Dear Fintech VCs:
I’ve been to a lot of Grateful Dead concerts. Which means I’ve seen a lot of people who have…let’s just say…drank the Kool-Aid. The electric Kool-Aid. And I’ve seen how that Kool-Aid distorts people’s perceptions of reality.
I can only conclude from the stuff published on sites like TechCrunch that some of you are drinking some serious Kool-Aid.
I don’t want to impugn the lot of you, as I have interacted with many of you over the course of my career as an industry analyst. I have found most of you to be really smart people. I actually envy many of you, since you make a shit-ton of money, eat at fancy expensive restaurants 4 to 5 nights a week, and fly first-class where ever you go.
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Despite my attempts to hold my tongue and let your distorted perceptions of reality slide, I can do so no more. The straw that broke the camel’s back was an article in TC titled What’s next for personal financial services? In it are some claims and comments that are just so wrong, I’ve got to respond.
I know this won’t stop you from investing in firms that don’t deserve any money. That’s not my goal. But if I can prevent just one more ridiculous, delusionary, twisted view of reality from being published, I will have succeeded.
Let’s look at some of the claims and points made in the TC article.
The Truth About Financial Innovation Now
The author of the TC article writes:
“It is telling that we are seeing organizations spring up like Financial Innovation Now (FIN), 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.”
It is true that big banks are likely to face increased pressure from well-recognized tech brands — the “hints” of that happened long before FIN was organized.
But FIN is a disaster waiting to happen — as is nearly every consortium that is formed by large, powerful players whose goals and objectives couldn’t be less aligned. Shh. Listen. I can hear MCX whimpering (in a Monty Python English accent) “I’m not dead yet.”
There’s simply no way these firms will be able to agree on regulatory and policy issues. The primary reason is that their individual financial services strategies aren’t well-honed and formed, which means they don’t really know what they should be advocating for. A secondary reason is that when those strategies do mature, they’ll likely be in conflict with each other.
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The comment “…with the reach and funding to offer a comprehensive suite of financial services if (but more likely when) they choose” needs some trashing, as well.
Do you really think the FIN firms are just sitting on the sideline waiting for the right time to pounce?
Google has made a number of forays into “financial services” — e.g., Google Wallet, product selector tools — and has failed pretty much every time.
Intuit has been in financial services for a long time. Do you think it hasn’t launched a “comprehensive suite of financial services” because the time has never been right?
Apple will never launch a “comprehensive suite of financial services” because it makes no business sense for it to do so. Google will never succeed at doing it because it is fundamentally a B2B company, not a B2C company. Intuit won’t do it because it knows damn well it wouldn’t succeed at it. Amazon on the other hand…I can see Amazon doing it. And I know exactly how it’s going to do it (but I’m not going to tell you).
Here’s the bigger issue: No one can launch a “comprehensive suite of financial services” anymore. That’s what the whole “unbundling” trend is all about. It’s what you VCs are investing in. Yet, one of you goes ahead and spouts nonsense about tech firms offering “comprehensive” services. Ugh.
You Understand the Concept of Revenue, Right?
After a useless description of the amount of money Americans spend on overdraft fees, the author of the TC article writes:
“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.”
First off, Chime isn’t a bank. But that’s a minor point.
Second, 75k open accounts? Really? Do you VCs really believe any statistic somebody tells you? I know you don’t. So shame on you for passing along unverified data just to bolster your viewpoint.
Third — and most importantly — is the statement “are offering consumers an alternative to traditional banks without the fees.”
Oh really? And how are they going to make money? Interchange? Wake up and smell the coffee. Advertising revenue from all the “eyeballs” they’re able to generate? That business model died in 1999.
At some point, Chime — and every other startup taking your money — will actually have to make money. Now I understand that you don’t really care about that. After all, all you really care about is that the firms you put money into sell out at some point. And if they do that before the charade that is their business model is exposed, more power to you.
But again, to tout some startup for providing an “alternative” to existing providers because it doesn’t charge “fees” is nonsense. They’re going to have to charge someone for something at some point.
Risk Ridiculousness
The author writes:
“[Millennials] 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.”
This is the stupidest thing I’ve heard all month.
Ever since credit scores were developed, younger consumers have had lower scores than older consumers. It’s the way our society works. You don’t start out in your career making peak earnings. You actually have to work and earn your way there. That’s the way it works. Or at least, it’s how it’s worked until now. Who knows what will happen if Bernie takes over.
The author says “peer-to-peer lenders, for example, have been for years utilizing social data to extend individual credit.” So what? Guess who’s seeing credit losses grow? P2P lenders.
That said, there’s no question that new approaches to risk assessment credit worthiness are needed, and will be developed. Rattling off isolated attempts at creating alternative scoring mechanisms proves nothing. My mother could devise an alternative approach to scoring creditworthiness. Any of you willing to put up a few bucks?
We Need More Than Intelligent Finance
The author writes:
“As the nature of work in the U.S. continues to evolve, there is a need for financial products that evolve with it. 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.”
I actually agree with this.
But sadly, it misses the point of where the real opportunity lies.
To deal with the impact of changing work patterns — the “gig” economy resulting from the “growth in 1099 labor” — we need a lot more than “smart products” that know our spending or track expenditures. We need changes in payroll policies and bill payment options.
CFSI has done a lot of work studying the financial lives of low to moderate consumers. What they’ve found is that the fluctuation of income over the course of the year — in the face of bills and expenses that don’t fluctuate — create huge problems for many LMI consumers. A product like Chime — which some of you VCs think is so great because it doesn’t charge fees — does nothing to help those consumers.
They need to get paid more often. Why do we get paid once or twice or month? Because in the old days of paper checks, it was too expensive for a company to issue a paycheck every week, let alone every day. But in the age of electronic money movement, why couldn’t money be moved to someone’s account from the company’s account electronically? The cost of doing this is nothing.
And why should we have to pay our utility bills every month if we had a slow month? Creating mechanisms for matching expenses to income would alleviate a number of problems that many LMI consumers have. Not to mention take a bite out of the payday lending industry that so many people hate.
Apologies to the Credible VCs
As I said in the beginning of this rant, I don’t want to impugn all fintech VCs. Some of you really know the industry and have a clear view of what’s going on. So why aren’t you writing in TechCrunch instead of the Kool-Aid drinkers?
But sadly, I can’t help but conclude that a few “bad apples” (they’re not really bad apples) are propagating nonsense about fintech.