5 Top Fintech Startups to Invest In
Financial technology (fintech) is one of today’s most exciting industries. For years, the financial industry was desperately in need of innovation. Now, in the past two decades, there’s been a surge of new fintech startups. These companies offer sleek services for payment processing, mobile banking, P2P lending/payments, as well as traditional financial services.
There are dozens of reasons to consider investing in fintech startups. Here are just a few:
- The industry has tons of room to grow. These days, cash is digital and your cell phone is your wallet. These are long-term tailwinds that probably aren’t changing anytime soon.
- They provide a valuable service. Lots of fintech companies provide much easier alternatives to existing services. For example, sending money with Venmn/Cash App is much easier than using cash. When companies provide value, it means consumers will come running.
- It’s a regulated industry. The financial industry is loaded with regulations. In general, regulation is not good for business. However, this regulation is actually a good thing for fintech startups. First, it helps consumers trust companies that are offering new services. It also helps investors believe in the long-term viability of new business models. Compare this to investing in companies like Airbnb or Uber, which are still fighting legal battles.
With that said, let’s take a look at the five top fintech startups to invest in. For full disclosure, I have small positions in SoFi and Coinbase.
Top Fintech Startups
No. 5 SoFi Technologies (Nasdaq: SOFI)
You might remember SoFi as one of my top Super Bowl stocks. SoFi is a sleek, do-it-all financial app that offers dozens of services. Its core business is making loans but it also has solutions for investing, insurance and money management. It also owns the rights to SoFi Stadium in Los Angeles. Recently, SoFi received its own banking charter.
This banking charter will allow SoFi to hold consumer deposits and use them to fund loans. According to SoFi’s CEO, “Our new bank charter will be a game-changer for us in differentiating our SoFi Checking and Savings offering in the marketplace, and improving our pricing and selection across Lending.” Essentially, this banking charter will make SoFi’s core lending business more profitable.
The biggest bull case for this fintech startup is honestly its user interface. SoFi just makes banking much, much easier for consumers. This might not sound like a big deal. However, it’s exactly what Uber did with taxis. Is riding in an Uber really any different from riding in a taxi? Nope, it’s still just a car. But is calling an Uber easier than a taxi? Yep. This simple advantage made Uber worth $60 billion.
Sofi currently has 3.5 million members. In Q4 2021, it added 523,000 new members. This was YOY member growth of 87%. It also added 905,000 new products, up 105% YOY.
No. 4 Block Inc (NYSE: SQ)
Block Inc (formerly Square) started as a point-of-sale payment processing company. It sold tablets and dongles that merchants could use to process credit cards. Over the past few years, it has evolved into much more. Now, Block also owns Cash App, Afterpay, Weebly and Tidal.
- Cash App is a popular money-sending app, similar to Venmo.
- Afterpay is a Buy Now, Pay Later service.
- Weebly is a web hosting service.
- Tidal is Jay-Z’s subscription music service.
This makes Block a bit of a jack-of-all-trades fintech company. Additionally, users can buy cryptocurrencies through Cash App. Square’s CEO, Jack Dorsey, is an avid crypto enthusiast. He also recently stepped down from his position as CEO of Twitter to focus on running Block. Due to this, be on the lookout for Block to rapidly expand its crypto offerings.
No. 3 Coinbase (Nasdaq: COIN)
Speaking of cryptocurrency, Coinbase is one of the only publicly-traded cryptocurrency exchanges. It’s also one of the top fintech startups to consider investing in. Despite being a relatively young company, Coinbase is already printing money. In 2021, it brought in $7.84 billion in revenue. It also reported a total net income of $3.62 billion. This is a net profit margin of 46%. That’ll work.
For reference, Coinbase already brings in more annual revenue than Airbnb and Doordash. It’s also already profitable, while most recent IPOs are not. Notably, Airbnb, Doordash and Uber are all still searching for profitability.
On top of that Coinbase is releasing an NFT marketplace at some point in 2022. As of November 2021, about 2.5 million people have joined the waitlist. This has the potential to become another massive revenue stream for this already profitable crypto company.
The entire crypto community received very good news recently. Joe Biden signed an executive order urging the Federal Reserve to examine making its own cryptocurrency. Investors are taking this as a sign that the U.S. government views crypto as an opportunity, not a risk. Cryptocurrencies and crypto-related stocks jumped on the news.
No. 2 Affirm (Nasdaq: AFRM)
Affirm is one of the largest Buy Now, Pay Later services. This is a fairly new industry that allows customers to finance their online purchases. For example, instead of paying $150 for new shoes, Affirm will let you pay $50/month over the course of three months.
The reason that Affirm is one of the top fintech startups is because its business taps into human nature. Shopping literally releases dopamine into your central nervous system, according to Harvard. In this sense, it’s no different from eating dessert. People love to buy things, but not everyone has an income that allows for incessant spending. This is why companies like Affirm are set up for success.
Affirm helps customers get what they want today, not tomorrow. Additionally, if you finance your purchase over 3 months or less then you pay 0% interest. This is a very tempting offer that will encourage many customers to use Affirm.
One thing that sets Affirm apart is its portfolio of partnerships. It partners with over 102,000 merchants including Walmart, Target, Neiman Marcus. For a young company like Affirm, this is a staggering number of partnerships. If I sat here and named every single store that I could think of, I’d get nowhere close to 102,000.
Fintech Startups No. 1 Robinhood (Nasdaq: HOOD)
Robinhood is an easy-to-use investment platform. It’s best known for being the first company to pioneer commission-free trading. However, it’s also one of the most controversial fintech startups.
This financial services company was founded in 2013. For most of its history, retail investors adored it. It made investing easy and introduced thousands of people to the stock market. Robinhood also branded itself as “democratizing finance for all”. As its name implies, it wanted to help the little guy fight back against big hedge funds. Everything was going well until early 2021.
Robinhood was a key player in the GameStop short squeeze. Many retail traders used the app to orchestrate a short squeeze against major investment funds. In the middle of the squeeze, Robinhood restricted trading on GameStop and other stocks. This led to severe user backlash, lawsuits, and heavy scrutiny from regulators.
After this event, Robinhood’s payment for order flow model came under fire. Payment for order flow is what allows Robinhood to offer zero-commission trading. However, it’s also an incredibly secretive practice. Even if it’s not illegal, Robinhood’s platform is now viewed as untrustworthy.
Nothing has really changed in regards to Robinhood’s sleek investment app. It still offers a great product. But, moving forward, the company will need to win back the trust of its consumer base.
I hope that you’ve found this article valuable when it comes to learning about the top fintech startups to invest in! As usual, please base all investments on your own research.