There are many fintech initiatives from the first decade that didn't catch on: algorithm-based buy/sell/hold advice, trade imitation, P2P lending, P2P insurance, on-demand insurance, and independent financial planning apps. But there are many more. In this post, it's worth looking at three more concepts that initially seemed promising but largely failed to change the financial services industry.
Before it is important to define once again how we classify the «fracaso. This article is not focused on highlighting the demise of high-profile individual fintech startups or various failed fintech initiatives undertaken by large corporations (such as Bloomberg Black o UBS SmarthWealth).
These ideas came with enthusiasm and momentum, but ultimately failed to change the way the average person manages their money.
We focus on ideas fintech that received some amount of publicity and initial push, but ultimately failed to change the way regular people manage their money. Here are three fintech concepts from the last ten years of fintech that were not successful.
Independent financial advisor search and matching tools
In the early 2010s, approximately 15 companies launched an online search or matchmaking service designed to help people find the financial advisor that best meets their needs. The traditional approach to financial advice, in which wealthy individuals often find an adviser through friends, family or through the proactive sales outreach of a local financial adviser, which lags behind modern product-search trends in network.
Every day, consumers shop online and check reviews from other users. The logic behind this first wave of startups was that the experience of finding a financial advisor should mimic the way consumers search for other products and services online.
New financial advisor matchmaking companies generally took one of two approaches. The first approach was to offer a search tool that would allow users to find local financial advisors based on parameters such as assets under management, experience, qualification, gender, etc. This is an example of a financial advisor profile on the now defunct financial advisor search tool tippybob.
2013 Screenshot of a financial advisor profile on Tippybob. Credits: Greg Easterbrook
The second approach was to offer an online financial advisor matchmaking service. Stakeholders were asked to enter basic information about their income, age, assets, needs, etc. and the firm would introduce them to a local financial advisor who was selected as an option tailored to their needs.
As of 2023, there are still some independent sites (like SmartAsset y zoefin) that offer some sort of financial advisor matching tool. And of course, Googling “financial advisors in my area” will result in paid ad placements. However, in general, independent financial adviser search and matching tools did not become widespread. Most wealthy people still find their financial advisor through traditional methods rather than relying on web-based approaches.
This idea did not prosper for two reasons. First, these startups couldn't overcome the difficulty of building a network on both sides for a product with a slow sales cycle. The advisors did not want to join these matchmaking services unless there are a large number of users on the platform. However, without a significant number of advisors on the platform, these services struggled to attract users. This chicken or egg problem was compounded by the very slow sales cycle of financial advice.
Second, financial advice is fundamentally different from other types of goods and services that are sold digitally. There are potentially negative consequences massive if a consumer chooses the wrong financial advisor and receives bad investment advice. Ordering a pizza or a pair of shoes online does not carry the same level of risk.
Consumers who would like to work with a financial advisor seem inclined to only want to hire someone with whom they have a high level of personal trust. Therefore, the business model of financial advisers has proven resilient to the disruption of online product search and comparison services that have revolutionized so many other industries.
Independent retirement advisory services
For most people in the United States, the retirement plan offered by their employer is their main retirement savings. However, the average American often has a hard time understanding these jargon-filled corporate retirement plans. They must also choose how they would like to invest their money. With these challenges in mind, several fintech startups have launched free or paid advice to help consumers better manage their employer retirement plan.
The level of advice provided by these online companies varied. The free advice typically included a user-friendly description of the retirement plan's rules, fees, and investment options. These retirement plan profiles tended to emphasize plan fees and costs. Some of these independent online retirement plan advisers even included a proprietary plan ranking in which they rated a user's plan against that of their peer group. Below is an example of the profile and qualifications of the plan of brightscope 2013. Note that the top right corner of the screenshot below also includes a financial advisor search feature.
2013 Brightscope profile of Walmart's retirement plan. Credits: Grant Easterbrook
Companies with a freemium or paid model used to provide a recommended investment portfolio, although some companies gave investment advice for free. Clients followed this advice and recommended portfolio allocation by logging into their 401(k) account. Below is an example of what this tip looked like.
2013 capture of Kivalia recommendations for Apple's 401(k) plan. Credits: Grant Easterbrook
By 2023 almost all of these independent retirement advisory firms have either failed or pivoted. Bloom, long the last remaining major independent online retirement plan advisor, closed its 401(k) counseling service in November 2022.
