When Robinhood launched the first commission-free mobile trading platform about six years ago, it was regarded as anomaly. Not so. Since then, many other digital-only and traditional brokerages and investment firms have followed suit, and offer low minimum investment amounts, removing some of the barriers to entry.
In many ways, digital, commission-free trading democratizes investing. According to a 2022 Broadridge investor study, more mass-market and younger consumers are investing than ever before.
And that means more money is leaking out of banks and credit unions to digital investing apps.
Stopping the Leaks:
Those small monthly outflows to investment apps like SoFi and Acorns can quickly add up to billions.
One large U.S. financial institution looked at outflows to a variety of fintechs including investing fintechs such as Acorns, Robinhood, and SoFi and was shocked to discover that it had lost $4 billion in only 18 months, notes Dani Fava, Head of Strategic Development at Envestnet. What’s even more shocking is that the average withdrawal to fund an online investment account was only $140.
“It’s like death by 28 million paper cuts,” says Fava.
Fava believes that banks and credit unions can minimize those cuts by offering “embedded investing” — online investing from within their app or website — and predicts that more traditional institutions will partner with investment firms. “Embedded investing will solve the problem of money outflows from financial institutions to fintech investing rebels,” notes Fava. “Investing becomes part of the consumers’ digital banking experience.”
Envestnet believes in the idea enough to have invested in building an in-app solution for banks and credit unions.
Investing from Within a Bank’s Digital Walls
Fava says that embedded investing will solve one of the biggest challenges that financial institutions face today: the increase in digital access to traditional financial services. Consumers no longer have to visit a bank or credit union website or app for access to an increasing number and variety of financial products and services. For example, consumers are offered a high yield savings account while visiting an investing app.
Embedded investing enables consumers to invest right within the financial institutions’ digital walls. In the case of the forthcoming Envestnet app, there is a tradeoff: The financial institution gives up some digital real estate. “The bank or credit union gives us space on their app or website and Envestnet drops in the experience,” says Fava. “The financial institution handles the funding flow to the brokerage.”
In many ways such arrangements are the latest act in a long-running play. Decades ago, banks debated the advisability of offering investment products that would “disintermediate” deposits. The counter argument was that you’re losing the deposits anyway so why not at least keep the customer relationship, and make some fee income along the way.
Everyone's a Bank:
Investing apps never stop with just that service. They partner with a bank to offer savings accounts and more.
With embedded investing, consumers can invest in equities, mutual funds, retirement plans, and view their investment accounts without leaving the bank or credit union app or website. Consumers feel a sense of comfort which traditional financial institutions provide, according to Fava.
“Our market research showed that consumers trust their bank and credit union and believe these institutions have their best interests in mind,” says Fava. “Consumers want their financial institution to offer more products and services so they don’t have to shop around.”
In the Envestnet application, if a consumer has investing questions, they would chat in-app with investing experts at Envestnet. The company also educates consumers about basic and more complex investing strategies.
Hyper-Personalizing Banking & Investing
A digital investing solution can also be a part of providing products and services that improve consumers’ financial health. “Banks and credit unions can become more influential in consumers’ financial wellness by helping them connect their daily financial decisions with their long-term financial goals,” Fava observes.
For example, a bank identifies that a consumer always makes their loan payments on time and has an emergency savings account that would cover six months of living expenses. The institution could then offer this person an online investment account with a low account minimum and even offer automatic transfers.
“We’re headed toward intelligent finance. It starts with using data banks have on spending and saving to identify consumers who would benefit from an investment account, and then hyper-personalizing the offer.”
— Dani Fava, Envestnet
Another way to personalize the investing experience is to suggest investment portfolios that reflect consumers’ values. For instance, options based on consumers’ stated desire to invest in climate change, diversity or other causes. Those consumers who invest in something they care about are more likely to stay the course in times of market volatility.
Importance of Appropriate Offerings
The buy now, pay later (BNPL) phenomenon provides an example of the power of a one-stop financial experience, according to Fava. It also is a good example of the importance of choosing carefully what products a financial institution promotes.
BNPL is rapidly gaining favor with consumers. “About three-quarters of consumers have used BNPL,” notes Fava. “That’s an incredible adoption rate.” She postulates that it comes down to accessibility. “BNPL is embedded within the buying experience. You don’t even have to go get your wallet. You don’t have to think about your credit balance.”
With that convenience, of course, comes the opportunity for abuse. Already studies are beginning to show a correlation between BNPL use and consumer debt problems.
While Fava uses BNPL as an example of how embedded finance has taken off, she also states that financial institutions must make sure that such a product is offered responsibly and doesn’t normalize making impulse purchases without the ability to pay for these loans.
The same holds true for investments. Simply offering an easy way to invest, if not coupled with context and education, could erode the trust banks and credit unions currently have.