The state of consumer fintech

Marc Andreessen in an interview recently said the following about finance: “We can reinvent the entire thing”.

How has tech been changing finance? That’s what this piece will be about, in specific reference to consumer finance, which I think really has started to “unbundle” as Marc talks about in his interview.

I think technology impacts consumer finance in three main ways:

1. It increases access to information thereby allowing consumers to make better decisions
2. It reduces the friction in conducting transactions where friction can be time or effort
3. It lowers the fees/rates on transactions by serving as a cheaper middle man.

But to show the above, I’ll have to break down consumer finance which by itself is very broad into its sub categories. To do so, I’ll start with a basic equation from Macroeconomics 101:

Y = C + S

which when it refers to consumers means that Income = Consumption + Savings.

A couple things to note with this equation, at least for the purposes of this piece:

• Savings more or less represents the same thing as investment
• Consumption can be greater than income, in which case savings is negative (i.e, that person borrows money rather than invests).

I think all consumer fintech products fall in one of two categories based on the equation:

1. Products that change how individuals consume/spend
2. Products that change how individuals save/invest/borrow

I’ll now dig deeper into each of the categories to see what the major activities involved are and how technology is impacting them. (Hint: at the end, we end up with a categorization as in the image below)

An overview of the consumer fintech industry

Consumption and Spending

Consumers tend to consume in two main ways: (1) spend money on purchases/bills etc and (2) send money to friends and family (this might not sound like consumption, but usually this transfer is associated with some “transaction”).

There are three main areas of consumption then which technology can disrupt:

1. Sending money to friends/family
2. Spending money on purchases/bills (i.e, paying)
3. Tracking spending

Sending Money

Technology has impacted this activity in three main ways: by making it simpler, cheaper and quicker. Some of the major players in this space which have made sending money to others a better experience include:

• Venmo which lets users send money to friends
• Pay with gmail which allows users to send money to their friends through email
• Square cash which allows users to send money to friends
• Paypal which allows users to send money to any phone number/email address
• TransferWise which lets users send money internationally for only 0.5% in fees.
• Coinbase which lets users send bitcoins to others

Spending money

Spending money is essentially the saying as paying. The technology products that fit in this category have disrupted the space largely by reducing friction and enabling smoother payments, and saving the consumer time. Some of them include:

• Apple Pay which enables consumers to pay with their phones through NFC
• Google Wallet which also enables consumers to pay with their phones through NFC
• Square Order which allows customers to order from local cafes and pay through their phone
• Paypal which allows customers to pay through the app at participating stores
• Mint bills which allows users to pay their bills

Although this more or less represents the bucket of payment companies, it is important to note that these refer to the products that change how consumers pay and not those products that make it easier for businesses to accept payments (e.g, Square/Stripe would not fall in this category, but Square Wallet/Order would)

Tracking spending

Another activity which relates to consumption is for a consumer to learn about how they consume so that they can make better decisions. Technology has impacted this space by increasing consumer’s access to information and helping them understand it better through budgeting and tracking apps. This tends to be known as the “personal finance” space.

Some of the companies in the space are:

• Mint is the clear leader in the space, having been around since 2006 and helps users track and manage their income and expenses.
• Level money is a mobile app that helps users budget and spend smarter
• Billguard helps users track spending and prevent their cards from fraud.

What happens when you combine more than one of these three activities involved in spending? Simple is one example — it’s a bank that budgets automatically and lets the user easily transfer money to others, and purchase things too (though still through a credit card).

Savings and Investment

As I mentioned earlier, savings can be positive or negative (borrowing). The two categories which emerge naturally from that definition are

1. Investing
2. Borrowing

Investing

I like to think about technology products and investing on a spectrum of degree of automation, but that’s a whole other concept that I’ll leave for another post.

Technology impacts investing in two main ways: (1) increasing access to information (2) making it cheaper to invest (reduced fees)

Some products that help increase access to information include:

• Openfolio which enables users to see what stocks others are buying and selling and how they are performing
• Stocktwits which is a social network for investors and traders
• Angellist which enables investors to determine which products are seeking investment
• Angel list Syndicates which allows users to “back” certain angels and get access to their deals

Some products that make it cheaper to invest include:

• Robinhood, which enables zero commission stock trading.
• Betterment which is an automated investing service that charges between 0.15%-0.35% in management fees
• Wealthfront which is an automated investing service that charges 0.25% in fees above $10k in assets managed.
• Personal Capital which is an automated investing service that charges between 0.5% to 1% in fees.
• Nutmeg which is an automated investing service in Europe which charges between 0.3 and 1% in management fees.
• Acorns which automatically invests spare change from everyday products into a diversified portfolio

Borrowing

Just like investing, technology impacts borrowing in two main ways: (1) increased access to information, and (2) making it cheaper to borrow by making alternative funds available (either through better measurement of creditworthiness due to data or by better connecting individuals that need funds with those that have them)

Increased access to information

This tends to be products that either:

• Help users understand the loan options available to them so that they can get the best rate. An example of this is Lendingtree, which allows individuals to compare loan offers from competing banks instantly.
• Help users track their credit score so that they have access to better interest rates in the future. Examples include Credit Karma and Credit Sesame

Access to alternative forms of funds

This includes those products that allow individuals to borrow money from sources other than banks, such as from peers. These products enable users to obtain loans at better rates normally because they use a system of creditworthiness that includes data other than the traditional credit score used by banks. Some notable examples include:

• Lending Club, a peer-to-peer lending company for personal loans, which recently IPO’ed
• Prosper which is another peer-to-peer lending marketplace
• Zopa which is a peer-to-peer lending marketplace in Europe
• Affirm which allows individuals to borrow money to purchase certain products
• Kickstarter where creators can get funds for their creations from backers

Closing Thoughts

The above was a broad overview of consumer finance in terms of the main activities involved, which companies are disrupting it and how.

One thing that becomes clear is that while some companies have multiple products that target different activities involved in consumer finance, there’s no one company that does all of this. For example, there’s no tech company that allows users to both invest in stocks and bond and also take loans. Similarly, there’s no company that both gives users short term credit (credit cards) and also let them invest in the markets. Simple was an all-in-one bank, but even then that focused on the consumption side of banking, allowing for easy sending, spending and access to spending information, but it did not allow users to invest in the markets or take loans. This is how consumer banking is being “unbundled” — a bank is being broken up into its key activities, and products are emerging which do those key activities better/cheaper than banks.

I’ll end with the three main ways technology seems to be disrupting the consumer finance industry:

1. Giving individuals better access to information (about spending, credit, investing) so that they can make better and more informed decisions
2. Enabling individuals to borrow, invest and transfer money at lower rates than traditional financial institutions
3. Reducing the friction and improving the experience in conducting transactions (where friction could be time, effort, clicks, etc.)