Fintech investment strategies for 2023

by James · February 17, 2023

Investing in fintech can mean buying into a wide range of services, from custodian banks to brokerage houses. But as a category, it means you’ve invested in a company that uses technology to help people manage their money. This is a large and growing field, with opportunities ranging from older institutions such as Visa to completely new apps and services. For many people, fintech can be a good way to combine the value opportunities of a technology stock with the stability often offered by financial institutions. Here’s what you need to know.

Consider working with a financial advisor if you’re looking for guidance on how to invest your money to reach your financial goals.

What is Fintech?

Fintech, short for “financial technology,” broadly refers to any type of service or company that uses technology to help people manage their money. There is no hard and fast definition for this sector, so exactly what counts as a fintech company can vary widely. Some investors define fintech strictly. They only consider a company “financial technology” if it has invented a new way to directly handle money or financial assets. Others use the term more broadly, encompassing everything from app-based brokerages to financial blogs.

Even the venerable ATM is considered a piece of fintech, albeit a legacy. These days, however, when someone refers to a fintech company, they are usually referring to new and developing technology.

Fintech is part of practically every consumer’s everyday life. Mobile banking, peer-to-peer payments (like Venmo), online brokers and even credit card machines are all examples of fintech in action. While new products and companies are constantly emerging in this field, giving investors access to value stocks and startups regularly, fintech has become an important part of finance in the 21st century.

This is even more true outside the US. As developing countries upgrade their economies, many of them have jumped past stages of older technology such as ATMs and credit card machines and straight to wireless, cashless finance. From Kenya to China, increasingly next-generation fintech is defining their daily transactions, making fintech not only a strong market for domestic investment, but also global growth.

Why consider investing in Fintech?

When investors talk about fintech as an investment field, they are usually referring to new companies and new technologies. While it is perfectly accurate to refer to investing in Visa or E*Trade as a fintech investment, a call to invest in fintech usually means that someone has invented a new idea or product.

Fintech products can come in just about any form, which is one of the reasons why this is an attractive field for investors. Some firms ship physical products, such as Block’s payment processing systems. Others create software and apps such as Venmo’s payment processing services. Finally, many fintech companies are service providers, such as Robin Hood’s investment platform. Of course, in most cases the company offers a combination of products, such as a service and a software interface to use that service.

The biggest reason to consider investing in fintech is the size of the sector. Even setting aside the established players like Visa ($472 billion market cap) and MasterCard ($355 billion market cap), these are wealthy and successful companies. At the time of writing, PayPal was valued at $93 billion, Fiserv at $67.6 billion, and Block at $50 billion. An estimate published by Fidelity estimates that this sector will grow from $110 billion in 2020 to nearly $700 billion by 2030, an estimate that again excludes some of the largest payment processors.

These are great success stories. When a fintech company does well, it can combine the rapid growth of a tech startup with the reliability of a banking investment. Of course, it’s important to note that fintech companies also come with the risks of a tech startup. These companies can fail as quickly as they can succeed, making new entrants a great but highly speculative investment.

Ways to invest in Fintech

As with all sectors, there are many ways to invest in financial technology. For investors looking to gain exposure to this field, a few good options include:

1. Shares

The lowest hanging fruit, you can always invest directly in financial technology through the holdings of related companies. Buying shares directly is always a speculative investment. You can capture all the gains of a successful company, but nothing will offset losses if the company does poorly. That’s not a bad thing, just something to consider as part of your overall approach to risk management.

The key question with fintech stocks is how much you want to balance growth against safety. Investors looking for strong gains can look for new and start-up companies, especially those with new technology. Investors who want a more stable investment can look to older companies such as banks and credit cards. These firms all use fintech as part of their day-to-day operations, from pay-with-a-loss to Zell, so an investment in your bank combines a fintech investment with the security of a much larger institution.

2. Mutual funds or ETFs

As with most industries, the counterpart to individual stocks would be mutual funds or exchange-traded funds (ETFs). There are several ETFs and mutual funds on the market that focus on fintech specifically, and build their portfolios around both new and existing companies operating in financial technology. The advantage here is twofold.

Firstly, you can benefit from the fund’s expertise. Instead of having to research good investments in a technically complex field, you can trust the fund’s managers to know which companies look good. Secondly, you get a strong risk reduction. While the fund is exposed to the sector as a whole, a given company cannot sink your investment if it does poorly.

Of course, both of these benefits are double-edged swords. While you get the fund’s expertise, you are also stuck with it. You can choose your fund, but you cannot choose the individual assets that make up the portfolio. The risk reduction of a mutual fund or ETF also means that you cannot capture all the gains of a high-performing asset. You won’t take big losses from a bad investment, but you won’t get the big return on a good one.

3. Technology

The heart of fintech is the technology, which creates a good side investment opportunity.

The next generation of financial technology will be driven by many of the same advances that are making headlines in other areas. Banks want to use artificial intelligence to create financial advisors in the app. Big data will be used to make credit and lending even more efficient. Wireless and near-field technology will continue to make electronic wallets more popular.

As new technologies emerge, many different companies will look to incorporate them into financial products. The result is that you can invest in the success of these products by investing in the technology behind them. Either through shares or funds, you can buy into the companies that create the technology for fintech products. This gives you the chance to side invest in the success of fintech itself.

The bottom line

Fintech is the financial technology sector. With companies like E*Trade, Venmo and more, this is increasingly a part of everyone’s daily life, and it can also be a great investment opportunity. There are several ways to invest in the industry. The easiest way is by investing in the technology itself or getting stock options with a fintech company. However, the more common ways involve choosing fintech-related investments such as shares or mutual funds.

Tips for investing

Homework is good, but tutoring is probably better. A financial advisor is a professional who can help you choose wise investments to help you achieve your financial goals. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three approved financial advisors serving your area, and you can interview your advisor matches at no charge to determine which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
If you’re here, it means you understand the importance of doing your homework. So before we invest in fintech, let’s dive into exactly how this industry works.

Disclaimer – SmartAsset may be considered a financial technology or “fintech” company. Nothing in this article is intended to apply to investing in SmartAsset, nor should this be read as a promotion of SmartAsset as a financial asset.

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