Are personal financial management tools actually dead on arrival? I hope not.
The hyperbolic bubble surrounding fintech has officially burst. Yet, its reverberations have not been spread equally. Consumer fintech, in particular, has borne the brunt of the burst. Within consumer fintech, pitching a tool for personal financial management (PFM) has become futile. Fintech investors know of three certainties in this environment: death (by regulation), taxes (anywhere but TurboTax), and your PFM will fail.
After a decade of ongoing struggles, there is reason to be bearish. Look at B2C fintech investments and you’ll see that the enterprise value created per dollar raised has been a fraction of the enterprise value created by B2B fintechs (Chart 1). Investors just haven’t been paid back for their risk. And if you look more closely at PFMs, you’ll find the successful outcomes have historically been strategic sales (vs IPOs). Pure PFM businesses succeeding as public companies are few and far between.
Chart 1: Consumer fintech has struggled to multiply investor capital
Yet, the issue of personal finance is too large to look away. Personal savings rates have plummeted to the lowest levels since the great recession (Chart 2), while consumer debt has surpassed $16 trillion, the most on record. 60% of consumers say they are living paycheck to paycheck, a troubling amount. The fragility of a consumer’s wallet is coming into full focus as the economy teeters on the brink of a recession.
Chart 2: Personal Savings Rates Plummeting from Stimulus Highs
While dozens of hot startups are constantly being funded to automate finances for companies, the promise of automating finances for consumers has lost its swagger. Why hasn’t a PFM company been able to capture the market and improve financial wellness for all?
Challenges for PFMs
I spoke to CEOs of PFMs of the past and present to pinpoint the real challenges they face. Here are my take aways:
1) A sustainable business model has been elusive. The first model attempted was a revenue-share model by Mint in which it upsold financial products of affiliates. While Mint was mildly successful, it faced an uphill battle. Users want to ignore their personal finances, so by default a PFM typically has low engagement — and this business model relies on high engagement and conversion. Another typical business model for PFMs is charging consumers a subscription, but it has been challenging. Albert, a PFM with banking features, opted not to charge a set fee but instead “trust you to pay what’s fair.” MoneyLion, a lender with PFM features, charges a subscription that is so burdensome that it recently came under regulatory scrutiny. Dave, another lender with PFM features, doesn’t offer much more than PFM tools with its subscription and public investors have rewarded the stock with an abysmal .3x EV/revenue multiple. Trim (a Core investment) brought to market a unique value proposition — automating the canceling of unnecessary subscriptions — but it struggled to create a recurring subscription-based revenue stream once consumers completed this initial task. Taking a different approach, Personal Capital has had success upselling customers from free financial planning tools to an AUM-based financial advisory model. Yet, the way it makes money currently looks more like a traditional bank than a disruptive fintech, as it primarily utilizes human RIAs to serve affluent users with >$1M in assets. All in all, fintech players have yet to find a business model that converts mass market consumers into profitable PFM users.
2) Concurrently, the heightened number of D2C companies in existance and venture capital dollars at stake has increased competition to acquire users. Anecdotally, Core reviewed 10x the number of deals last year as it did just eight years prior. The number of finance apps used by a single consumer is growing at the fastest rate amongst any category (Chart 3). Last year, Core’s founder, Arjan Schütte, wrote about his frustrations with customer acquisition costs (CAC), and we estimated that, each year, companies with financial products spend $35B acquiring new customers. It has become nearly impossible to build a product off of paid advertising alone and increasingly competitive to win valuable industry distribution partners. Success in this environment requires PFMs to have inherent virality (think Wordle but for finances… nearly impossible to pull off). The result — a graveyard of budgeting apps.
