The move to digital wallets is on pitting fintech giants PayPal (NASDAQ: PYPL) with its Venmo and Square (NYSE: SQ) with its Cash App against each other for financial services app dominance. Among ETFs, the ARK Fintech Innovation ETF (NYSEARCA: ARKF) is the premier avenue for playing the digital wallet theme.
ARKF invests in equity securities of companies that ARK believes are shifting financial services and economic transactions to technology infrastructure platforms, ultimately revolutionizing financial services by creating simplicity and accessibility while driving down costs.
“ARK defines digital wallets as smartphone-enabled financial ecosystems that provide access to a variety of services including wealth management, insurance, instant payments, and crypto assets,” according to a recent report by the asset manager.
Fintech allows financial firms to leverage cutting edge technology to reduce costs, improve decision making and risk controls, remove middlemen, and enhance customer experiences. A thematic approach includes investments that stand to benefit from structural change driven by demographic and technological changes.
When it comes to digital wallet exposure, ARKF is indeed dominant. The ARK fund allocates nearly 11% of its weight to Square, one of the largest such weights to that stock among all ETFs. ARKF’s PayPal allocation is close to 4%.
Regarding Venmo, its user growth is slowing as Cash App pilfers market share, but Venmo user-to-user transactions are soaring.
“Despite the falloff in its user growth, Venmo’s peer-to-peer transactions have increased consistently since 2016,” according to ARK. “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. During those three years, transaction growth, as shown above, hovered between 80% and 100% on a year-over-year basis before decelerating to a record low 60% last December.”
Looking at Cash App, that’s rapidly becoming one of the dominant names among financial apps, offering investors startup-like growth.
“Cash App is the second largest peer-to-peer payment application and digital wallet in the US,” according to ARK. “Initially a side project born out of a Square hackathon, today the Cash App is one of Square’s most important assets, contributing roughly 12.5% to its revenue. Operated like a startup, Cash App has a distinct culture but enjoys the benefits of Square’s global scale.”
Boding well for the long-term ARKF thesis is that digital wallet users should be valued at the same rate as traditional bank customers, but that’s currently not the case. Plus, it’s cheaper for Venmo and Cash App to acquire new customers.
“To acquire a new customer, banks spend up to $1,500, more than seven times the $20 that digital wallets spend, primarily because they lack organic peer-to-peer payment network effects,” notes ARK.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.