The ARK Fintech Innovation ETF (ARKF) is higher by almost 55% year-to-date, leaving old school financial ETFs in the dust as fintech companies continue forging into new market segments.
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 pushing new boundaries, Square – ARKF’s top holding – is among the fintech names leading that charge.
Why It's Important to ARKF
Square could move into direct deposits is the latest sign of fintech companies, including plenty of ARKF components, moving into areas previously dominated by traditional banks. For example, Square is also playing a significant role in processing payroll protection program (PPP) loans. Additionally, the company also procured a banking charter in Utah.
As ARK Invest analyst Max Friedrich points out, a new frontier for Square are the loans known as payday loans. Square is beta testing this offering via is fast-growing Cash App platform, offering loans of $20 to $200 to users in some regions.
This is a potentially lucrative opportunity for Square because, as Friedrich notes, Americans take out $27 billion worth of payday advances every year, incurring $4 billion in fees in the process. The industry, often referred to as predatory lending, is ripe for disruption. Payday lenders usually charge borrowers excessive interest rates, meaning going well into three digits. Additionally, the lenders love to roll loans over and keep borrowers indebted and living off of loans.
Friedrich notes a traditional payday loan could charge a borrower $15 for every $100 borrowed plus another $15 per $100 on a two-week extension. Conversely, Square can make the same loan for $5 per $100 loaned and a 1.25% compound interest rate on a one-week extension.
Bottom line: a loan that costs a $200 loan at a payday store costs the borrower $230, but Cash App can knock that down to $210.
“With its this new product, Cash App provides consumers with a cheaper and more humane alternative to expensive payday loans. Cash App does not have the high infrastructure costs and capital intensity as payday lenders,” says Friedrich.