“Fintech” Explained

Q What are “fintech” companies? — D.R., Tacoma, Washington A The moniker “fintech” is a combination of the words “finance” and “technology”; fintech businesses develop and/or use technology for financial operations. That’s a wide arena, encompassing companies involved in contactless payments, robo-advising, mobile banking, peer-to-peer lending, blockchain technology, cryptocurrencies, brokerage services and more.

For example, PayPal is a fintech company, processing credit card payments; its subsidiary Venmo is one as well, facilitating personto-person payments on mobile platforms. Square is another: You may know it for the little credit card processing gadgets that many small businesses attach to smartphones in order to accept credit card payments, but it has grown to offer more than that, including a small business lending platform.

Fintechs are disrupting traditional financial businesses, with newer, faster and better financial services. Many have already rewarded shareholders handsomely, but more than a few are trading with high valuations now — so tread carefully.

Q

Can you explain what a company’s “capital allocation” is? — G.S., Pocahontas, Arkansas A

A company’s capital allocation is how it spends its money, often with the goal of making the company bigger and healthier. A company can, for example, use its money to build more factories, hire more workers, pay down its debt, pay its shareholders a dividend, buy back some of its shares, buy another company, invest, save for a future opportunity and so on. Companies will generally do multiple things with available funds.

Ideally, companies should spend their money in the most productive ways. That means not overspending on an acquisition, and not buying back shares when they’re overvalued. When a company’s capital is not allocated effectively, shareholders suffer.