Most Americans still manage their finances using brick-and-mortar banks, brokerages, and insurance companies.
But so-called “fintech” companies are slowly chipping away at these traditional businesses. Soon even your local bank branch and ATM may be relics of the past.
“Fintech” is short for the “financial technology” sector. It consists mostly of startups that have developed digital technologies to provide cheaper and faster financial services to tech-savvy consumers.
Fintech services include payment processing, online and mobile banking, online and peer-to-peer (P2P) lending, and even brokerages like Robinhood.
Fintech is still a small part of the overall global banking and financial sector. But it is snowballing. E-commerce and digital payments exploded during the worldwide pandemic.
And judging by the inroads fintech companies have made across the globe, fintech has plenty more growth ahead.
That’s why fintech is one of my favorite big-picture investment themes.
Let me explain…
A Global Phenomenon
Americans think of themselves as being on the cutting edge of technology and innovation.
The remarkable global dominance of the FAANG stocks – Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX) and Google parent Alphabet (Nasdaq: GOOGL) – confirms this view.
But U.S. tech companies are far less dominant in the fintech sector.
Millions of Brits have abandoned traditional high street banks for “neo-banks” like Monzo, Starling Bank and Revolut. These upstarts offer bill splitting, virtual cards and even stock trading for far lower fees than established rivals offer. TransferWise, a currency-transfer business, has become a household name across Europe.
Fintechs are allowing less developed countries to leapfrog their more developed rivals.
In Latin America, Nubank and MercadoLibre (Nasdaq: MELI) are shaking up the stodgy banking sector.
Most Africans don’t have bank accounts. They use mobile phone payment systems instead.
But no region of the world has embraced fintech like Asia. A group of “super apps” offering a remarkable range of services puts them far ahead of any rivals in the U.S.
The Biggest Fintech You Never Heard Of
The big kahuna in Asia is, of course, China.
This week, China’s biggest fintech business, Ant Group, was expected to list 10% of its shares on the Hong Kong and Shanghai stock exchanges.
Ant had always billed itself as a technology company instead of a financial firm. As such, it avoided the onerous financial regulation its rivals had to undergo. Alas, Chinese regulators cracked down and stepped in to delay the initial public offering (IPO).
Ant had hoped to raise $34.4 billion in cash, making it the biggest IPO ever in terms of money raised. The offering valued the 6-year-old firm at a whopping $300 billion, putting it on par with Mastercard.
Ant’s story is remarkable even by fintech standards.
Ant was founded in 2004 as a PayPal-style payments service for the e-commerce giant Alibaba (NYSE: BABA). But it didn’t take long for Ant to revolutionize China’s financial system.
Today, Ant has more than a billion active users in mainland China. It handled more than $17 trillion in digital payments in the 12 months ending in June. That’s about 25 times more than PayPal, the biggest online payments firm outside China.
The secret to Ant’s phenomenal growth?
Payments are merely a gateway service. Ant has also become one of China’s biggest lenders. It built credit-risk models with more than 3,000 variables, allowing it to make lending decisions within three minutes.
It sells more than 6,000 investment products. It manages China’s biggest mutual fund. It offers health insurance.
As The Economist described it…
Think of [Ant] as a combination of Apple Pay for offline pay, PayPal for online pay, Venmo for transfers, Mastercard for credit cards, JPMorgan Chase for consumer financing and iShares for investing, with an insurance brokerage thrown in for good measure, all in one mobile app.
In short, this fintech startup has built the most integrated fintech platform in the world.
How to Invest in Fintech
So how can you best profit from the fintech revolution?
Well, you can’t directly invest in Ant (yet).
But NYSE-listed Alibaba owns a 33% stake in Ant.
You could also invest in an exchange-traded fund (ETF).
The star among the fintech ETFs this year is the ARK Fintech Innovation ETF (NYSE: ARKF).
As an actively managed ETF, ARK is not constrained by an index. That allows the ETF to make big, concentrated bets.
ARK is also different from its competitors in that it invests only about two-thirds of its portfolio in U.S. stocks. The remaining one-third is spread throughout the world.
ARK’s top 10 holdings include bets on U.S.-based Square (NYSE: SQ), Latin America’s MercadoLibre, and China’s Tencent Holdings Ltd. (OTC: TCEHY) and Alibaba.
Up 82.16% this year, the ARK ETF is a swing for the fences.
And if you’re going to take a big swing, fintech is the sector to do it in.
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