Retail banking has gone through a digital transformation over a decade or two. The advent of mobile banking has been the key driver of thinning foot traffic at physical bank branch locations, resulting in the perpetual closure of bank branch offices as more consumers migrate to online and digital banking.
All the major blue-chip banks have invested heavily in fintech to provide digital banking services. If they haven't acquired banking fintech, they have built their fintech divisions to retain customers from switching to more technology-enabled banks or adopting new technology. Mobile banking has become the most widely used method for basic banking services like checking balances and bill pay.
The best fintech bank accounts usually pay the highest annual percentage rates on interest.
Mobile apps have become mainstream when handling the most common banking tasks. While retail banks have been bolstering their digital offerings and access, financial technology (fintech) firms have disrupted the banking industry by offering neobanking services. These neobanks operate online, offering personalized services, better interest rates and fewer fees. All of these benefits have accelerated their popularity.
Fintech banks are on the cutting edge of digital innovation and continue to grow their services, offerings and customers. Don't get left behind on this secular tailwind; look at the five best fintech banks to invest in now.
Overview of fintech banks
Fintech banks are usually chartered financial institutions that utilize technology and digital innovation to provide financial products and services to consumers. Fintech banks, also called neobanks, are digital only and mobile-first, used through their mobile app. Since they don't have physical branch offices and are only accessible online, digital banks have lower overhead expenses than their traditional counterparts.
It allows them to offer higher savings interest rates and lower fees than conventional banks with branch office locations. To get a bank charter, top neo banks must follow regulatory and compliance standards like conventional banks.
Since they are a relatively new form of banking, many critics argue that digital bank regulation is less stringent than those faced by traditional retail banks. Retail banks are taking a cue from the fintechs and continuing to expand their mobile apps and digital transformation to stay competitive. Many digital banks provide services that regular banks don't or won’t, like stock and cryptocurrency trading, robo advisors and a wider assortment individual retirement account (IRA) investments for a maximum of $250,000 per account. Remember that some major fintechs offer banking services under a partner bank's charter.
Evolution of banking in the digital age
The evolution of banking in the digital age has been nothing short of remarkable. From traditional brick-and-mortar institutions to the rise of fintech, the landscape of financial services has shifted.
For centuries, banks have served as physical pillars of economic stability. People could deposit their hard-earned money and seek loans to buy homes, start businesses and enhance their lives. However, as the world became more interconnected and technology advanced, cracks began to show on the surface.
Enter fintech. With the rise of mobile apps and online platforms, customers gained access to various banking services. The convenience and efficiency fintech banks offered led to a migration away from traditional brick-and-mortar institutions. As foot traffic dwindled, physical bank branches began to close.
Fintech banks quickly attracted customers with higher interest rates and lower fees.
Meanwhile, mobile apps have become essential to check balances, transfer funds and make payments. The days of waiting in long lines and filling out paperwork at a physical bank were over.
As fintech banks gained popularity, they also introduced innovative features. Cryptocurrency trading, robo advisors and personalized financial services became the norm. With 24/7 customer support available through their mobile apps, customers could finally get help at their convenience instead of being put on hold for hours by busy call centers. The customer-centric approach of fintech banks created trust and satisfaction.
One advantage of a fintech bank over a traditional bank is its ability to leverage data. Through algorithms and machine learning, they could analyze vast amounts of information about their customers' financial habits and provide personalized recommendations.
Fintech banks also invested heavily in cybersecurity measures, gaining a measure of trust from customers that traditional banks had a hard time equaling. Of course, retail banks soon began investing in their own digital transformation. They revamped their mobile apps, streamlining and introducing new features.
Meanwhile, fintech banks collaborated with e-commerce platforms, ride-sharing services and even social media networks. This move allowed customers to seamlessly manage their finances while engaging with other companies.
Governments and regulatory bodies also adapted. They recognized the importance of fintech banks in financial inclusion and economic growth and adopted supportive regulations encouraging innovation and consumer protection.
As fintech banks continued to expand and attract more customers, they became major players in the financial industry. In the future, as they continue to innovate and introduce new products and services, they'll keep challenging traditional banks to step up their game.
Key criteria for evaluating fintech banks
When choosing a fintech bank, focus on essential factors like fees, security, user experience and available services.
- Fees: Unlike traditional banks that often charge hefty fees for various services, fintech banks are known for their lower fee structures. This includes reduced or eliminated ATM, overdraft and monthly maintenance fees. Evaluate the fee structure to determine if it works for you.
