By W.B. King
An otherwise unknown phrase a decade ago, “fintech” has proven that consumers are comfortable migrating from conventional banking models to digital banking alternatives. And the proof is in the numbers. According to PitchBook Data, in 2009 fintech startups received approximately $1 billion from venture capital investors. In 2020, the investment was more than $44 billion. Venmo, PayPal’s subsidiary, is another standout example with P2P payments in America representing $12 billion in transactions in the first quarter of 2020.
During the 2021 Collision Conference, Wise’s Co-founder and CEO Kristo Kaarmann and Betterment’s CEO Sarah Levy discussed the evolution of fintech (before it was defined as such) as well as where the industry is headed. Julie VerHage, co-founder of Fintech Today, served as moderator.
Finopotamus, along with 38,000 attendees from more than 140 countries, virtually attended the event to better understand how influential players outside of the credit union space are viewing technology trends. This article is the final installment in a three-part series.
“The New Fintech Frontier: Where Do We Go From Here?” session covered a lot of ground, including discussions on fintech trailblazers as well as how fintechs have forever changed the financial services industry. To this end, VerHage made the case that like accessing social media or gaming apps, consumers increasingly want to seamlessly execute banking tasks on their phones. And while this consumer driven movement has popularized many fintech offerings, it has been an evolution.
“When we got started, we were before fintech 1.0. There was no term ‘fintech,’ or it was used to refer to some clunky core banking system,” said Wise’s Kaarmann. “This term started appearing when we were three or four years old.”
Founded in 2011, the London –based Wise, formerly TransferWise, is an online currency exchange and payments service that allows consumers to exchange currency using mid-market rates for a flat fee.
“When people started talking about fintech we all looked around and said ‘what is this thing they are talking about,’ and overtime we realized it was us,” Kaarmann continued. “When we started people were using banks for anything that had to do with money—to move money, make payments or investments or store money, especially outside of the U.S. But for many people today, especially younger people, going to a bank is no longer their first choice. It’s an exciting time to be building new products and apps.”
In the case of the New York City –based Betterment, Founder and Chairman Jonathan Stein laid out his then controversial financial advisor vision during the 2010 FinovateFall Conference.
“Traditional investments have not been designed for people. Maybe they have been designed for institutions, trading bots or active traders, but they are not designed for the lawyers, doctors and teachers who we know in our personal life,” said Stein. “At Betterment, we’ve undertaken to design the first investment for everyday people.”
Fast forward 10-plus years and Betterment is the largest digital wealth advisor in the U.S with 29 billion in assets under management. Levy, who began her post as CEO in December 2020, noted that when Betterment started in 2010, the concept was simple: to democratize investing and to bring transparency to the process.
“The mission of the company was to empower people to do what’s best for their money so they can live better,” said Levy. “It was a very aspirational idea, which drew me to this position. It set a tone—even the name ‘Betterment’ is about constantly improving.”
Among lessons learned from the pandemic was the need for touch-free, ease of use digital financial transaction capabilities. And while fintech offerings, like most new technologies, have been traditionally adopted by the younger set, in 2020 digital financial transactions increased exponentially across all banking demographics (less tech troglodytes holdouts).
“Fintech was this unknown concept a decade ago, but now fintech has come into the main stream,” said Levy, who added that prior to her current post she held senior level positions at Nickelodeon, BET, MTV and Comedy Central.
“There’s this real opportunity to tell a story at the intersection of an established, trusted brand and a disruptor DNA,” said Levy. “My previous life was with Sponge Bob—talk about a happiness brand—so this [joining Betterment] to me was an opportunity to bring that happiness and brand building to a new space.”
When it comes to building trust and traversing payments regulations, Kaarmann said the process has been an interesting journey. When his company was founded, PayPal, he noted, was the only formidable company that existed that could be considered a fintech.
At the time, Wise’s mission was an unproven model: building an app and hoping people would trust the company with their hard-earned money. And while Wise handles roughly $5 billion a month in transactions today, 10 years ago Kaarmann said the premise was a “tremendously controversial” hypothesis.
As is the case with Betterment’s success, Kaarmann explained that providing transparency and eliminating unneeded banking fees helped to build lasting consumer relationships. And there was a need for a new model, he said. As an example, he offered that an international wire transfer might cost a traditional banking customer $20, but that same consumer doesn’t know that the bank takes 5% of the fee coupled with a bad exchange rate.
“We decided to tell customers how much it costs to send a bank transfer and we knew that the number was going to be bigger than the banks show, but our hypothesis was that they were going to trust us for being transparent,” said Kaarmann.
“We do ask the regulators to be better at their job—to hold the industry to account because it shouldn’t be the challenges of the new players [fintechs] to demand transparency,” he said. “We have regulators for exactly that reason, which is to protect the consumers. We think regulation is a good thing and we believe in it.”
For Wise and Betterment, 10-plus years of earning customers’ trust has paid off as both companies have expanded product offerings. Wise, for instance, which started as a money transfer platform, today offers debit cards and business accounts, among other products. Betterment began as a robo-advisor, but now also offers other products like retirement accounts.
“You built this trust so you could launch these other products,” said VerHage, who conceded she recently rolled over a 401k to a Betterment account. She then questioned both Kaarmann and Levy on when they knew it was time to start expanding product offerings.
Kaarmann explained that Wise’s business banking and consumer banking non-lending service is successfully serving customers across “dozens of countries.” He added that customer desire gave rise to new products like a “Wise” account that can hold up to 40 different currencies, which he referred to as a “multi-currency bank account" that works without borders.
“Once people have money with us adding a debit card that uses the correct balance—whether in the U.S. or Ireland—was just a logical extension in what people wanted,” he said.
Levy explained that Betterment always looks at product offerings through the consumer lens. This can take the form of advice, such as eliminating debt, taking advantage of tax-saving solutions offered by the government and establishing long-term retirement accounts and/or 401k accounts.
“Our position is setting you up for a better long-term outcome as opposed to focusing so much on the here as some of our competitors do,” said Levy. “We think about the next places to go beyond just a transparent investing account and it became obvious that 401ks was a place to go. It’s about meeting the customer where they are no matter where their financial journey begins. For us, that is a real differentiator.”
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