3 Fintech Stocks That Could Win Big Over the Next 5 Years

Source: Shutterstock

Fintech is one of the hottest buzz words in the market. Say “fintech stocks”, and suddenly, investors get excited.

But what exactly is fintech? It is a broad term, and essentially, fintech is just the morphing of technology and financial services. In other words, fintech stocks are the class of companies which are using technology to innovate in the traditional financial services space.

Seems pretty straight forward, right?

Right. And because the fintech space is relatively nascent, everyone is winning. Over the past year, GLB X FUNDS/FINTECH THEMATIC ETF (NASDAQ:FINX) is up 40%, versus a mere 12% gain for the S&P 500.

So far, then, betting on the whole fintech sector has been a winning strategy. But over the next several years, this strategy might not work as well. As the nascent fintech field matures, competition will intensify and there will be a clear separation of winners and losers.

Who will the winners be? Nobody knows for sure. But here is a list of my 3 favorite fintech stocks to own for the next several years:

Fintech Stocks for the Next 5 Years: Square Inc (SQ)

square stock

Source: Via Square

My favorite fintech stock is Square Inc (NYSE:SQ), owing to the company’s robust exposure to and dominant positioning in secular growth markets.

At its core, Square is a pure-play on the secular growth in mobile, card and digital payments. The company has emerged as a go-to enabler of non-cash payments for merchants of all sizes.

Why? The company’s commerce solutions are strikingly simple, convenient, and easy to use.

It used to be that accepting digital payments at some locations was a hit or miss due to the complexity of it. But today, as opposed to requiring several moving parts to support digital payments, all retailers need to complete essentially any transaction is a phone and Square technology.

Because of this enhanced convenience and the massive shift away from cash, Square has benefited from explosive growth. Revenues rose by more than 50% last quarter.

This big growth isn’t going anywhere anytime soon. Payments processing is a $26-billion-and-growing market. With the addition of ancillary markets like small-business loans and food delivery (Square’s subscription and services businesses), Square believes its total addressable market is around $60 billion.

Revenues this year are expected to be just over $1.4 billion. Clearly, the growth runway is quite big and long for SQ stock.

The only thing to worry about here is valuation. SQ stock does trade at a rather rich 130-times forward earnings multiple, and the stock’s latest move up to $60 does imply some cryptocurrency hype baked into the valuation. But while near-term valuation friction remains a concern, longer-term, SQ stock will grind higher as cash becomes a thing of the past.

Fintech Stocks for the Next 5 Years: Paypal Holdings (PYPL)

Source: Shutterstock

Much like Square, Paypal Holdings Inc (NASDAQ:PYPL) is another fintech stock that is a pure-play on the transition away from cash. But whereas Square enables non-cash payments for retailers in the brick-and-mortar format, Paypal is more of an e-commerce play on non-cash transactions.

Not surprisingly, as cash payment volume has decreased, e-commerce sales have surged. After all, you can’t pay with cash online. Thus, digital payment methods are the only options in the red-hot e-commerce space.

Paypal is behind one of the most robust and widely used digital payment methods in the world. Thus, considering how digital payments and e-commerce are inextricably linked, Paypal will remain a strong growth stock so long as e-commerce sales volume grows. E-commerce sales growth in the U.S. has only accelerated over the past year (from 15% to 16%), meaning that the e-commerce growth narrative isn’t showing any signs of being knocked off course any time soon.

As a result, the Paypal growth narrative looks quite promising in a multi-year window.

As far as the stock is concerned, the valuation is actually quite reasonable for the fintech space (35-times forward earnings) and against the backdrop of 24% revenue growth and 29% earnings growth last quarter.

Overall, then, PYPL stock looks like a good buy here and now.

Fintech Stocks for the Next 5 Years: Amazon.com (AMZN)

Source: Shutterstock

This one is a bit trickier than the previous two fintech stocks.

Square and Paypal are traditional fintech stocks that are pure plays on the transition away from cash-less payments and towards digital payments. Indeed, their whole business models are based on that transition.

But Amazon.com, Inc. (NASDAQ:AMZN) operates as an e-commerce and cloud giant. While both of those components are big-growth components in their own nature, they don’t inherently fall under the fintech umbrella.