- Security: Look for banks prioritizing strong security measures, such as multi-factor authentication, encryption and fraud detection. Ensure that the bank is insured by the Federal Deposit Insurance Corporation (FDIC) so you can protect your deposits.
- User experience: Look for user-friendly mobile apps and intuitive interfaces that make navigating and accessing services easy. Read reviews from other customers to get an idea of the overall user experience.
- Available services: Some fintech banks offer advanced features like stock trading, cryptocurrency investments and robo advisors. If these services align with your financial goals and interests, consider a bank that offers them.
Why invest in fintech banks?
Fintechs are on the cutting edge of banking technology. As more consumers migrate towards online and digital financial services, digital banks continue to increase users and popularity. The key benefits of fintech banks are 24/7 access, convenience and time savings.
Fintech banks appeal to the millennial and Gen-Z demographic native digital consumers and nomads. Like pulse dial phones, beepers and Sony Walkmans, many Gen-Zers and Gen-Alpha will probably never know what it feels like to step into a bank branch office. Each new generation is getting more acclimated to digital banking as physical banking falls further in the rearview mirror. Forward-thinking investors who want to stay at the forefront of innovation may consider investing in fintech banks.
5 best fintech banks to invest in now
Here's our list of the five best fintech banks to invest in now in no particular order.
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Name
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Ticker
|
Market cap
|
Specialization
|
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Sofi Technologies
|
SOFI
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$7.18 billion
|
Student loans
|
|
Block
|
SQ
|
$40.44 billion
|
P2P payments
|
|
PayPal
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PYPL
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$70.96 billion
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Digital payments
|
|
Robin Hood
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HOOD
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$9.26 billion
|
Stock trading
|
|
Discover Financial
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DFS
|
$24.34 billion
|
Credit cards
|
While digital banking is a new realm, these companies have been around for longer than most digital banking startups. Many have already become mainstream as they diversify their financial services to include banking products transforming themselves into neobanks.
The best fintech bank is a subjective matter. SoFi and Discover are two pure fintech banks.
However, SoFi tends to offer more services, including student loans, brokerage services, banking products and many insurance products through partnerships. Sofi offers homeowners and cyber insurance with Lemonade, auto insurance with Gabi, life insurance with Ladder, and identity theft protection with Identity Force. Its brokerage services allow for stocks, crypto trading, artificial intelligence (AI) powered robo advisors and IRA accounts. With its growing services and affluent customer base, Sofi could be in line as the best online bank and best neobank.
SoFi Technologies Inc.
SoFi Technologies Inc. NASDAQ: SOFI may sound familiar to you if you are a football or music fan. SoFi Stadium in Irvine, California, seats 70,240 people indoors and hosts NFL games and live concert events with major performers like Taylor Swift, Metallica and Beyonce. Named after SoFi Technologies, a fintech that offers an all-in-one mobile app and online platform providing student, personal, mortgage and investment products, its name is also short for "social finance."
The company was founded in 2011 as a lending platform offering student loans. Its strategy grooms students early in their careers to use their finances. The company offers banking products like no-fee checking and savings tools.
It grows with them after college, providing personal loans and mortgages while helping their money grow with investment products. Investment products include robo-advisors, individual retirement accounts (IRAs) and brokerage accounts to invest in stocks.
SoFi is a one-stop shop for millennials and Gen-Z users getting started on their career and financial life journeys. SoFi attracts an exceptionally high-income user base; the average income of a SoFi customer is $160,000.
They are usually young, college-educated individuals with high income and credit scores. The average SoFi customer is a 34-year-old professional with a bachelor's degree or higher and a 746 credit score.
Student loan repayments resuming after a three-year moratorium should help boost its bottom line. The company targets profitability by fiscal 2024, though its net income is still uncertain.
Learn more about SoFi Technologies analyst ratings and price targets on MarketBeat.
Block Inc.
Block Inc. NASDAQ: SQ, initially called Square Inc., named after its point of service and digital payment processing service. It changed its name to Block Inc. after growing many ecosystems under its umbrella.
Block comprises the legacy Square payments segment but has grown its Cash App division to offer many financial services to its users.
The company received its banking charter in March 2020 from the FDIC, marking its entry into the banking industry. Square was the first major fintech company to receive a banking charter and paved the way for the neobanks. The charter enabled it to offer consumer financial services like a debit card, FDIC-insured checking accounts, peer-to-peer (P2P) funds transfers and payment processing through Cash App.
