During a recent chat, my managing editor told me about how his wife had recently set up an account with SmartyPig in order to put away some cash for vacations and Christmas gifts.
“I think it’s a pretty good idea,” he told me. “That money is now out of sight, so it’s hard to blow it on takeout food or an Amazon spending spree. She didn’t have to visit a bank branch to open it up or even talk to anyone on the phone. It’s even got a pretty good interest rate — and where you can you find that anymore?”
He presented SmartyPig as an example of fintech … an online, short-term savings account from Sallie Mae Bank. And I explained to him that it’s an old idea in a new package. You remember Christmas club accounts, right?
It was an utterly mundane conversation — the kind of thing guys-of-a-certain-age talk about when they’re not talking about the playoffs or their latest home-improvement project.
But that boringness was what made it stand out.
Frankly, I want to hear more boring stories about technological innovations making life better for people. You can follow those stories to profit opportunities with evidence and proven track records backing them up.
Bitcoin and many of today’s popular stocks, on the other hand, require leaps of faith from their followers. If that faith fades, it all comes crumbling down.
I’m not the only one who feels this way. So today, let’s take a look at a recent report that lays out the case for fintech over bitcoin.
Plus, I’ll show you a few fintech investment ideas.
Why Fintech Wins
In a research note last week, JPMorgan analysts said Bitcoin is an “economic side show” — and that fintech is the future of banking and other financial services.
Even as bitcoin hovers around a $1 trillion market cap, the JPMorgan analysts said cryptocurrencies may never become a mainstream asset. According to their research note:
Bitcoin prices have continued their meteoric rise with Tesla, BNY Mellon, and Mastercard’s announcements of greater acceptance of cryptocurrencies … But fintech innovation and increased demand for digital services are the real COVID-19 story with the rise of online start-ups and expansion of digital platforms into credit and payments.
Before going further, let’s define fintech.
The term refers to any new technology that improves or automates financial transactions. But increasingly, fintech has become shorthand for any type of disruptive finance-focused technology, from mobile payment apps to, yes, cryptocurrencies.
Generally speaking, fintech companies enable individuals and companies to conduct financial transactions without having to use traditional bank-based channels.
Square Inc. (NYSE:SQ) is one of them, and it is probably the best-known “disrupter” of payment processing. The San Francisco-based company focuses on small businesses – enabling them to take payments through a variety of point-of-sale mobile payment methods.
Millions of merchants use Square’s app to process payments through their smartphones. You may have seen a taxi driver, for example, take a payment by swiping your credit card through a plug-in device on his smartphone. That taxi driver was probably using the Square app.
Square is a leading payment processor that is attempting to become a leading digital bank, also known as a “digital wallet.”
From its inception, Square has provided payment processing services to small merchants — predominantly a mobile app that enables merchants to process credit card payments on their mobile devices.
The company also operates fast-growing digital banking services via its Cash App. Because this business has been growing at triple-digit rates year-over-year, it now accounts for about one third of Square’s gross profits.
And based on the growth trajectory of this business, it should account for half of gross profits within two years.
Cash App is a money transfer platform that allows users to send, store, and/or receive cash. But Square continues to add features the platform to make it more competitive in the marketplace.
And there is plenty of competition!
That’s the biggest risk to the stock. Square competes against folks like Venmo, Zelle, and Apple Pay.
Another risk is that the company is prioritizing revenue growth and market share over profitability.
Even so, it has been generating robust free cash flow. Assuming the company’s core payment-processing business maintains slow and steady growth, while the digital banking business generates high double-digit growth, Square will be a winner.
But it won’t be the only one …
No Faith Required
The long-term trends for fintech are rising. Adapt Insights pegged the market at $4.8 trillion by at the end of 2019, and it says that figure will nearly double to $10.1 trillion by 2024.
That’s because companies that develop and employ cutting-edge technology are growing to huge sizes faster than ever … grabbing market share faster than ever … and changing the world faster than ever.
This exponential progress is creating a Technochasm between companies that develop and use technology successfully … and those that don’t.
We’ve been seeing the effects in my Fry’s Investment Report service.
One of our fintech investments, the Global X FinTech ETF (NASDAQ:FINX), has gained nearly 70% since I recommended it on June 11, 2019 — handily outperforming the S&P 500’s 33% return over the same time frame.
And this isn’t just because fintech recovered faster than the broader market following the COVID selloff. The S&P is up by just over 16% from this time last year, while FINX is up by more than 45%.
The companies in FINX use innovative technologies to improve or automate financial transactions.
These technologies include peer-to-peer lending, mobile payments, instant short-term lending, and cryptocurrencies — and the companies that provide these services can be incredibly profitable.
PayPal Holdings Inc. (NASDAQ:PYPL), for example, is one of the earliest and best-known payment processing companies, facilitating e-commerce and even expanding to offer credit to customers. Today it is more than 110% higher than its pre-pandemic all-time high.
Square is 150% higher than its pre-pandemic peak.
Products from companies like this are seeing wider use thanks to the pandemic, and people are more satisfied with their banks when they integrate peer-to-peer payment methods into their systems.
Research from McKinsey shows that 6% of U.S. consumers have joined my colleague and opened a new fintech account during the pandemic. Mobile banking traffic ballooned by 85% in April 2020, and older Americans are becoming increasingly comfortable with online banking.
I expect these new habits to stick around, giving fintech companies an advantage going forward.
As they become more accessible, more people will adopt them. Because the pandemic made these technologies more necessary, it has only accelerated their widespread adoption.
While I know a lot of bitcoin speculators, I know very few bitcoin users. On the other hand, almost everyone I know uses fintech, even if they don’t realize it.
That tells me the fintech industry is likely to continue growing rapidly over the next few years. Meanwhile, bitcoin has very little but faith to back its value up.
I’m always looking for new fintech stocks — and other Technochasm-related investments — to bring to my Investment Report subscribers. Learn how to join us here.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.