Should You Forget Big Banks and Bet on a Fintech Instead?

For decades, big banks were the center of the U.S. financial system, with JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) in the lead. But financial technology, or fintech, companies keep pushing into the same turf with digital-first platforms, aggressive pricing, and simpler ways to borrow, save, and invest.

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That creates a real investor question: Do you stick with traditional bank stocks for stability or lean into fintech for potentially better returns during the next several years? The truth is it's not an either-or call for everyone, and the trade-offs are clearer once you separate durability from upside.

Why traditional big bank stocks are still a safe bet

Traditional banks are still among the safest bets today. The biggest U.S. banks, like JPMorgan Chase and Bank of America, have diversified revenue streams, decades of market leadership, and a solid customer base that will be tough to crack.

In fact, both JPMorgan Chase and Bank of America have price-to-earnings (P/E) ratios of about 15, a common metric for gauging whether a stock's valuation is high or low relative to its earnings. The lower, the better.

Now, a P/E of 15 is not necessarily cheap relative to the sector's median of 13, but it still looks reasonable for companies of their size and financial strength.

Overall, the case for big banks boils down to stability, reasonable valuations, and attractive shareholder returns.

Why fintech stocks could be the smarter growth play: SoFi, Block, and Affirm stocks

But consistent and reliable stocks don't always translate to explosive growth -- and that's the key argument for fintech.

Companies like SoFi Technologies (NASDAQ: SOFI), Block (NYSE: XYZ), and Affirm (NASDAQ: AFRM) are trying to capture segments of the financial services sector that banks have traditionally dominated. The sheer excitement around the underdog story is sometimes enough to drive share prices higher. In all three cases, their stock prices have doubled or tripled within the past year.

The problem, however, is that these are speculative growth stocks, so the upside comes with considerably more risk. In fact, all three companies have lost some of those gains, with only Block trading near its recent 52-week high.

But that doesn't discount the fact that these smaller fintech players are reinventing banking. SoFi is a particularly interesting example because it has expanded well beyond its original student-loan business. It now offers personal loans, investing, banking, credit cards, and other financial products through a single platform.

Fintech companies' portfolios are starting to look like traditional banks', but with a digital-first approach that can make it easier to attract today's customers.

The risks of investing in banks over fintech

Of course, neither option is risk-free.

For banks, one of the biggest concerns is credit quality. They're much more sensitive to interest rates, and increased regulation can constrain how aggressively they deploy capital.

Fintechs face a different set of problems. Many still lack the profitability and scale of established banks, making their stocks more vulnerable when investors become less willing to pay a premium for future growth.

Competition is another major issue. Big banks have the resources to offer their services through digital platforms. Fintech companies, meanwhile, don't always have the capacity to open a physical branch. That creates a clear advantage for banks that fintech can't immediately replicate.

Big banks or fintech stocks: Which is the better buy?

So, which one should you spend your hard-earned money on?

For conservative investors focused on stability, income, and shareholder returns, big banks like JPMorgan and Bank of America remain best in class.

But investors willing to accept greater volatility in pursuit of potentially higher growth may find more upside in fintech stocks such as SoFi, Block, and Affirm.

Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Rick Orford has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block and JPMorgan Chase. The Motley Fool has a disclosure policy.