Cash App doesn't provide interest-earning savings accounts. It does offer stock, exchange-traded-funds (ETF) and Bitcoin trading when you open a Cash App Investing brokerage account. Square Capital offers business loans to qualifying businesses based on card sales. Square makes customer loans and takes repayment directly out of daily sales, a less risky way of providing loans since the borrower needs to have already established a sales history with Square.
Qualified individual borrowers can also take small personal loans through the Cash App Borrow feature, which provides cash advances. Borrow limits the short-term loans to $200 with a 5% fee and 1.25% finance charge.
Square offers a small interest-bearing business savings account and offers. Block acquired buy-now-pay-later firm Afterpay, which allows its users to pay for products in installments with partnered merchants.
Learn about Block analyst ratings and price targets at MarketBeat.
PayPal Holdings Inc.
PayPal Holdings Inc. NASDAQ: PYPL is one of the most recognizable fintech in the world. It doesn't have a bank charter but offers many financial services, including working capital loans and credit cards.
The company pioneered instant electronic payments and transfers when transferring money from a bank required multiple days, and wire transfers took hours and contained a hefty fee.
PayPal enabled users and businesses to send money to each other within minutes, as long as both parties used a PayPal account. The company expanded its user base in over 200 countries, enabling instant cross-border transfers. The company collects a fee for each transaction, playing the middleman without risking its capital since the accounts had to be pre-funded to send funds.
PayPal rolled out its PayPal Savings account that pays 4.3% annual percentage interest (APR). However, it's important to note that PayPal expressively states it's "not a bank." It partners with Synchrony Bank to provide select basic banking services. Users have to use a PayPal account to use PayPal Savings.
PayPal Working Capital provides personalized business loans based on historical PayPal sales. It charges a fee for the loan and collects repayment from PayPal payments made to the borrower. The borrower can choose what percentage of sales they want PayPal to collect on each transaction. PayPal has mentioned that it may consider attaining the banking charter.
Robinhood Markets Inc.
Robinhood Markets Inc. NASDAQ: HOOD is an online brokerage disruptor that ushered in the age of zero-commission stock trades. Robinhood's entry into stock trading caused other discount and online brokers to adopt zero-commission stock trades to keep customers from switching. The company has been adding neo bank services to bolster its offerings. Robinhood has no banking charter but partnered with FDIC-insured banks to provide some services. It offers brokerage services from commission-free stock, options trades, cryptocurrency trading and IRA accounts.
It offers a cash management account, which allows users to earn interest on the cash in the account, direct deposit, bill payment and ATM access through a Robinhood Visa debit card.
The Robinhood Gold subscription provides:
- Level two screens
- Margin trading
- Extended hours trading
- Access to $2 million of FDIC insurance on deposits
The company reported topline growth of 29% year-over-year (YoY) in its Q3 2023 earnings report but is still losing money.
Learn more about Robinhood analyst ratings and price targets on MarketBeat.
Discover Financial Services
Discover Financial Services NYSE: DFS owns the Discover credit card and has diversified into many banking services. Discovery Financial Services owns Discover Bank, which offers online savings, checking, money market, certificates of deposit (CDs) and IRAs.
The savings account advertises that it pays five times the national savings average. Savings accounts have no monthly maintenance, insufficient funds, deposit items returned or stop payment fees. Its checking account also has a cash-back debit card that customers can utilize along with checks. Deposits are FDIC insured as Discover Bank is chartered and regulated. Discover Bank is a neobank with no branch offices, as everything is done online and digitally.
Learn about Discovery Financial Services analyst ratings and price targets at MarketBeat.
Future trends in fintech banking: What to expect
Future trends in the fintech banking sector will revolutionize the industry and shape our banking choices in the coming years.
One of the biggest trends on the horizon is the rise of decentralized finance (DeFi). DeFi aims to disrupt traditional banking systems using blockchain technology to offer transparent and decentralized alternatives to traditional financial institutions. You'll be able to access a wide range of financial services through smart contracts. Lending, borrowing and investing can all take place without the need for banks. This has the potential to reshape finance completely.
With DeFi, borrowers can access loans directly from lenders, cutting out the middleman. This eliminates the need for credit checks and extensive paperwork, making borrowing more accessible to a wider audience.