But make no mistake. Amazon will lever its massive e-commerce business to make a big jump into the fintech space.

There has been a lot talk about this recently. The idea is that Amazon has a whole bunch of consumer purchasing data, the sum of which can be used to offer optimized and highly-personalized banking services. Moreover, the company has over 100 million Prime members, presumably implying that more than 100 million consumers frequently shop on Amazon, so an in-house payment method work make sense for uniformity and convenience sake.

Even further, among tech companies, Amazon ranks highly as a company that consumers would trust with their money.

In the big picture, it seems like Amazon launching a fintech service is a matter of when, not if. This fintech component will be yet another huge growth driver alongside the company’s already red-hot e-commerce and cloud growth drivers. Put all three of those together, and it is easy to see not only why AMZN has a big valuation, but also why that valuation could be even bigger.

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If you do business with organized crime – Be Careful!

When we last checked, since 2009 the top banks had been fined a total of $204 billion. Bloomberg now reports,“Wells Fargo’s $1 Billion Pact Gives US Power to Fire Managers”:

“The settlement covers issues in Wells Fargo’s auto-lending and mortgage units. The bank revealed last year that it had forced unwanted insurance on customers who took out car loans….”

Fines are just part of the cost of doing business:

“Still, investors appeared relieved…as shares advanced 1.8 percent to $52.44…the best performer in the 24-company KBW Bank Index. The settlement should remove one overhang from the shares, especially since the penalty isn’t as bad as some analysts had anticipated….” (Emphasis mine)

Firing executives, levying fines and no jail time will not solve the problem. Does the justice department think “Next man up” doesn’t apply to organized crime?

A week later, American Banker reports, “Yet another Wells scandal; House moves closer to passing dereg bill.” Quoting from the Wall Street Journal:

“…. Just when you thought all of the various Wells Fargo scandals had been settled, or at least known about, comes word that the Labor Department is investigating the bank for allegedly pushing holders of lower-cost 401(k) plans it manages…pressuring them into buying the bank’s in-house funds.”

Meanwhile, Congress is “moving closer to passing joint legislation that would roll back parts of the Dodd-Frank law and ease regulations on small and medium banks.”

In 2016 I asked, “Should Trump get elected and try to rein them in, are the banks that confident they have bought enough members of Congress to protect their gravy train?” Maybe we have the answer.

In February, MarketWatch updated the scorecard:

“Banks have been fined a staggering $243 billion since the financial crisis.”

Add another $1 billion to Wells Fargo – they are still pale in comparison to the top three.

Where the power is

Forbes reports, “The Five Largest US Banks Hold More Than 40% Of All Deposits.” (The top five are JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bankcorp. Approximately 6,500 banks make up the remainder)

“Total deposits for the five largest U.S. banks have grown by 4.3% over the last twelve months – above the industry-wide growth figure of under 4%. This is a commendable feat by these banking giants…. This represents a share of more than 40% of the…. U.S. deposit market and this figure is likely to trend even higher as the largest banks continue to outperform the overall industry.

…. With the Fed hiking benchmark interest rates…the interest rate environment has finally begun showing signs of improvement. This, in turn, has tempered the deposit growth rate over recent quarters. (Emphasis mine)

…. JPMorgan’s particularly strong growth figure of 7% over the last few quarters helped it become the largest bank in the country…surpassing Bank of America, which has held that position for more than two decades….”

Two banks paid almost 50% of the fines for illegal and unethical activities – yet they remain the two largest banks in the country. Who says crime doesn’t pay?

American Banker reports, “2017 reputation survey: Banks avoid the Wells Fargo drag”:

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“While Wells Fargo’s image is in tatters – and will likely remain so for some time…. The 2017 survey revealed that the banking industry overall extended its multiyear reputation recovery among U.S. consumers, achieving a reputation score that qualified as “strong” for the first time since the Survey of Bank Reputations began in 2011.

Simply put, banks are acting more responsibly with customers – no longer processing transactions in a way that will more quickly trigger overdrafts, for example. …. And these efforts are paying off in higher reputation scores.

Of the 39 banks evaluated in this year’s survey, more than half of them received “excellent” marks from their existing customers, up from just under a third of the banks in the 2016 survey.

