Are Fintechs serious about improving our financial wellbeing?
“We are on a mission to make the financial system more fair, accessible, and inclusive”, proclaims Jack Dorsey. The Buy Now Pay Later (BNPL) player his company (Square) recently acquired shares the same aim, nothing less than “fairness and financial freedom for all”. Who knew that paying for things by instalments could be so transformative.
Even Payment Service Providers (PSPs), most of whom you will never have heard of, are in on the act. Payoneer claims to help “anyone, anywhere to participate and flourish in the new global economy”, without a hint of irony. Their new brand identity uses the colours of the pride flag, a symbol of inclusivity, and implores merchants and consumers to “realize their potential” by buying and selling more things online.
Meanwhile online trading platform Robinhood is busy “democratising finance for all” by allowing day traders to buy and sell meme stocks. To what extent this represents taking from the rich and giving to the poor is still uncertain. It seems every Fintech, in every subdomain is on a mission to improve our financial wellbeing. The problem is, their business models are often in conflict with their highfalutin claims. Here are three examples:
1. Online trading platforms
They offer “commission free” trading, which sounds great for the consumer but disguises the fact that 30–50% of revenue comes from Payment For Order Flows (PFOF). These are options, not equity trades, and they are far more lucrative because there is a larger spread between the bid (or price the buyers are willing to pay), and the ask (the price the sellers want). By harvesting orders market makers profit on what is called the “bid ask spread”.
The path to growth and profitability is to drive users towards more speculative and less liquid options trading. But the masterpiece is to make trading as addictive as social media by delivering frequent dopamine hits, which in turn encourage a higher frequency of options trades. If it reminds of you an online casino, that is because for many, it is. Prudent users treat it with caution and only invest money they are willing to lose, much like a sports betting account. This explains why savvier investors hold their “serious” money in less gamified, and more trusted broker accounts.
2. BNPL providers
They allow you to buy stuff you may or may not be able to afford and pay these back in instalments. It’s great for merchants who sell more (this payment method increases Average Order Value by between 40–80%) and customers can’t get enough (repeat purchases, an indicator of customer loyalty are between 3x to 5x versus other payment methods). BNPL brands have done a great job of positioning themselves as a companion that puts you in control of your spending. After all you are not taking out credit subject to high rates of interest, you are merely “spreading things out” in a responsible, grown-up way. Instant gratification without the feeling of regret, if you will.
Credit cards, on the other hand, are the bad guys. And with good reason. Of the $176Bn credit card companies have made in 2021, 43% ($76Bn) came from interest fees. The average BNPL provider only makes between 10–25% from late fees (Afterpay make 14%). Odd then that these self-proclaimed paragons of prosperity bury “bad revenue” in the darkest corners of their P&Ls. Most omit it completely. If only guilt didn’t have an odour.
3. Superapp contenders
The likes of PayPal, CashApp, Revolut and Wise are trying to build an ecosystem of connected services that maximise user engagement and customer data collection to better target high value financial products like loans, insurance and investments. This is a great strategy because it drives up Average Revenue Per User (ARPU), customer loyalty and over time, Customer Lifetime Value (CLV).
But enough business model jargon, the point here is that these Fintechs genuinely help us to lead better financial lives by being able to pay for stuff instantly, manage our money more transparently, save more intelligently, diversify investments more seamlessly, and protect ourselves against unforeseen events. But at the same time, they are bolting on high engagement services like crypto trading and BNPL, without providing much guidance or education to customers about the potential risks.
Binance provides a model that these players could be wise to follow — more guidance, education and support to help us improve our financial wellbeing. The problem is, this is much harder to monetise. Customer acquisition hacks via high engagement products curry more favour with investors.
Freedom or pain?
Money is either freedom or pain. Learning to earn it, save it, spend it and invest it should be treated the same way as riding a bike; it’s a basic life skill everyone should have to navigate the journey of life.
Yet 1 in 4 adults in developed economies struggle with basic financial concepts like calculating compound interest or understanding the impact of inflation on savings.
It should frighten us to know that less than half (49%) of adults meet minimum financial behaviour scores around saving, planning for the long-term and keeping watch and control over their finances.
This is the intractable issue Fintechs should get serious about solving, if indeed they are serious about solving it at all.
Don’t put your life in the hands of a rock n roll brand
Fintech branding has come a long way.
They have become lifestyle brands that sit on your home screen, next to Google Maps, Spotify and Tik Tok. Snoop Dogg even features in their ads, as his new BNPL alter ego “Smooth D-O-G-G”.
Come to think of it, were you to invite these brands into your home, you would have the makings of a middle-class book group, or some kind of cottagecore gathering. Say hello to…
Cleo (your personal financial advisor).
Alan (your french friend who works in insurance).
Charlie (an adorable penguin who helps you manage your debts), ok this is getting a bit weird.
Mollie (your payments facilitator, who you never see but helps you buy anything you want online, anytime).
Clark (an insurance broker and superman fanboy).
Klarna (your hot pink, Scandi cool, YOLO companion).
Financial services brands didn’t used to be like this. They used to boring, functional and bordering on the invisible. Rumour has it, they were developed by a guy called Nigel throwing darts at a board containing the words: pay, world and safe:
Scuba
Credit cards and BNPL are not “bad” products in themselves. If you know how to use them they can be a great source of liquidity and a smart way to manage cash flow to live a fuller life. Indeed, credit cards remain one of the best ways to improve your credit score and get access to important financial products like mortgages and business loans. But more consumers need to understand how they work before diving in. Payback on time. Exit when you’re up (nowhere is this more relevant than crypto trading), and read the small print (this applies to every insurance product, ever). Don’t be fooled by highfalutin claims, reddit chatrooms or that first hit of dopamine upon signup. First ask, are the long term interests of the product I am signing up to (and its business model) aligned with mine? Many are not.
The basics of financial well-being are like learning to swim, they allow you to keep your head above water. Once you know the basics there are new strokes to learn, and different bodies of water to explore. But if you want to dive deeper, you will need to acquire new skills and new knowledge. Don’t go on a scuba diving trip with a snorkel. If you do, you’ll either drown in debt or need to come up for air before you see any of the beautiful fishes.
Postscript: I am supporting the Financial Times Financial Literacy and Inclusion Campaign (FLIC). Where free markets are failing to help consumers navigate a bewildering array of financial products, a community of financially literate professionals are helping to democratise financial education and provide it for free to those who need it most. Come join us! In the meanwhile I will continue to think of ways to make financial wellbeing a profitable win-win business. Ideas welcome.
