Summary

• Fintechs becoming banks creates demand for essential technology infrastructure.
• Invest in infrastructure providers supplying core processing and compliance software.
• This approach targets the entire sector's growth, not just single fintechs.
• Infrastructure stocks may offer stable, recurring revenue from long-term contracts.

The Real Money in Fintech Isn't Where You Think It Is

So, PayPal wants to be a bank. I must admit, I nearly choked on my tea when I read that. Not out of surprise, mind you, but at the sheer, unadulterated predictability of it all. Every disruptive little tech upstart eventually gets tired of playing in the sandbox and decides it wants to wear a pinstripe suit and sit at the grown ups' table. It’s a tale as old as time.

But for an investor, this isn't a story about PayPal. Frankly, I couldn’t care less if they succeed or not. The real story, the one that should have you leaning in, is about who stands to profit from this entire charade. It’s the classic gold rush dilemma, isn't it? You can either gamble on a plucky prospector striking it rich, or you can be the chap who sells him the shovels, picks, and durable trousers. I’ve always preferred selling the trousers.

The Great Fintech Headache

Becoming a proper, regulated bank is an almighty faff. It's not just about having a slick app and a trendy logo. Suddenly, you’re drowning in a sea of compliance, regulatory reporting, and fraud detection. You need systems that can process millions of transactions without a single penny going astray, all while keeping the watchdogs at the Bank of England happy.

These flashy fintechs, built on whizzy code and venture capital dreams, are utterly unprepared for this. Their internal tech is designed for customer acquisition, not for the mind-numbing, box-ticking reality of core banking. So, what do they do? They have to buy the plumbing from someone else. And that, my friends, is where the opportunity lies.

Forget the Prospectors, Back the Plumbers

Instead of trying to pick which of these newly minted banks will actually thrive, I find it far more sensible to look at the companies providing the essential infrastructure. Think of firms like Fidelity National Information Services or Jack Henry & Associates. They aren't household names, and their work is about as glamorous as installing a new boiler, but my word is it essential.

They provide the core processing platforms, the back office software, the digital nuts and bolts that allow a financial institution to function. When a company like PayPal decides to become a bank, these are the doors they come knocking on. They need the whole kit and caboodle, from loan origination systems to anti money laundering software. It’s an infrastructure goldmine, built on the ambitions of others. To me, this is the very definition of a sensible long term play, and it forms the core idea behind a basket I've been looking at called Fintech Banking Infrastructure Stocks for 2025.

The Beauty of Boring, Sticky Revenue

What I find most appealing about this is the business model. It's wonderfully, reassuringly boring. Once a bank integrates one of these core systems, ripping it out is like performing open heart surgery on the business. The switching costs are monumental. This creates incredibly "sticky" customers and predictable, recurring revenue streams that consumer facing apps can only dream of.

Of course, no investment is without risk. A sharp economic downturn might slow the queue of fintechs applying for charters, and tech spending could dip. But the fundamental need for this digital plumbing isn’t going away. Banks, new and old, simply cannot operate without it. It’s a non negotiable cost of doing business, which gives these infrastructure providers a defensive quality that is rather comforting in today's choppy markets. So let others chase the next big thing in payments. I'll be over here, quietly investing in the plumbers. It’s rarely exciting, but it’s often profitable.

Deep Dive

Market & Opportunity

• The evolution of fintech companies into full-service banks is creating high demand for essential banking infrastructure.
• Fintechs require sophisticated technology for core processing, loan handling, and meeting regulatory requirements when they obtain banking charters.
• The investment opportunity focuses on the "picks and shovels" providers supplying technology to all chartered financial institutions, rather than individual fintech companies.
• There is surging demand for regulatory technology, including compliance software, risk management systems, and fraud detection.

Key Companies

• Fidelity National Information Services (FIS): Provides core banking platforms that manage account processing, transaction clearing, and regulatory reporting for financial institutions.
• Jack Henry & Associates Inc. (JKHY): Offers comprehensive banking software solutions for managing back-office operations, including customer onboarding and loan origination.
• nCino Inc (NCNO): Provides a cloud-based Bank Operating System that integrates customer relationship management, loan processing, and regulatory compliance.

Primary Risk Factors

• Economic downturns can negatively impact bank formation rates and technology spending budgets.
• Regulatory uncertainty can delay bank charter applications and technology implementation projects.
• The sector faces potential disruption from new technologies and changing economic cycles that could impact infrastructure demand.
• All investments carry risk and you may lose money.

Growth Catalysts

• The trend of fintechs applying for bank charters creates sustained, long-term demand for infrastructure services.
• Complex regulatory requirements for banks make specialised technology for compliance, anti-money laundering, and verification essential.
• The subscription-based model of banking software creates predictable revenue and high customer switching costs for providers.
• Established providers benefit from natural barriers to entry due to the high reliability, security, and compliance standards required in banking.