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Rod Ebrahimi is co-founder at ReadyForZero.com, an online financial program that helps Americans tackle debt. You can follow him at @innovatebig.
Even though financial services is among the most profitable industries in the world, the existing regulatory systems, technical infrastructure and deep-rooted incumbents make it difficult for new entrants to innovate.
Whether you are moving money in new ways like mobile payments company OboPay or disrupting long-standing business models like peer-to-peer lender Lending Club, there are technical and regulatory roadblocks. Unlike the open APIs supporting consumer Internet products like Facebook, financial services infrastructure isn’t easy to build upon or extend.
Fortunately, though, there is a lot of excitement surrounding new opportunities within financial services.
So what does the “future of money” look like and what is driving innovation?
Customers are more trusting and demanding (both good things).
Traditionally, large financial services companies had to spend millions to acquire and serve their customers directly. Call centers and expensive media buys were the only way to stay competitive. Now customers use online and mobile tools to do a lot of their important financial work, including but not limited to signing up for new financial products with little or no human interaction. They demand simple ways to access their finances and expect real-time information all hours of the day. As a consequence, people have become even more comfortable inputting and accessing sensitive personal data online — a good thing for startups.
Companies like Pageonce, for example, prove how a good user experience – created by a great UX design and graphic design — can help set skeptical users at ease and make collecting personal information easier. Power and control is shifting to customers, a growing general trend within financial services. Less consumer skepticism means we will see more opportunities for direct-to-consumer models like credit-score tracking service CreditKarma that are a win for both consumers and financial institutions; we hope to see a lot more of this.
Increased trust leads to significant privacy and security concerns.
Because customers are demanding increased access and control of their financial data, companies need to store and transmit more sensitive information in new ways. This raises unique privacy and security issues that can be challenging, particularly for a nascent financial services startup. Simple things like ensuring that no customer data is accessible to employees while at the same time promptly addressing customer support requests can be extremely challenging. Financial services startup Blippy addressed a similar issue shortly after launch wherein users’ credit card numbers were accidentally exposed publicly online (credit card numbers were essentially search-able using Google). Blippy responded and resolved the issues, but some critics suggested it was “too little, too late”. Trust is difficult to build in the first place and even more and even more difficult to recover from once it has been lost especially for financial services companies.
The changing regulatory environment will continue to be challenging to navigate.
We recently had the opportunity to meet with the new Consumer Financial Protection Bureau to learn more about what’s coming with respect to legal provisions. This government agency will initially focus on predatory marketing tactics that mislead consumers into signing up or paying for services that don’t deliver on their promises. The team is working with the Google Adwords Team, for example, to prevent specific companies from advertising directly to consumers and instead delivering informative news and information. Financial services companies must work hard to protect their companies’ and customers’ interests. Early innovators often incur serious setbacks before making a new model work. Visionary companies, like peer-to-peer lender Lending Club, spend millions to meet the demands of regulators before launching.
Expensive, out-dated and difficult to integrate infrastructure.
Building consumer-friendly products that can access and update financial data in real-time is hard (to say the least). Companies like online banking platform Yodlee! have tried to make account aggregation services accessible, but resource-limited startups still have a difficult time building products that connect to and support a large number of consumer banks. Financial services companies should stay as “laser-focused” as possible by doing one thing very well as opposed to trying to do too much. Our team focused on credit card debt, for example, instead of going all out and supporting all types of debt.
Processing payments is also a challenge, both from a regulatory and from a systems perspective. The systems are difficult to build on and even more difficult to support. New startups like BillFloat use a combination of ACH (Automated Clearing House), MasterCard and PayPal technologies to process payments for consumers who need more time to pay their bills. The infrastructure to make payments exists, but it’s a difficult area to build products around. In almost all cases, for example, “moving money” requires licensing in each state here in the U.S. The hope is that once leaders emerge, their efforts will help new entrants build innovative payment products.
More data = options for customers + profits for companies.
As people continue to do most of their purchasing and money management online, startups have the opportunity to provide them with more personalized financial products. Services like BillMeLater, for example, allow consumers to make purchases without a credit card using just their social security number (last 4 digits) and birthday. Customers benefit and companies can monetize in new ways. The Economist wrote a good piece entitled “Data-driven finance” (March 17, 2011) that discusses companies like Klarna that use consumer data and new risk models to allow people to purchase goods online instantly. This “data” trend suggests that a wave of startups are essentially asking users to “pay” with their personal data for valuable goods and services. We believe this trend will fundamentally drive the “future of money” in the coming years.
We want to see more financial services innovation; particularly in areas that empower consumers with their own data and give them new options. The road is challenging for new upstarts, but there are many important, worthwhile problems to be solved here that will create a number of meaningful and long-lasting companies over the next 5-10 years. What do you think?