Why didn't this idea catch on? First, these fintech newcomers underestimated the cost of acquisition for a very specific customer profile. Put another way, it was too expensive to acquire clients who were financially savvy and DIY-minded to take the time to manage their 401(k) plan by logging into a separate service. Most consumers simply don't like to think about money and want to minimize the amount of time they spend thinking about it, a recurring theme in fintech failures over the past decade.
Second, over the past 10 years, an increasing number of corporate retirement plans have begun to offer some type of investment advisory/management service within the retirement plan website. companies like Financial Engines y GuidedChoice they partner with leading retirement plan registrars and provide employees with investment advice in the same online session as their retirement plan. As more and more retirement plans began to offer some type of advisory solution at such a session, the market for independent advisory services shrank.
Income-Based Student Loans
The cost of college in the United States and the associated student debt burden have long interested employers. At the start of the first decade of fintech, several start-ups touted the idea of an income-based lending service. Unlike a traditional loan, where graduates have to pay a large lump sum with interest, income-based loans were intended for graduates to pay a fixed proportion of their income over a certain number of years.
At the time, advocates hoped this income-only approach would be less intimidating for students nervous about taking on debt to pursue higher education, particularly those interested in lower-paying careers. Proponents noted that this approach would likely result in a lower debt burden for all but the highest income earners. Income-based student loan repayment schemes were already working well in countries like Australia and the UK, so it was believed that private companies could implement a similar approach for borrowers in the US.
2013 capture of Pave. Credits: Grant Easterbrook
Companies like Pave y Upstart they tried to bring this approach to the United States. These companies raised money from investors who were willing to loan a student money in exchange for a share of their future profits. Income-based student loan fintech firms typically vet students and set parameters around the percentage of income (usually between 3% and 10%) and the number of years (usually around 10) the student must pay back to the investors. Investors run the risk that the student will not earn enough money to earn the desired return. On the other hand, investors can also gain if the student is exceptionally successful. Some degree of mentoring and support was also sometimes offered, either by the investor who wants their students to succeed or by the lending company itself. Here there is a good article from 2013 summarizing the business model and the initial enthusiasm behind the idea.
What happened? The first big blow against the model was the negative attention from the media. Highly critical articles compared this loan repayment approach to indentured servitude or even characterized it as a modern form of involuntary servitude. The fact that income-based student loan repayment already worked effectively in other countries was lost in a sea of bad press, creating anxiety among potential borrowers that they were being taken advantage of.
In addition to the negative scrutiny from the media, the business model itself proved especially challenging. Unlike government lenders (for example, Australia's loan repayment program is interest-free and only adjusts for inflation), private companies need to make a profit for their investors. How does a fintech lender structure an income-based student loan agreement to protect investors if the student decides to join the Peace Corps after graduation? What fees would a fintech charge a pre-med student with graduate years ahead? What terms would a computer science major at an Ivy League college receive compared to an art history major at a lower tier college with a low graduation rate? These challenges proved difficult for income-based student loan fintechs to overcome and ultimately changed their business models.
Keep in mind that in the years since these startups moved away from income-based student loans, the federal government has made changes to existing programs and implemented the REPAYE income-based loan option. These changes have made the federal government's income-based lending programs more popular in recent years, meaning that it is now highly unlikely that a private American fintech company will try this model again.
The financial services industry must not forget the lessons of the first decade of fintech
As noted above, there is nothing shameful about failure. Refocusing to find the right product for the market is a natural part of the startup life cycle. The objective of this article is to remember which ideas did not prosper and why, so as not to repeat the same mistakes.
The flaws identified in algorithm-based buy/sell/hold advisory applications, trade imitation, P2P lending, P2P insurance, insurance on demand, and independent financial planning showed some hard lessons to learn when innovative concepts hit the market. Among those failed ideas, there are two main takeaways:
- Home, fintech entrepreneurs need to remember the essential principle that the average consumer doesn't like to think about money and often wants someone else to take care of it.
- En second First, the industry needs to be realistic about the high cost of customer acquisition. The online retirement plan advisers mentioned in this article also struggled with both of these problems.
The other main lesson from this article is to remember that money and financial products have unique properties that set them apart from other sectors of the economy. One mistake, whether it's working with a bad financial advisor or accidentally taking out a more expensive student loan, can cost tens of thousands of dollars. The potential for large losses means that services must build a high degree of trust with stakeholders and customers. Given this reality, the modern online product search mindset may never reach traditional financial advisors. It also means that trying to change the established ways people borrow money can be difficult, as new income-based student loan repayment ventures can attest.
The entrepreneurs who will lead the second decade of fintech must learn the lessons of the past as they seek to build the next generation of fintech innovation.
