Fintech is often viewed as the future of financial services, but for investors looking to access this theme via exchange traded funds, there are some considerations to be made.
First, the future is now. Amid low interest rates and rising loan loss provisions, the S&P 50 Financial Services Index is lower by 20.3 percent over the past year while the largest fintech ETF is higher by 2.2 percent over the same period. Second, investors should understand what some of the primary drivers of the fintech revolution are, including digital wallets and mobile payments.
Third, in the current environment, investors ought may want to avoid those ETFs heavy on peer-to-peer and internet-based lenders due to rising household debt and deteriorating credit quality. Those looking for access to the right fintech themes may want to have a look at the ARK Fintech Innovation ETF (ARKF), a fund with substantial digital wallet exposure.
Even if you’re not familiar with the phrase “digital wallet,” there’s a good chance you know about the companies driving this part of the fintech spectrum and you may even be using the products. Think PayPal’s (PYPL) Venmo and Square’s (SQ) Cash App.
Essentially, a digital wallet is a financial services provider rooted in smartphone technology, offering features such as trading, mobile payments and cryptocurrency.
Digital Wallet Growth
In the domestic digital wallet space, Venmo is the entrenched king on the throne while Cash App is the upstart competitor. ARKF is one of the few ETFs offering above-average exposure to both stocks as the duo combine for about 15 percent of the fund’s weight.
Regarding Venmo, it’s user growth is slowing, but that’s not a knock because transactions among existing customers are soaring.
“After more than doubling from 10 million to 23 million in the year ended December 2016, the number of monthly transactions hit 140 million in December 2019,” according to ARK research. “During those three years, transaction growth, hovered between 80% and 100% on a year-over-year basis.”
In its own right, Cash App is booming, thanks in large to factors as simple as word-of-mouth and viral marketing. As the chart below indicates, Google search trends for Cash App have been catching up to Venmo, confirming the former’s credibility in the digital wallet space.
Courtesy: ARK Investment Management
Fuel for the Cash App fire is another often overlooked catalyst: the unbanked. Not everyone banks at a traditional venue, like a Bank of America or Wells Fargo. For any number of reasons, millions of American’s don’t use such standard institutions and many of them count on Cash App as their bank of choice.
“The Cash App’s US geographic concentration is in the south,” according to ARK. “In 2018, several reports highlighted that Square’s Cash App was especially popular with low-income consumers in cities like Atlanta where unbanked rates are high.”
Speaking of Banks…
The point about standard banks and the unbanked is relevant to the ARKF thesis for another pair of reasons. First, as ARK research notes, a traditional bank spends about $1,500, on average, to acquire a single customer, but a digital wallet company’s average cost of customer acquisition is peanuts at $20.
Second, markets aren’t yet appropriately valuing digital wallet customers. A traditional bank’s customer is worth $3,650, using traditional metrics, but a Cash App or Venmo is valued at a fraction of that, indicating that ARKF is a growth idea, it may actually be undervalued.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.