Fintech is in the midst of a golden age of investment and innovation. According to KPMG and CB Insights, investments in fintech startups doubled between 2014 and 2015, to $14 billion. However, comparatively little of this money has been focused on the $138 billion market opportunity to disrupt alternative financial services in the United States. This lack of focus is damaging America’s financial health. So why hasn’t fintech done more to meet this vast market need?
Part of the reason is that many of the design methodologies that have become common practice in the last decade — the “lean startup” ethos, rapid prototyping and rigorous a/b testing — are much harder to deploy in consumer financial services, where regulations and legal requirements are often interpreted as limiting innovation.
As Max Klein, co-founder and CEO of Float, a company that helps consumers manage their cash flow put it, “We’ve proven we can attract and engage users. That’s easy compared to getting set up with a bank partner to actually service those accounts.”
Those entrepreneurs who do attempt to tackle the financial services industry face the added burden of convincing a bank, business partners and investors that their new model is not only viable, but also legal and scalable.
It’s this last part that is particularly challenging when many investors, who are often wealthy, have very little awareness of this critical market need. “It was easier to get onto the Steve Harvey show and pitch my product to millions of potential customers than it is to get some VCs to understand that this is a real market,” says Nicole Sanchez of eCreditHero, a company that helps consumers correct inaccuracies on their credit reports.
Beyond the more obvious deterrents, traditional accelerator models are often not sufficiently long enough — or focused enough — to give founders the time, resources and insight required to launch products and see them scale. This very dynamic was behind 500 Startups’ recent launch of a financial services-focused cohort, and Techstars’ widely respected partnership with Barclays.
Unique challenges exist in fintech that simply don’t exist in other markets.
For those that raise capital successfully, the path from Series A through growth rounds gets no less difficult as entrepreneurs find themselves dedicating significant time and money to legal and regulatory compliance, often rebuilding business processes in order to scale. Unique challenges exist in fintech that simply don’t exist in other markets. In financial technology, in order to build the product so it can work, you have to work with the incumbents, with whom — by definition — you are competing.
CFSI and JPMorgan Chase launched the Financial Solutions Lab in 2015 to provide additional support for this ecosystem. Our first program, launched in June of 2015, sought companies who had solutions that could help Americans better manage household cash flows. One year in, the companies in the Lab have added well over 100,000 new users and raised more than $80 million in additional capital. Most importantly, consumers are benefiting: Across the user base of our companies, savings rates are up, credit scores are increasing and debt loads are declining.
This year we hope to follow on that success by supporting a new class of startups and nonprofits that are building the future of financial services. In particular, we’re interested in products that help consumers weather financial shocks — things that can help consumers anticipate and manage the unexpected and expected shocks that all of us encounter, whether it’s a car repair, job loss, trip to the ER or long-term illness.
Think about it: Every car, eventually, breaks down. So why don’t we have insurance products or more accessible savings/credit instruments that anticipate this eventuality? Durable goods purchases — things like a washer and dryer — are another example. There aren’t great products that help people plan and purchase these expensive items, especially considering how little savings the average American has.
There is great potential in insurance — private disability insurance, job-interruption products, even helping consumers better plan and manage more conventional insurance. These are all areas of life where one could imagine a tech-based solution, and one where some solutions exist.
Cumulus Funding is pioneering the use of Income Share Agreements, so consumer payments go down when a big shock happens. Products like Activehours and FlexWage allow consumers to pull their earned income forward. Meanwhile, the team at APA Save is helping consumers stay on top of bills and more quickly pay off debt -– so they have more of a cushion to absorb life’s shocks. There is no shortage of ideas and capable entrepreneurial teams.
The same trends that are powering the explosion of consumer technology — mobile engagement, improved data analysis and new customer acquisition models — are also breaking down some of the historical barriers to entry in financial services and enabling completely new approaches to engaging and serving customers. A better future of consumer financial services is possible — one where providers compete on the ability of their products to improve the financial health of their consumers.
But for that reality to come to fruition, all of us in fintech — financial institutions, regulators, founders and investors — need to recognize the financial health problem American consumers are facing and work together to realize the innovation that’s possible.
Can we do it? That’s the $138 billion question.