Does consumer FinTech need saving from itself?

Daedalus Icaro alta nimis ambienti orbatur. Italy, published 1606. Source: Los Angeles County Fund

Sustaining innovation, regulation and entrenched business models are resulting in lower-cost digital offerings. This has benefited the consumer and helped thousands budget, save and invest better. Yet, so far the industry hasn’t changed consumer behaviour and startups face distribution and acquisition costs challenges. We need our zero to one moment.

Peter Thiel defines two types of innovations in his seminal book Zero to One. Disruptive (zero to one) and sustaining (one to many). Today, “disruption” is one of those overused terms that everyone and everything claims to be. Yet, very few people have read Clay Christensen’s book or seem to understand what Disruption Theory is and how it actually works. Most view it as a simple change or improvement of the status quo. Yet, even with this basic (incorrect) definition it’s not often understood that the change or improvement has to be at least 10X better in some metric that is of value to the target market in order to fundamentally change the game.

Metcalfe’s and Moore’s laws are the fundamental forces that have resulted in software eating the world. FinTech and the Health industry are the last two bastions waiting to be “disrupted” having lagged other sectors due to their strong regulatory oversight. Within the financial industry, regulation has an important role to ensure that all participants play within the same set of rules. Working with people’s money requires strong oversight to police bad behaviour and there are countless and constant examples of firms and individuals on the front pages of our newspapers doing the exact opposite. This means that the FCA lays very strong tracks on which the financial industry has to run. How firms should operate, how they should communicate, what their charging (revenue) models have to look like and what a big part of their cost structures (regulatory and compliance) are likely to be. The frameworks are robustly defined.

Amidst this backdrop, we constantly read about the wonders of consumer FinTech. Every quarter a few new apps launch that helps us budget, save, invest or transfer money easier. We read about London being the FinTech capital and the amount of “disruption” happening in the city Yet, the fact of the matter is that consumer Fintech has mostly been anything but disruptive. This is not to say that consumers have not benefited and that digital offerings have not iterated and improved upon existing services (sometimes significantly). However, as an industry we are much overhyped, offering sustaining innovation, but falling short of the disruptive sort.

The vast majority of consumer Fintech businesses are the end result of taking existing business models or processes and applying technology to the cost structure. Technology (mostly software today) has the incredible power to drive fixed and variable costs to zero. This has meant that new businesses can go to market with offerings at a third or a quarter of the cost of the incumbents. These startups also offer clients a far greater user experience, user interfaces and a more seamless digital service, all wonderful things for the average consumer. So we have lower costs and better online experiences, how can this be a failure?

The fact of the matter is that very few offerings have 10X’d any metric for the end user. A simple example, a better app, slicker interface and more accurate expense tracking is amazing but fundamentally most users still use their traditional bank accounts and statistically, they are more likely to get a divorce than change their bank account from one provider to another¹. On top of that, despite the adoption of many of these startups, savings and investment behaviour in the UK are still at decades lows² despite unemployment levels being at its lowest since the 1970s³. Yes, macroeconomic factors play a definitive role here and real average weekly earnings are nowhere near their 2008 peak⁴. However, we’d be hard-pressed to argue any FinTech startup has changed behaviour in how people handle their personal finances as Uber has changed transportation or AirBnB hospitality. Yes, it’s far easier to sell someone a service that meets an immediate need rather than when they retire, but one can argue that FinTech has failed to make the case of why someone should sacrifice one over the other or even care to. On top of that, the typical user profile of many FinTech apps are men between the ages of 30-50 working in business services. The industry is simply not democratising personal finance as diversely as it should be.

On the other side of this argument are the actual firms offering these services. As we already touched upon most of their business models and cost structure are fairly defined by the regulatory and business environment. For example, if we assume for a second that its possible, it would still be counter to current regulation to create a zero-fee financial advice app-driven purely by artificial intelligence. The app would have certain set costs so it would have to monetise its clients through another business model in order to exist, something that currently would face incredible pushback. Now, strong arguments can be made in why a zero-fee financial advice offering results in incorrect incentives and why the regulatory environment does not permit it, but the argument still holds. Disruptive innovation is not always just a technological change but often a disruptive business model made possible by a new technology. And business model innovation is far easier in other industries outside of financial services.

On top of the fairly set train tracks (defined cost structures), one can argue that technology is commoditising most of personal finance (curtailing revenue). One budgeting app offers a fairly similar proposition to another. This means in many sub-sectors within consumer FinTech we are in a race to the bottom in terms of fees in order to compete and gain market share. While costs are increasing with regulation. This is why many consumer FinTechs have raised huge rounds of capital and have exceptionally high customer acquisition costs. Big Banks might complain about the regulation, but it greatly benefits them as it prohibits smaller players from innovating far more rapidly. Hence why consumer FinTech is going through the big bundling at the moment in order to gain scale, drive down unit economics and reduce acquisition costs.

So is it all doom and gloom?

No, consumer FinTech is still doing a good job in slowly democratising personal finance for all. Costs are coming down and online experiences are becoming seamless. More and more apps are partnering which means we are building mesh networks where clients can harmoniously interact with a variety of providers far better than having walked into a high street bank’s office. We are only in the early stages of these changes and no doubt we’ll continue to see continued iteration.

However, for FinTech to be truly disruptive we still need to have our zero to one moment. Something that fundamentally changes business models, processes or infrastructure and uses technology to initially serve the least profitable market whilst moving upmarket (taking market share) over time or creating entirely new unserved markets. Which ultimately leads to 10X improvement over time and access for far more participants. We need to embrace the fact that personal finance could very well be free (mostly) or at least at break-even costs, which means new revenue models and disruptive innovation will be and is sorely needed.

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