Already there has been a huge amount invested in fintech in 2016, with investors funding close to $9 billion in January and February alone. It is a sector of innovation that shows no signs of slowing down, with companies tackling every part of the financial infrastructure, from savings and lending to credit and insurance to payments and money transfer.
If 2015 was the year of the great “Bank Unbundling,” with new companies dissecting the consumer banking experience to offer specialized services, it was also a year that saw the emergence of a new landscape of financial influencers taking a seat at the table.
Technology companies are increasingly vocal about their role in the finance ecosystem. It is telling that we are seeing organizations spring up like Financial Innovation Now, a policy group composed of companies including Amazon, Apple and Google — a hint that big banks are likely to be facing increasing pressure not just from upstart companies, but large, well-recognized brands with the reach and funding to offer a comprehensive suite of financial services if (but more likely when) they choose.
So what does all this mean for consumers? We’ve identified what we believe to be the next wave of innovation shaping the future of personal financial services.
Processes and services that promote efficiency and reduce waste
Financial innovation has a huge opportunity to reduce wasted time and money through more efficient processes.
For some instances of this we see technology having the opportunity to work with legacy providers to improve customer experience. Processes like securing a mortgage, or finding the right insurance policy, have historically been slow, opaque and painful for consumers.
New platforms, like our portfolio company Policy Genius, provide an intuitive, quick and transparent search process for consumer insurance products, helping drive new business for traditional insurers in under-utilized products, like life insurance, while providing a great discovery experience.
Technology enablers with a specific focus, like startup Matic, have the opportunity to work with banks and lenders to provide a scalable and modern process for securing a mortgage by bringing old-school communication and document management online.
For other kinds of financial waste, it is likely that the new innovations will be in direct competition with legacy institutions. A perfect example of this is overdraft fees. It’s estimated that through major banks alone, American’s pay around $30 billion in overdraft fees each year, a number that was estimated to be as high as $38 billion in 2011 — while the median transaction amount that triggers an overdraft claim is as low as $36.
The most exciting thing about financial innovation is the potential breadth of its impact.
New banks — like Chime, which is reported to have more than 75,000 open accounts and counting — are offering consumers an alternative to traditional banks, without the fees. Banking increasingly incorporates an online/mobile point of contact; from a Federal Reserve survey on mobile banking in 2015, of those respondents that have bank accounts, 39 percent used mobile banking in the last 12 months, up from 22 percent in 2011. This will further reduce switch costs for those interested in a bank alternative.
Rethinking credit: New approaches to risk…and rewards
Overall statistics indicate that credit awareness and viability are improving in the U.S. The average credit score in the United States is 695 (April 2015), a record high, and higher than the average pre-recession score of 688 in 2005. Within that average, there are also encouraging trends — 800+ credit scores are at 19.9 percent versus 16.9 percent in 2005, and 12.5 percent are below 550 versus 14.4 percent in 2005. This speaks to an awareness of the importance of building and maintaining good credit history among consumers, but it is only part of the picture.
Millennials, the group that has become the focus of many of the recent consumer fintech innovations, now comprise roughly 25 percent of the U.S. population, as well as being the most diverse major population group, with about 44 percent identifying as part of a minority race or ethnic group. They make up 25.2 percent of the credit population, but on average have worse credit scores — 28.1 percent score between 300-579, versus 19.1 percent of the total population, while far fewer score 740+ (22.4 percent versus 40.7 percent of the total population).
Novel approaches to risk analysis and customer loyalty are needed to address this diverse group.
The consistent criticisms of traditional credit scoring systems — they are rigid, static, limited in the picture they paint of financial well-being and closed off to many who find it confusing and challenging to build credit — are tied to a belief that the risk assessments of today are still rooted in an old paradigm of limited information. Increasingly, the immediate accessibility to a variety of data sources is leading data-driven approaches to valuing and underwriting risk for lenders.
These are not new ideas. Peer-to-peer lenders, for example, have been for years utilizing social data to extend individual credit. What these approaches have lacked, however, is the kind of robust scale to create confidence. We believe the timing is right for risk assessments 2.0, which will be about using the insights from these new approaches — data around which social metrics are relevant, default rates, etc. — to craft better, more scalable products that reach more consumers.
A prime example of this is German startup, Kreditech, which is able to offer loans to customers based on a dynamic algorithm that factors in 20,000 data points evaluating risk. These companies are helping accelerate the understanding of credit risk beyond the FICO score.
For existing credit users, how do banks and new entrants drive loyalty and engagement? One area that we see becoming increasingly influential is customization and personalization of rewards programs. Card-based transactions have taken over paper money; it’s likely that in the near future, mobile money will create for many the possibility of eliminating the wallet altogether.
Without the physical necessity of a credit card limiting choice — people love credit cards, but not enough to carry around 15 to maximize their possible rewards — there is a huge opportunity to create highly personalized financial products that drive customer loyalty. Why should two card holders with completely different habits and lifestyles have a standard set of rewards and incentives?
AI applications in financial innovation will continue to improve consumer financial services across a variety of verticals. Popular apps like Digit have created consumer value by automating and optimizing personal savings, and the next wave of innovation will focus on creating a full suite of services utilizing AI to drive financial health and literacy. Imagine a personal financial concierge who automatically helps you optimize your spending, savings and investment based on your own personal habits and goals.
The next wave of consumer financial services will mean more efficient, more fair and more valuable services for people.
As the nature of work in the U.S. continues to evolve, there is a need for financial products that evolve with it. As marketplace investors, we see the growth of 1099 labor and the need for innovation to service this new type of work. Smart financial products that learn what spending is for work versus personal, and track expenditures accordingly, has huge value for tax preparation. Budgeting, facilitated payment and a variety of other unique challenges will be addressed by tools that utilize data and learning.
Innovating for the under-banked
In the United States there is a huge and diverse market of underserved groups. It is estimated that 28 percent of the U.S. population is either un-banked or under-banked, and for those operating outside the traditional banking system, it can be costly and inefficient. There are a variety of reasons for this; some very complex and some as simple as geography. For example, in the South Bronx, there is one bank branch per 20,000 people, compared with one bank branch per 3,000 people in Manhattan. This dichotomy is even more pronounced in rural areas.
For those without bank accounts, to cash a check can cost as little as a couple of dollars at stores like Walmart. But more typically, a 1 percent fee on top of a flat $5-$10 fee is charged; so for example, a $15 fee on a $1,000 check. Perhaps you don’t think this is a lot in the grand scheme of things, but it’s certainly a lot compared to the $0 fee you are likely charged to cash your checks at your bank.
Another dominant force in the lives of the underbanked, the payday lending market, is estimated to be as large as $46 billion, with ultimate fees often exceeding the amount borrowed. Startups like Finova Financial, which offers an alternative to traditional car-title Loans, are tapping into this potential market by offering improved, flexible and more affordable services. As smartphone penetration increases, so does the opportunity to create innovative consumer services for the under-banked.
These are complicated systems, and each one of the trends discussed here deserves much more attention than is possible in this format. The most exciting thing about financial innovation is the potential breadth of its impact, and it’s our belief that the next wave of consumer financial services will mean more efficient, more fair and more valuable services for people.