What’s stopping users from loving fintech?

Average people do not love fintech. In fact, in many cases they hate it. I’ve seen this first hand since I took the (currently on pause) dive into fintech a little over two years ago, but two posts by Pascal Bouvier of Route 66 Ventures got me thinking about how deep this problem really is. Pascal’s example of the relative lack of progress in modernizing remittances (sending money home from, for example, the US to Mexico) is a great one: remittances SHOULD be done electronically, they ARE incredibly horrible/expensive/broken, there are MANY players trying to disrupt the market; yet, the incumbent (Western Union) is still cleaning up. Why? Because nobody is winning their users’ hearts. Nobody loves their bank, but nobody LOVES fintech startups either.

This is a problem in almost all of the major markets getting disrupted right now to some degree: banking, money transfer, credit, payments, and even alternative lending (although they’re doing better than the rest). Big financial institutions know “disruption is coming” but it still feels like it’s coming really slowly. There are many reasons why, but the big one in my opinion: fintech entrepreneurs aren’t creating experiences that the average user can understand, can trust, and can use. There are 3 fundamental reasons for this:

1. Regulation gets in the way #

I was talking to the lead developer of a new fintech product who was adding steps to verify bank account ownership for making deposits into his system. He lamented at several (necessary) steps, “this is just bad UX, this is too many steps. We’re going to lose users here”.

He was right. But unfortunately, there was no alternative - verification of ownership for bank account debits is required. Why? Regulation.

If banks process too many ACH transactions that are later charged-back as “not authorized” they can get in HUGE trouble. Businesses that allow that to happen get in trouble too. So fintech developers have to verify bank account ownership. The same applies to bank account opening, brokerage account opening, transacting large amounts of money, etc, etc. Anything in fintech requires a lengthy signup process, controls on what you can and can’t do, and constant monitoring and risk analysis.

I often hear people say “Paypal sucks”, but what they’re usually encountering isn’t Paypal - it’s regulation. Only by getting very, very, VERY creative can fintech entrepreneurs abstract this away from their users and soften its impact. However, that brings us to the next reason:

2. Entrepreneurs who understand fintech and entrepreneurs that understand user behavior have little overlap #

The venn diagram of entrepreneurs who are “great at understanding and delighting users”, “want to innovate in fintech”, and “CAN innovate in fintech” contains roughly 0 people. As a result, a common theme for many fintech companies is to spend as much as the first two years on risk, compliance, and understanding their unit economics with just a few customers or users before raising a big round of funding to hire marketing and branding people to scale the business.

As a result, many fintech companies, and even many of the darlings of the industry right now, are fundamentally money generating machines that thrive by having large budgets for user acquisition. Even the brands of recently public companies like Lending Club are not well known to the average individual, nor are the brands of almost any of the huge fintech “unicorns” right now.

Notably, one of the only fintech companies to get this right was Simple. Their valuation growth topped out because of bad unit economics and they sold to BBVA for $100MM - a great return for everyone involved, but a fraction of the value of many fintech companies that are far less well known and dramatically less well loved by users. I’m particularly bullish on startups with good unit economics and great customer acquisition/UX people - but I know of very few (Painless 1099 from the Coffitivity guys is one example - I would love recommendations on others to check out¹). So why can’t great UX people innovate in fintech? Well….

3. The core infrastructure to get users and entrepreneurs on the same page in fintech basically doesn’t exist. #

If you’re a great UX person and you want to get into fintech, the first thing you would probably do is seek out services to abstract away the core fintech infrastructure you need to prove there’s a need for what you’re building in the market.

You’ll be left wanting.

There are very, very scant options for entrepreneurs who want to fully outsource core banking, payment, risk mitigation, or identity infrastructure. I’ve seen seasoned fintech entrepreneurs spend over a year just making their first bank relationship, integrating identity services, and making sure everything doesn’t break for edge cases before moving on to the core experience they’re trying to create. It’s horrible. Companies like Plaid and even Stripe are chipping away at this bit by bit, but it’s a jungle out there. If you’re a seasoned entrepreneur wanting to start a fintech company I’ve got news - you still need a fintech person and probably a really experienced (read: expensive) one just to get started. Oh yeah, and it’s still going to take about a year so sit tight.

So what are we going to do? #

So how are we going to fix this problem? As you may have noticed, these 3 reasons cascade downward. If we have better infrastructure, more great UX people can innovate in fintech, and regulatory concerns will have less impact on the user experience for new fintech products. That’s why I’m always on the lookout for companies building great APIs for fintech, great services that abstract away old infrastructure, and ESPECIALLY banks and established institutions that want to work with startups to provide this infrastructure.

The signs that this is going to accelerate over the next 5 years are strong. Banks are partnering with cryptocurrency companies, starting accelerators, and are partnering with startups all over the place. It’s only a matter of time before the rate of innovation cascades down more significantly and allows for the user/fintech entrepreneur gap to close. I can’t wait.

Notes #

1. Other fintech apps from great UX/customer folks: Qapital