Chart 3: A Recent Explosion of Finance Apps
3) While consumers may want to ignore their personal finances, they are also wary about giving up full control when it comes to large financial decisions. In 2022, Robo Advisors had just a 3.8% penetration rate amongst consumers. While it would be encouraging to see more tech adoption, there is good reason for consumers to be cautious at times. Automated house flippers have lost millions when they purchase homes with limited “human-in-the-loop” decision making. The tech-first financial manager of the future will have to find a way to build trust innately into its product. All the CEOs I talked to believe this continues to elude the majority of PFMs.
4) A market mismatch exists — no one will commit enough R&D to build machine learning (ML) models that could truly create self-driving money until there is proof that consumers will adopt them. With the top 10% of Americans owning 70% of wealth in the country and utilizing humans to assist with large financial decisions, the focus for financial service companies has been on capturing high-net-worth consumers with humans driving decision-making. And while creating a lightweight budgeting tool is one step, automating money movement is an entirely different animal, one with dire financial consequences if mistakes are made. The financial companies that have the resources to develop these ML models and invest in consumer conversion (i.e., big banks), don’t want to cannibalize their lucrative financial advising businesses. The result — products that don’t excite.
Solutions
How can we build a sustainable PFM tool that creates more financial freedom, convinces hesitant users to give up proper autonomy, and generates free cash flow? Most veteran industry CEOs were doubtful, but all agreed the financial wellness problem still looms so large that we must keep trying.
First, we need a business model that works — and this may not be through the traditional consumer channel. One potential solution may be employers, more than just the progressive ones, paying for financial wellness products. For example, Addition Wealth (a Core investment) brings financial wellness as a benefit to employees. Perhaps if employers sponsor the use of financial management tools, employees will inherently trust them. Alternatively, a sustainable business model may not rely on financial products at all. Klover (another Core investment) gives users the power to exchange their financial data for free PFM tools and early access to income, while providing brands a SaaS product to better understand their consumers. By creating a differentiated revenue stream through advertisers, Klover can afford to provide unprofitable financial products to consumers. Another route may be building an automated PFM-as-a-service to banks who own distribution channels and are incentivized to upsell their consumers with financial products. Particularly when it comes to PFMs that stress responsible money management, innovative business models that don’t charge the consumer are always nice to see.
Second, we need truly differentiated technology. Financial infrastructure, particularly banking-as-a-service (BaaS), has made it easy to create a neobank or PFM tool, but has a 10x better solution really been built on top of BaaS recently? Instead, I see startups building the same commoditized products but for differentiated communities. We need to think outside the box and build a PFM tool on a new tech stack. I’m intrigued by newer ML models, such as GPT-3, which deserve to have a crack at creating an optimized financial journey based on unique consumer traits. I’m also intrigued by the programmability of smart contracts and the interoperability of digital wallets. Can we build a self-driving crypto wallet for financial management? Could there be an RIA Alexa with limited power of attorney? I could see risk-seeking crypto users being more than willing to be the early adopters of this differentiated technology.
Third, a company then needs to take on the even-more colossal task of influencing consumers to give up control. McKinsey points to five ways to influence consumer behavior: reinforce positive beliefs, shape emerging habits with new offerings, sustain new habits, align messaging, and be ultra consumer-focused. While early Robo-Advisors created a new industry with a new offering, they have yet to sustain new habits and have not aligned the broader messaging. Leaning on Clayton Christenson’s jobs-to-be-done framework, the ultimate job-to-be-done by PFMs for mass market consumers is to take away the stress of money management in a way in which consumers believe that they are optimizing their money in a responsible way. It requires a challenging give-and-take between fruitful long term behavior (saving) and productive short term behavior (consuming). Accomplishing this with a PFM tool, as opposed to the traditional human advisor, would be a radical change in behavior.
How stress-free would it be to have your finances optimized at all times? Packy McCormick writes about tech at times being indistinguishable from magic. If we can crack the code, there is a chance a self-driving PFM would not only be sustainable, but could be the most likely candidate for the oft sought after super app. Now that would be magical.
Thoughts and comments welcome! I’m @roosontheloos on twitter
