Investing in Top FinTech Companies

Fintech is a combination of the words finance and technology, and it’s a broad category made up of companies that apply new technology to financial businesses. For example, companies that develop new digital payment-processing solutions are considered fintech, as are companies that build and operate person-to-person payment applications.

The potential of fintech is pretty exciting. Even after the growth of the cashless payments space in recent years, the majority of payment transactions around the world are still done in cash. And even though online banking institutions offer interest rates and fee structures that are typically much better than those of traditional banks, the majority of consumers still use branch-based banking for their financial needs.

Types of fintech stocks

Fintech is a broad term that refers to any company that applies technology to the world of finance. Many types of companies are under the fintech umbrella. Here are some of the products and services they offer:

• Payment processing
• Online and mobile banking
• Online and peer-to-peer (P2P) lending
• Person-to-person payments
• Financial software
• Financial services

Five top fintech stock investments

To be sure, many fintech stocks have been hit hard in the recent stock market downturn. Growth stocks in general have taken the worst of the decline, and most fintechs fit into this category.

Having said that, there’s a ton of long-term potential in the fintech industry, so it can be an opportune time to look for solid companies to hold for the long term. With that in mind, here are five fintech stocks that could make great additions to your portfolio:

1. Block

Formerly known as Square, Block’s (NYSE:SQ) product suite has evolved from a way for merchants to accept credit cards using their mobile phones into a large-scale financial ecosystem for individuals and small businesses. The company now processes card payments at an annualized rate well over $100 billion, it recently launched its own banking subsidiary (Square Financial Services), and it has a thriving small business lending platform. Plus, Square recently entered the buy-now, pay-later lending space with its acquisition of Afterpay.

Two big parts of Square's business are especially compelling. First is its Cash App, with 44 million active monthly users and virtually unlimited potential for Square to build out its consumer financial service offerings. The platform already offers direct deposits, debit cards, the ability to buy and sell Bitcoin (CRYPTO:BTC), and a user-friendly stock trading platform. Second is Square Online, the version of the company's merchant platform that helps sellers develop an omnichannel presence, which could be a great way for the company to benefit from the surge in e-commerce adoption.

2. PayPal

PayPal Holdings (NASDAQ:PYPL) is the undisputed leader in online payments, but it is so much more than that. Its Venmo person-to-person payment platform has emerged as an industry leader and continues to increase its massive user base at a breathtaking pace. PayPal has also been acquiring complementary businesses, such as e-commerce tool Honey, and has invested in several other successful businesses, such as MercadoLibre (NASDAQ:MELI), Uber (NYSE:UBER), and more. With more than $1 billion in free cash flow generated every quarter, PayPal has the financial flexibility to pursue opportunities as they arise.

PayPal has 429 million active accounts in more than 200 countries around the world. Although user growth has slowed down a bit lately, PayPal is doing a great job of figuring out how to increase monetization of its user base. In a nutshell, this is a highly profitable industry leader, and there's no reason to believe that will change anytime soon.

3. Goldman Sachs

This one might sound odd at first. When many people think of Goldman Sachs (NYSE:GS), they think of old-school Wall Street business as usual -- literally the opposite of fintech innovation.

However, Goldman Sachs has made clear that consumer banking is a big part of the company's future plans. It has taken some big steps to transform from an investment bank and wealth manager for the 1% into a full-featured consumer bank. The Marcus savings and personal loan platform was the first component and has been incredibly successful in just a few years. Then the company expanded into the credit card business in 2019 as the exclusive issuer of Apple’s (NASDAQ:AAPL) credit card and has since become General Motors' (NYSE:GM) credit card partner as well. Most recently, the Marcus Invest platform was launched and offers automated investment portfolios.

Goldman is building out its consumer business in a very fintech way -- with no costly branch network to worry about and a tech-focused approach to maximizing efficiency and consumer value. And, unlike most other fintechs, Goldman's massive investment banking business tends to do better in turbulent markets, making this a less cyclical fintech stock.

4. Adyen

Adyen (OTC:ADYE.Y) isn't exactly a household name to most U.S. investors, but it certainly belongs in the same conversations as Block and PayPal.

Based in the Netherlands, Adyen provides payment processing solutions to businesses and has operations all around the world (including a large U.S. presence). It offers payment solutions for in-person, online, and mobile channels. But, unlike the other major payment processing tech companies, Adyen focuses almost exclusively on large businesses. Just to name a few, Microsoft (NASDAQ:MSFT), Uber (NYSE:UBER), and McDonalds (NYSE:MCD) all rely on Adyen for their payments needs. You may recall that eBay dropped PayPal as its preferred payment processor a few years ago. That was in favor of Adyen.

Adyen's growth has been impressive, and the business processed more than $540 billion in payment volume (U.S. dollar equivalent) in 2021. Plus, Adyen is highly profitable, with a 63% EBITDA margin that could get even better as the business scales.

5. MercadoLibre

MercadoLibre (NASDAQ:MELI) is often referred to as the Amazon.com (NASDAQ:AMZN) of Latin America, and the nickname certainly makes sense. The company has a massive e-commerce business with more than $30 billion in annualized merchandise sales volume, and it continues to grow at an impressive pace. The company also has a logistics platform (Mercado Envios) and a lending business (Mercado Credito), both of which have gained serious traction in recent years.

However, it’s the Mercado Pago payments platform that is most exciting from a fintech perspective. The business processes more than $100 billion in annualized payment volume and is growing at a much faster rate than the e-commerce business. Most encouraging is that Mercado Pago is growing faster when it comes to processing payments outside of MercadoLibre’s e-commerce platform. Think of Mercado Pago as an earlier-stage PayPal (remember when it was part of eBay?) that is starting to develop into an impressive business all by itself.

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One great fintech ETF to consider

Whenever you have a high-growth and relatively young industry, it can seem intimidating to try to choose one or two stocks to invest in. And that's especially true in a volatile and unpredictable market environment like we're seeing in 2022.

With that in mind, an alternative that lets you profit from the fintech boom without having to pick individual stocks can be an exchange-traded fund, or ETF. If this sounds good to you, consider the Global X Fintech ETF (NASDAQMKT:FINX).

The fund invests in a portfolio of fintech companies and holds more than 60 stocks as of mid-2022. The portfolio includes a few of the names on the list above, as well as several others, such as top holdings Fiserv (NASDAQ:FISV) and Intuit (NASDAQ:INTU), as well as many others of all different sizes and business models. The point is that all the companies have excellent growth potential, but your investment won’t get crushed if one or two of them don’t quite live up to expectations.

A great arena for long-term growth investors

To be perfectly clear, investing in fintech stocks isn’t for investors with low tolerance for volatility and risk. Like any new and exciting industry, fintech is likely to be a bit of a roller-coaster ride as the industry matures. This is especially true in rough economic times, as we're seeing in 2022.

However, for long-term investors with relatively high risk tolerance, fintech stocks like those mentioned here can be an excellent means of capitalizing on one of the most exciting growth trends in the business world.