…. This year (Wells Fargo’s) score went into free fall, plunging to 48.6, by far the lowest of any bank. (A score under 50 is considered “weak.” Scores between 60 and 69 are “average;” between 70 and 79, “strong;” and above 80, “excellent.”)”

Overall Reputational Ratings
Bank Rating
JPMorgan 69.2
US Bancorp 67.6
Citibank 65.4
Bank of America 57.2
Wells Fargo 48.6

When I went to school 70-80 earned a C, 60-70 got a D, and anything below received an F.

The top five banks rank “average” or below.

Looks more like D’s and F’s to me!

JPMorgan, Citibank, Bank of America and Wells Fargo were fined over $150 billion for illegal activities while paying their executives billions in bonuses along the way. As they have no fear of being jailed; expect their behavior to continue.

Reuters recently reported, “Largest US banks still ‘too big to fail’: Minneapolis Fed study”. If they falter they can count on the taxpayers to bail them out once again!

Why would anyone do business with any company that has no regard for the law or their retail customers? I don’t get it!

There is a better way!

Deposit growth has slowed, now they must compete for deposits. Might they consider treating retail customers fairly? Don’t bank on it! (pun intended)

When handling retirement money, bank professionals are (theoretically) held to the fiduciary level of responsibility – meaning they must put their clients’ interests ahead of their own. Expecting the big banks to behave ethically is asking them to perform an unnatural act. Don’t be fooled! They have shown us their true colors!

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Be a good shopper

Shortly after Jo and I were married, I began looking after her mother’s (affectionately called grandma) financial affairs. Grandma held Certificates of Deposit (CD) in several local banks. Over time, Bank of America gobbled up most of these banks.

I received a letter about a maturing CD – they would automatically roll it over at a rate that seemed low to me at the time (4%). I called the bank. The local manager said, “Since you asked, I’m authorized to raise the rate by ½%.” I told her to close out the CD and send us a check.

She was shocked! I asked, “How many other elderly seniors, who need the money, are you ripping off?” She said she would mail the check and promptly hung up. While ½% more may not sound like much, it was 12 ½% increase above the first amount. How many years had grandma been getting lower than market rates? That’s not looking after your good, loyal customers.

When I deposited the check in grandma’s brokerage account I told her broker what happened.

Get with the times!

At the time, most seniors shopped CD rates in the paper and bought them locally.

Today you can go online and buy CDs through your broker. You can quickly compare rates all over the country. I found dozens of CDs paying more than the local banks. While price fixing is illegal (wink-wink!), banks in Florida were ripping seniors off!

Wolf Richter wrote a sad, but hilarious article, “I Asked my Wells Fargo Branch about CDs with Higher Interest Rates. This is What Happened Next”:

“Competition for cash is returning for the first time in 9 years, and banks hate it.”

The article seemed so extreme I decided to check it out myself.

I found current CD rates on the Wells Fargo website. I was required to enter my zip code. Are they lower in FL or AZ? Why should that make a difference? If I want to lend them money, I want the best rate.

Here are the “Standard CD rates”:

If I bought a $10,000 Wells Fargo CD at my local branch, I would receive 0.15% interest for the year. Oh boy! I’d get $15 in interest, before taxes.

I then checked my online broker and was quickly shocked:

With the click of a mouse, I could buy a 13-month Wells Fargo CD paying 2 1/4% interest, payable MONTHLY! That is 15 times more than the rates on the Wells Fargo website. No wonder they get bad grades, they are ripping off their local customers.

As interest rates rise, CDs will offer better rates to those who take their time and shop. There are over 6,000 banks to choose from. Internet shopping has never been easier, and that includes borrowing and/or lending money.

Get rid of your savings account

Most accounts are paying a fraction of 1%, not even close to keeping up with inflation. My broker offers one-month CDs paying about 10x the interest of a cash account. Ladder them properly and you can have one mature each week!

I don’t do business with any of the criminal banks. If you do business with them, put them in a competitive environment and demand the best deal. They don’t know how to compete on a level playing field.

They make famous bank robber, Willie Sutton look like a piker. The banks have turned into the robbers! At least Willie got thrown in jail. Take your time and protect yourself from being ripped off!

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