“You have a great UI, but this is never going to work: people don’t trust startups with their money”
This was a comment often heard during the presentations of the two following financial startups during the Tecrunch Disrupt conference in New York: Plantly and Betterment. It appears that most(?) people in the industry seem to believe these skeptics/realists (depending on your point of view) are right. In the FastCompany article on BankSimple a journalist noted the following:
Online personal finance has proven to be a difficult business to master. Witness the fall of FiLife last month. Mint.com has not seen a significant increase in unique visitors since it sold to Intuit for $170 million in September. Thrive was sold to Lending Tree in February of 2009 in a rumored fire sale. And Geezeo dropped its consumer facing service in January. And while online banking works, for the most part, no one raves about innovation in that space.
On the other end, during the Techcrunch Disrupt conference I saw these guys presenting:
Skeptics have it wrong, there is something great happening in the financial services industry. Plantly may not be the best company, may not succeed, may not have a crazy business model but here are two guys (one somewhat related to Finance) building something in their “garage” to solve one of their issues, making investment decisions understandable to them through technology.
Everyone knows the famous Bell Curve of the technology adoption lifecycle
On the left side of the graph you find the Plantly, Banksimple creators; it is probably an obvious statement but innovation comes from entrepreneurs trying to solve their or others pain points. The fact that we see more and more people on that left side of the curve in financial services innovation makes me believe that there will be new viable key disruptive companies in financial services soon.
These last weeks have been busy with events, announcements and new startups! Great material for future posts but this one is on markets and how new exchanges have become an interesting field in financial services innovation. Recently Exchanges have had a poor reputation. The flash crash has highlighted the multiplicity as well as complexity of stock markets. But since its creation in the 13th century, there is no better system that allows liquid, transparent, risk free (default on transaction) exchange of virtual goods. It’s therefore not surprising to see that innovative start-ups in financial services are trying to create exchanges to address the transaction needs of new goods.
If we look at what is happening in the investment management sector, perhaps we can extrapolate a possible evolution in P2P Lending.
The development of electronic trading and discount electronic brokers such as E*Trade, have granted a better access to the stock markets. People are now able to trade most products and markets, without having to use a broker, financial advisor, or other intermediary. But trading successfully requires good financial knowledge and time, which most people may not have.
Companies such as Kaching or Covestor, allow investors to follow the investment of “managers” (other investors for Covestor or qualified investment managers for Kaching). A reputation score (performance, followers) helps investors select their managers. A “management fee” is paid to the lead investor for its services. This fee should be less than for a regular mutual fund because most costs outside of management do not apply.
This reintermediation strategy could be applied to P2P lending. For some strategies, finding the right borrower, minimizing write down risks and maximizing return requires as much time and knowledge as investing in stock markets. Following the strategy of a successful lender for a fee could be an interesting offer.
Addendum: as mentioned by Tuomas Talola in the Comments: the basis of such a website exists at http://www.ericscc.com/ where you can review the performance and portfolio of each Prosper Lender. I would be interested to know how Prosper share that information and the rational behind it.
On Bankervision, I read this great post Using people as glue. It is often the case, when you move from a legacy system to a new system that you have to face the struggle of moving your data and user experience from one to the other. As described by James Gardner:
You know that, even if you mandate a new systems approach, you’re always going to have to spend piles of money doing legacy integration, because that’s where the data is. It is data on which the business relies, so it has to be available, and, obviously, the job of moving it all, and the business rules and all the rest, to a new system in one go is far to large and politically charged. And then, you wake up one morning and realize on top of everything, you have the "die or retire problem". Everyone who knows the guts of legacy is either dead or about to retire. You have to do something about legacy, so you sigh, and sign up for truck loads of integration anyway. (emphasis added)
Gardner proposal is to use people to do these tasks instead:
What about, for example, using people as glue? Why can’t they look up data in both systems and perform appropriate updates?
Now, I’m not suggesting that anyone put people back into systems permanently. But as temporary, good enough, solution while something better is worked out, surely it makes sense to at least consider the option.