How to Invest in Fintech in 2023

What is fintech?

Fintech, the shorthand for “financial technology,” refers broadly to any kind of service or firm that uses technology to help people manage their money. There is no hard and fast definition for this sector, so exactly what counts as a fintech company can range widely. Some investors define fintech strictly. They only consider a company properly “financial technology” if it has invented a new way to directly handle money or financial assets. Others apply the term more broadly, sweeping in everything from app-based brokerages to financial blogs.

Even the venerable ATM is properly considered a piece of fintech, albeit a legacy one. These days, though, when someone refers to a fintech company they’re generally referring to new and developing technology, such as generative artificial intelligence.

Fintech is a part of virtually all consumers’ daily lives. Mobile banking, peer-to-peer payment (like Venmo), online brokerages and even credit card machines are all examples of fintech in action. While new products and companies are constantly emerging in this field, giving investors access to value stocks and startups regularly, fintech has become an essential part of finance in the 21st century.

This is even more true outside of the United States. As developing nations upgrade their economies, many of them have leaped past the stages of legacy tech like ATMs and credit card machines and directly to wireless, cashless finance. From Kenya to China, increasingly next-generation fintech defines their daily transactions, making fintech not only a strong market for domestic investment but global growth as well.

Why consider investing in fintech?

When investors talk about fintech as a field for investment, they’re usually referring to new companies and emerging technologies. While it’s absolutely accurate to refer to investing in Visa or E*Trade as a fintech investment, usually a call to invest in fintech means that someone has invented a new idea or product.

Fintech products can come in just about any form, which is one of the reasons this is an attractive field for investors. Some firms ship physical products, like Block’s payment processing systems. Others create software and apps like Venmo’s payment processing services. Finally, many fintech companies are service providers, like Robinhood’s investment platform. Of course, in most cases, the company provides a combination of products, such as a service and a software interface with which to use that service.

The biggest reason to consider investing in fintech is the sector’s size. Even setting aside the established players like Visa (approximately $482 billion market cap in mid-June 2023) and MasterCard (approximately $358 billion market cap), these are wealthy and successful companies. At the time of writing PayPal was valued at approximately $71 billion, Fiserv at $70 billion and Block at $39 billion. One estimate published by Fidelity projects that this sector will grow from $110 billion in 2020 to nearly $700 billion by 2030, an estimate that again excludes some of the biggest payment processors.

These are big success stories. When a company in fintech does well, it can combine the fast growth of a tech startup with the reliability of a banking-industry investment. Of course, it’s important to note that fintech companies come with the risks of a tech startup as well. These companies can fail as quickly as they can succeed, making new entrants a great but highly speculative investment.

Ways to invest in fintech

As with all sectors, there are many ways to invest in financial technology. For investors looking to get exposure to this field, a few good options include:

1. Stocks

As the lowest hanging fruit you can always invest directly in financial technology through the stock of related companies. Directly buying stocks is always a speculative investment. You can capture all the gains of a successful company, but nothing will even out losses if the company does poorly. That’s not a bad thing, just something to consider as part of your overall approach to risk management.

The key question with stocks in fintech is how much you would like to balance growth against security. Investors who are looking for strong gains can look for emerging and startup companies, especially those with new technology. Investors who would like a more stable investment can look to legacy companies like banks and credit cards. These firms all use fintech as part of their daily operations, from pay-with-a-tap to Zelle, so an investment in your bank bundles a fintech investment with the hedge of a much larger institution.

2. Mutual funds or ETFs

As with most industries, the counterpart to individual stocks would be mutual funds or exchange-traded funds (ETFs). There are several ETFs and mutual funds on the market that focus on fintech specifically, building their portfolios around both new and existing companies operating in the financial technology space. The advantage here is twofold.

First, you can take advantage of the fund’s expertise. Instead of having to research good investments in a technically complex field, you can rely on the fund’s managers to know which companies look good. Second, you get strong risk mitigation. While the fund is exposed to the sector as a whole, any given company can’t sink your investment if it goes bad.

Of course, both of those advantages are double-edged swords. While you get the fund’s expertise, you are also stuck with it. You can choose your fund, but you can’t select the individual assets that make up its portfolio. Too, the risk mitigation of a mutual fund or ETF also means that you can’t capture all the gains of a high-performing asset. You won’t take heavy losses from a bad investment, but you won’t get the outsized returns of a good one.

3. Technology

The heart of fintech is its technology, which creates a good side investment opportunity.

The next generation of financial technology will be driven by many of the same advancements making headlines in other areas. Banks are looking to use artificial intelligence to create in-app financial advisors. Big data will be used to further streamline credit and lending. Wireless and near-field technologies will continue to make electronic wallets more popular.

As new technologies emerge, many different companies will look to build them into financial products. The upshot is that you can invest in the success of these products by investing in the technology behind them. Whether through stocks or funds, you can buy into the companies that make the technology for fintech products. This gives you the chance to invest in the success of fintech itself.

Bottom line

Fintech is the financial technology sector. With companies like E*Trade, Venmo and more, this is increasingly a part of everyone’s day-to-day life and it can be a great investment opportunity, too. There are a number of ways to invest in this broad and rapidly evolving industry. The easiest is by investing in technology itself or getting stock options with a fintech company. The more common ways, however, involve choosing fintech-related investments such as shares of stock or funds.

Disclaimer – SmartAsset can be considered a financial technology or “fintech” firm. Nothing in this article is intended to apply to investing in SmartAsset, nor should this be read as a promotion of SmartAsset as a financial asset.

Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

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