Investing in fintech stocks and shares has gained enormous popularity in recent years. With technological innovation accelerating, there are seemingly new fintech solutions appearing each month. And with the digitalisation of finance improving the quality and speed of financial services, this accelerating pace isn’t expected to change anytime soon.

Today, fintech stocks have grown into an attractive wealth-building opportunity within the investor world. At least, that’s what I think. So, let’s dig deep into the industry and explore the opportunities and the risks these firms face.

What are Fintech Stocks?

Fintech companies can come in a variety of shapes and sizes. But generally speaking, any business using technology to deliver a financial service falls under this stock market sector. Without having to comply with a lot of the red tape, these companies tend to be more agile than traditional financial institutions.

Given the diversity of financial services out there, it’s not surprising that there is an equally diverse collection of categories for fintech shares to fall into.

• Regulatory (RegTech) – These companies cater to the compliance issues within the fintech industry. Their services include managing regulations such as anti-money laundering policies, financial directives, and terrorist financing regulations—companies like Suade fall under this category.
• Blockchain & Cryptocurrency – Blockchain and Crypto are hallmark examples of fintech in action. An excellent example is the Coinbase Global platform which connects users for buying and selling cryptocurrencies.
• Crowdfunding – These platforms provide services of funding a project with a small amount of money contributed by many people. Kickstarter and GoFundMe are examples of crowdfunding platforms.
• Lending (LendTech) – Fintech lending has streamlined the traditional method and kicked out all out-of-date policies. Companies like Tala and OppLoans are gaining popularity in this field, especially with interest rates on the rise.
• Payment (PayTech) – This includes all mobile payments and International Money transfers. In fact, online payments have entirely changed the way payments are executed. Mobile payments have removed the bank’s interference from within. Arguably one of the biggest players in this arena is PayPal Holdings and Block Inc with its Cash App.
• Robo-Advising & Stock-Trading– Robo-Advising and Stock-Trading apps have revolutionised the asset management sector. They provide intuitive recommendations to their users. Interactive Brokers and Robinhood Markets offer these services.
• Insurance – Insurance companies are quickly adapting to the Fintech growth. Insurance CRM software is used to collect, store, and manage data in one place. As a result, this allows the insurance companies to provide a great user experience. Examples of Fintech Insurance companies are Lemonade and Oscar.

The Risks and Challenges Faced by the Fintech Shares

There is no denying the fact that Fintech stocks have risen in the past years. In fact, the whole industry continues to grow. Additionally, financial technology is improving the process and services within organisations.

However, the fast-paced advancement towards growth comes with growing challenges. Let’s discuss some key challenges the fintech stocks are tackling every day:

• Cyber Security Risks – In the era of digitalisation, security in the virtual world has become increasingly important. Today, it is not only money but huge amounts of data that is at stake. And if Fintech shares cannot prevent security breaches on their respective platforms, it could lead to serious legal and reputational damage.
• Regulatory Issues – The emergence of new technologies is giving rise to new regulatory concerns. In fact, recently, there has been a huge increase in regulations of banks and credit unions. Therefore, for fintech stocks, it is quite challenging to fulfil all regulatory requirements while carrying out their operations.
• Customer Trust – Despite the ease of carrying out every task, there is still a huge population that is not comfortable with the “fast-paced technological changes”. Therefore, lack of trust in fintech is a major obstacle for these stocks that need to be tackled.
• High Rate of Technological Changes – With new technologies being implemented, not everyone knows how to handle them. Therefore, it is quite a challenge for companies to cope with the rapid changes in fintech, specifically ensuring they don’t become obsolete versus a competitor.
• Integration of Technologies and Services – It’s not easy for every company to integrate the latest technologies into their existing system. While doing this, there is a huge impact on the business outcomes/service. Therefore, the challenge arises whether the customer accepts the change or not.

Key Financial Metrics to Consider before Investing in Fintech Stocks

The financial strategies adopted by fintech companies are different from others. Tech-based companies usually have lower profits due to increased re-investment, typically in marketing. On the other hand, a huge amount of money is spent on capital investment.

Additionally, these companies have a very different portfolio of current assets as there is no inventory in the case of fintech companies. That’s why some common financial metrics used to judge a company’s health aren’t applicable when it comes to investing in fintech shares.

With that in mind, let’s take a look at what I believe are the most useful metrics to watch.

• Liquidity Ratios – Many technology companies often do not make a profit. Therefore, it is very important to know how well the fintech company can meet its short-term obligations.
  • Cash Ratio – Since the company only has cash as its current assets, it is a very important liquidity ratio for fintech stocks.
  • Current Ratio – Maintaining a high current ratio is very important for fintech companies.
• Active accounts, Inactive Accounts, and Returning customers – These indicate how successful the company is at keeping people engaged with their product. Since these platforms often profit from transaction fees rather than subscriptions, a high engagement and usage rate of their technology is paramount to success. Monthly Active Users (MAUs) is a common metric used to gauge this.
• Debt to Equity Ratio – Understanding the financial leverage of fintech stocks is very important since these companies have high debt amounts to fund product development.

Key Terms to Know before Investing in Fintech Stocks

Investing in fintech stocks and shares can be a bit of a minefield when it comes to acronyms. There is a lot of jargon out there that’s often not explained. So, let’s take a look at some of the most common found in reports and media.

• AML -Anti Money Laundering
• API – Application Programming Interface
• CDO – Chief Data Officer
• KBA – Knowledge-Based-Authentication
• P2P – Peer to Peer
• SaaS – Software as a Service
• AISP – Account Information Service Provider. It provides third-party access to account information with the customers’ consent.
• AES – Advanced Encryption Standard. It is the symmetric-key block algorithm that is the Fintech industry standard to encrypt and decrypt classified data.
• BIN – Bank Identification Number
• Blockchain – Blockchain is a distributed ledger technology that’s secure, immutable, and unanimous.
• Decentralised Finance – It is a blockchain-based system making products and services available on a decentralised public network.
• NFC Payments – Near Field Communication (NFC) powers contactless payments through mobile wallets and contactless cards.

Market size and Growth Forecast of the Fintech Industry

The fintech industry has been continuously rising over the past few years. In fact, this sector continues to attract investments.

In 2020, global investment in fintech totalled $105bn, according to KPMG. As a result of the huge boost in demand for investing in fintech stocks and shares.

The industry is growing rapidly. According to Research And Markets,  the Global Fintech Market was valued at $7.30trn in 2020. This market is expected to grow at a compounded annualised growth rate of around 26.87% until 2026 reaching $31.5trn!

Top Fintech Stocks in the UK by Market Cap

Top Fintech Stocks in the US by Market Capitalisation

Should I Invest in Fintech Shares?

There is no denying the fact that the fintech industry is advancing. Be it startups like Robinhood or decade-old companies like Mastercard. Everyone is jumping on the fintech bandwagon. Moreover, the explosive growth of cryptocurrency and blockchain has offered additional sources of investment in the fintech world.

Without a doubt, investing in the best fintech stocks is a great investment opportunity today for my portfolio. At least, that’s what I think. But depending on the risk tolerance of investors, it may not be the most suitable sector for everyone. Personally, I think the potential rewards far outweigh the risks for my investing journey.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has published Premium reports on Mastercard Corp, Fiserv Inc, Alpha FX, PayPal Holdings, Robinhood Markets, and Coinbase Global. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.