How To Trade A Year Of Innovations And Looming Regulations In The Fintech Sector

Although you wouldn’t think it at first glance, 2021 was a rocky year for fintech stocks. 

Since 2020, the market has seen a rise in e-commerce spending, an uptick in digital and contactless payments and a flurry of new investor interest in cryptocurrencies (and investing in general). All of those trends continued through last year. 

But fears of interest rate hikes from the Federal Reserve and a growing sense that the world is returning to normal caused more cautious investors to start offloading their fintech stocks, whose high growth was seen as pandemic-driven and, therefore, likely to stagnate after economies reopened.

Those counter forces pulled the sector in both directions, creating some volatile movement throughout the year that would make any swing trader drool. Now, 2022 is shaping up to be a year of even more innovation—but also a year where governments start cracking down, especially in the decentralized finance space.

2022 Might Be More Bullish But Still Bumpy

Despite the pessimism of those more cautious investors, there are still massive growth opportunities for fintech companies ahead, even with economies reopening. But, as with any emerging industry (especially where technology and finance are involved), that rapid growth is likely to draw the attention of regulators looking to curb misuse or abuse of the new capabilities that fintech is making possible.

Pandemic-Driven Innovations Are Here to Stay

A lot of the digitization and innovation triggered by the pandemic are welcome changes to slower, less intuitive traditional financial services. The ecommerce wave that began as a pandemic necessity, for example, shows no signs of slowing now that economies are reopening. Consumers still want the convenience and capabilities that online shopping made possible.

Fintech innovations that made banking, investing and financial planning easier for everyday people weren’t just temporary solutions to the pandemic. They sparked a new generation of financial management tools the wide segment of consumers who want to make smarter decisions with their money but don’t have the high net worth required to access traditional wealth management services. 

The Super App Is Coming

Super apps—apps that consolidate multiple financial services into one convenient platform—are already becoming more popular among consumers who want to manage everything from one central hub. 

For most companies, meeting that demand means adding new capabilities to their own slate of services as well as partnering with other companies to create integrated tools. PayPal Holdings Inc. PYPL, for example, which launched its super app late last year, expanded in-house services beyond payments and into things like digital wallets, shopping tools and crypto capabilities. It also partnered with Synchrony Financial SYF to add banking services like bill pay and savings accounts. 

Decentralized Finance Will Remain Popular But May Face Regulation

Cryptocurrencies were as popular as ever in 2021, and there’s no sign that’s stopping this year with the Russia-Ukraine conflict putting crypto even further in the spotlight as a possible safe haven asset for hedging against volatile markets like gold.* Likewise, non-fungible tokens (NFTs), the digital collectible that everybody has been talking about (and confused by) for months, are expected to keep growing this year.

That’s especially true as tech companies like Meta Platforms Inc. FB invest heavily in metaverse¹ technology meant to bring more of our daily lives into the virtual world where NFTs² are expected to thrive.

However, the space is already facing increasing scrutiny from federal and international regulatory bodies like the U.S. Securities and Exchange Commission and the Bank for International Settlements. As its popularity grows, stricter oversight and requirements could push some of the smaller, less mainstream companies out. 

How To Trade The Fintech Sector In 2022

Fintech stocks got off to a weak start at the start of the year and Russian sanctions further upset the market as major companies like Visa and Mastercard blocked Russian banks from their networks. But a lot of opportunities for bullish turns still exist, especially as crypto markets and digital payments continue to move closer to the mainstream and fintech innovations continue to roll out.

For investors anticipating a rebound, this recent downturn in the fintech sector could be a prime opportunity. One of the best ways to trade the swings in this sector is with a thematic exchange-traded fund (ETF), rather than trading individual stocks in a sector that’s experiencing a major shakeup that could change who the dominant players are. 

To help with that, Direxion launched FNTC, its Daily Fintech Bull 2x ETF (FNTC) that tracks the Indxx US Fintech and Decentralized Finance Index (IUFDFI), in January. IUFDFI is made up of companies that derive 50% or more of their revenue from tech-driven financial services, including companies offering decentralized finance services.

The index includes a broad range of companies offering things like digital payments, personal finance software, tax software, backend payment processing, peer-to-peer lending and crowdfunding. The top 10 stocks in IUFDFI are:

• Intuit Inc. INTU - 9.73%
• MasterCard Inc. MA - 9.29%
• Visa Inc. V - 8.58%
• American Express Co. AXP - 8.45%
• PayPal Holdings PYPL - 7.17%
• Fidelity National Information Services FIS - 4.02%
• Capital One Financial COF - 3.78%
• Fiserv FISV - 3.69%
• Block SQ - 3.11%
• Global Payments GPN - 2.38%

This makes it a useful way to gain indirect exposure to crypto markets since digital payments companies are so heavily weighted in the index. Companies like PayPal and Block, for example, both offer crypto buying and selling capabilities to its users. 

With 2x leverage, every trade you make is magnified 200% so you can make the most of the many upswings that 2022 is likely to see. That does mean that losses are also magnified, though, so you still have to be responsive and ready to exit a trade that isn’t going the way you anticipated. Keep an eye on regulatory news, especially inside the United States, and be ready to trade on news of new tech, new apps and new partnerships that could come out this year.

*Source: https://www.cnbc.com/2022/03/04/russia-ukraine-war-cryptocurrencies-and-sanctions-in-the-spotlight-.html

¹ Metaverse: A virtual-reality space in which users can interact with a computer-generated environment and other users.

² Non-fungible tokens (NFTs): A digital asset that represents real-world objects like art, music, in-game items and videos.

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