financial institutions, asset managers, and trusts that enable the manager to integrate their daily tasks, such as trading and portfolio management, with back-office functions, such as accounting and regulatory compliance. Most of these software platforms are subscription-based, requiring contract terms of one to five years.
BlackLine is a cloud-based software platform that allows businesses to automate burdensome and tedious accounting tasks, such as reconciling financial data, in real time. These tasks traditionally take lots of man-hours and are only done at the end of each month or even quarter. BlackLine’s platform allows businesses with several product lines in different geographical markets to accumulate this data instantaneously, giving companies the confidence needed to make quicker strategic decisions all while sharply reducing accounting and back-office costs.
PayPal was essentially the world’s first digital wallet. The service gained significant traction as eBay’s early buyers and sellers seeking a safe and fast way to make transactions. PayPal has more than 426 million active user accounts, meaning those customers now use their accounts more than three times per month.
Guidewire Software (GWRE)
Guidewire provides property and casualty (P&C) insurers with software platforms that allow them to run their businesses effectively. Guidewire’s platforms enable insurance companies to accomplish seemingly all of their core services, from data analytics and digital engagement to underwriting and claims management. Guidewire serves more than 350 companies in 32 different countries, including Farmers Insurance and Nationwide.
Q2 Holdings (QTWO)
Q2 Holdings is a technology company that helps smaller banks and credit unions offer cloud-based platforms to their account holders can enjoy good experiences across all digital channels. These smaller banks often do not have the IT expertise or the necessary in-house resources to compete with the virtual offerings of bigger rivals.
Many might know Square as the credit card reader used by their local farmer’s market or favorite food truck. Indeed, that’s how the company started, offering payment processing services to smaller businesses that could not traditionally afford card acceptance services. But today, Square is a place where small businesses can go to meet nearly all their administrative needs.
All seven of these fintech stocks would make solid long-term investments, and I’ve recommended several of them in my Cabot Explorer advisory, where I recommend high-growth stocks from around the world. My portfolio of global stocks currently boasts an average return of better than 150%!
Do you, or would you invest in these fintech stocks? Why or why not?
*This article was originally published in 2020 and has been updated.