Interest rates are determined by the market rather than financial institutions, allowing for more competitive rates. Traditional investment tends to come with high subscription fees and barriers to entry. But with DeFi platforms, anyone can participate in decentralized markets and earn passive income through yield farming and liquidity mining. Smart contracts ensure transparency and security, giving investors peace of mind.
Another trend gaining momentum is open banking. This is the practice of sharing financial data securely between different financial institutions and third-party providers. Instead of logging into multiple banking apps or websites, you can use a single platform that pulls in data from all your accounts. This makes it easier to track your spending, budget and save money. It also promotes competition and innovation because fintech firms can build services on top of existing infrastructure.
We'll also see the integration of AI and machine learning (ML) in fintech. These technologies can enhance the customer experience, streamline operations and improve risk management. AI-powered chatbots and virtual assistants can dole out personalized financial advice and assistance, making banking more accessible. ML algorithms can analyze vast amounts of data to detect patterns and make accurate predictions, helping banks identify potential fraud or assess creditworthiness.
As technology advances, so do the threats posed by cybercriminals. Financial institutions will invest heavily in advanced security measures to protect data. Biometric authentication, like fingerprint or facial recognition, will become more common. Quantum computers also have the potential to break traditional encryption methods. However, they also offer the opportunity to develop new encryption methods to resist these attacks.
Expect the emergence of digital currencies and central bank digital currencies. These will provide faster cross-border transactions, cutting out the middleman and reducing costs. With CBDCs, governments will have more control over their monetary systems while offering more financial security to the unbanked.
Finally, personalized financial services will be everywhere. Leveraging customer data can allow companies to provide highly tailored financial products and services. They'll analyze individual spending habits, income and goals through advanced algorithms and machine learning. This, in turn, will lead to personalized budgeting tools, investment recommendations and loan options, enabling people to make more informed financial decisions.
Fintech: Its early years
The FDIC doesn't offer $2 million insurance, only up to $250,000 on deposits. Many fintech banks have promoted a $2 million FDIC insurance program in the wake of the regional bank scare in 2023, as many well-known regional banks saw their stock prices crumble.
Fears of potential insolvency increased after the sudden collapse of Silicon Valley Bank and Signature Bank. Incidentally, the platforms offering $2 million FDIC insurance don't have banking charters but a network of partner bank connections using brokered deposits. The FDIC provides up to $250,000 deposit insurance per depositor per bank. If you have five accounts at one bank that exceed $250,000 total, the FDIC only insures up to $250,000.
Brokers like Robinhood have a network of partner banks that act as intermediaries, opening up deposit accounts of up to $250,000 per bank for their customers, up to eight banks. Eight banks, each covering a $250,000 FDIC deposit account, totals the $2 million FDIC insurance coverage promoted.
Fintech banking is in its early years with much more runway. With the growth of digital banking services and the race to deliver cutting-edge technology, fintech banks can be a good long-term investment for risk-tolerant investors. Unlike their blue-chip counterparts, most fintech bank stocks don't usually pay a dividend. Be sure to look at the fintech banks list in this article.
FAQs
Here are answers to some frequently asked questions.
Which is the best fintech bank in the world?
The best fintech bank is a subjective matter. SoFi and Discover are two pure fintech banks. However, SoFi tends to offer more services, including student loans, brokerage services, banking products and many insurance products through partnerships. Sofi offers homeowners and cyber insurance with Lemonade, auto insurance with Gabi, life insurance with Ladder, and identity theft protection with Identity Force. Its brokerage services allow for stocks, crypto trading, artificial intelligence (AI) powered robo advisors and IRA accounts. Sofi could be in line as the best online bank and best neobank with its growing services and affluent customer base.
What banks are using fintech?
All the major blue-chip banks have invested heavily in fintech to provide digital banking services. If they haven't acquired a banking fintech, they have built their fintech divisions to retain customers from switching to more technology-enabled banks or adopting new technology. Mobile banking has become the most widely used method for basic banking services like checking balances and bill pay. The best fintech bank accounts usually pay the highest annual percentage rates on interest.
Is investing in fintech banks a good long-term investment?
Fintech banking is in its early years with much more runway. With the growth of digital banking and the race to deliver cutting-edge technology, fintech banks can be a good long-term investment for risk-tolerant investors. Unlike their blue-chip counterparts, most fintech bank stocks don’t usually pay a dividend. Be sure to take a look at the fintech banks list in this article.
Before you consider SoFi Technologies, you'll want to hear this.
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