FinTech: how to invest in the next generation of financial services

FinTech (financial technology) is one of the fastest-growing areas of technology today. An innovative, dynamic industry, fintech is disrupting a wide range of business models, including banking, payments, investing, and insurance. And consumers are benefitting. Not only are we seeing the launch of new products and services that are convenient, efficient, and affordable, but the technology is also making financial services more accessible to people who were previously underserved by traditional financial institutions. 

Looking ahead, the fintech industry is likely to create opportunities for investors. Between now and 2030, global fintech revenues are projected to grow six-fold to hit $1.5 trillion. To help investors gain exposure to this high-growth industry, eToro has created the Fin-Tech Smart Portfolio. Designed for long-term investors, this portfolio provides access to some of the biggest names in the fintech world.  

INVEST IN FINTECH
CopyTrading does not amount to investment advice.

What is FinTech?

FinTech refers to technology that’s used to improve and automate the delivery and use of financial services. Through specialised software and algorithms, and advanced technologies such as artificial intelligence (AI), it aims to make life easier for both consumers and businesses. 

A broad industry, fintech encompasses: 

  • Digital banking Today, new digital banks or “neobanks” are springing up everywhere and capturing market share from the traditional banks. Some examples of neobanks include Revolut, Nu, Chime, and N26. These banks  which have slick apps that have been built for the digital age  don’t have physical branches like traditional banks. As a result, they can offer consumers lower fees and more competitive interest rates. It’s worth noting that traditional banks are fighting back by launching their own online banks. For example, JP Morgan has launched Chase while Goldman Sachs has created Marcus. As a result of the rise of digital banks, banking is becoming far more accessible to people in the emerging markets (China, India, Brazil, etc.), who in the past may not have had access to financial services. 
  • Payments (PayTech) This area of fintech is focused on payments and transactions and is the largest sub-sector. Today, digital payments revenues account for more than 80% of global fintech revenues. There are many different types of companies that operate in this space and we are seeing some exciting innovations. One group of PayTech companies that is generating strong growth right now is payments processing platforms. These companies  which include the likes of the Netherlands’ Adyen, Block, Marqeta, and Italy’s Nexi offer integrated platforms that help businesses to deal with payments and customers to send money to other people. Another fast-growing area is Buy Now, Pay Later (BNPL), which allows consumers to pay for purchases over time. Companies that offer this technology include PayPal, Affirm, and Sweden’s Klarna. It’s worth noting that today, the payments industry is still full of intermediaries (such as banks). The goal of many PayTechs is to cut these intermediaries out. 
  • InsurTech  InsurTech refers to technology designed to increase efficiency in the insurance industry. This form of technology is seeing rapid adoption around the world today as insurers move to streamline their processes and reduce their costs, and consumers look for better products and faster service. One example of an InsurTech is Lemonade. With this company, consumers can purchase a range of different types of insurance within minutes via the website or app. Another example is Chinese company ZhongAn Insurance. Founded by Alibaba’s Jack Ma and other famous Chinese executives, it has sold over 10 billion insurance policies to date. 
  • LendTech  This area of fintech aims to improve lending processes. It includes companies that are aiming to improve existing lending processes, like Upstart which uses AI to help banks judge a consumer’s credit worthiness as well as peer-to-peer (P2P) companies such as LendingClub, which was the first P2P lender to register its offerings as securities with the US Securities and Exchange Commission (SEC). 
  • WealthTech  This technology is designed to help people grow and manage their wealth more effectively. It includes online investment platforms (such as eToro), robo advisors (automated investment platforms that use algorithms to create and manage investment portfolios), and wealth management software companies that help individuals and wealth managers manage portfolios.
  • AccountingTech  The goal of this form of fintech is to simplify and automate business accounting. An example of a firm that operates in this space is New Zealand’s Xero. It offers a cloud-based software-as-a-service (SaaS) accounting solution aimed at small- and medium-sized businesses. 
  • RegTech  Short for regulatory technology, RegTech aims to automate and improve financial compliance. RegTech companies use a variety of technologies, including AI, machine learning, and big data, to help businesses comply with regulations and avoid fines from regulators. 
  • Infrastructure and data companies  This includes companies that are developing software to help other businesses become fintechs. An example here is SS&C Technologies, which provides a broad range of tech-focused solutions for investment managers, family offices, and other financial institutions. Another example is Black Knight, which offers mortgage- and loan-originating systems for lenders, brokers and banks.

It’s worth pointing out that these areas are not mutually exclusive. Many companies offer a range of services. PayPal, for example, offers payments services, investing services, loans, buy now, pay later (BNPL), and more. 

Four trends driving the growth of the fintech industry

Now, the fintech industry has experienced significant growth over the last decade. However, realistically, it’s still in its infancy. Here are four powerful trends that are likely to drive industry growth in the years ahead:

  • Increasing demand for digital financial services  Consumers today want digital financial services that are convenient (i.e., smartphone based), efficient, and affordable. They don’t want to go into a bank and wait in a queue for 30 minutes to make a payment. This shift in how we do our banking is creating a lot of opportunities for fintech companies. It’s worth noting that today, many bank products and services are still very inefficient and costly. International transfers are a good example. So, there’s plenty of room for growth. 
  • Increasing smartphone access  In 2022, the number of smartphone mobile network subscriptions worldwide was around 6.6 billion. However, by 2028, the number is expected to exceed 7.8 billion. That equates to an extra 1.2 billion customers for fintech companies (almost four times the population of the US) to target. 
  • Better offerings thanks to data, AI, and the cloud FinTech companies are using big data and AI to better understand their customers. This is allowing firms to enhance their offerings, personalise customer experiences, and reduce fraud. Cloud computing is also playing a key role in the growth of the industry. The cloud is helping businesses improve scalability, reduce costs, and increase security. 
  • The growth of blockchain Blockchain is increasingly being used to create new and innovative financial products and services. Some examples of blockchain applications include cryptoassets, smart contracts, and tokenised securities.
  • Given fintech’s growth potential, the industry is seeing a huge amount of investment from venture capital companies, banks, asset managers, and other players in the financial industry. Over the last five years, global fintech investment has totalled nearly $900 billion
Past performance is not an indication of future results.

INVEST IN FINTECH
CopyTrading does not amount to investment advice.

Access to a basket of top fintech stocks

eToro has created the Fin-Tech Smart Portfolio; this is a diversified investment portfolio that provides access to a wide range of global fintech companies, including payments organisations, digital banking businesses, InsurTechs, financial market infrastructure companies, and more. Through this portfolio, investors can access the entire fintech ecosystem, and allocate capital to some of the world’s best fintech stocks. 

 

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.