Rob Goldstein is the chief operating officer of BlackRock, the world’s largest asset-management firm with $5.7 trillion under management.
He heads BlackRock Solutions, the unit responsible for Aladdin, the firm’s signature operating system combining risk analytics, portfolio management, and trading.
Goldstein also leads the firm’s fintech effort, overseeing several recent acquisitions and investments.
- BlackRock’s acquisition of Cachematrix, which simplifies the cash-management process for banks and their corporate clients.
- A minority stake in Scalable Capital, a Europe-based digital investment manager.
- A partnership with UBS on Aladdin Risk for Wealth Management, an adaptation of BlackRock’s institutional Aladdin platform.
- An investment in iCapital, a fintech platform providing access alternative investments for high-net-worth investors and their financial advisers.
- The acquisition of FutureAdvisor, a digital investment manager.
BlackRock is also a huge player in developing passive investment products – funds like ETFs that passively track benchmarks at a much lower cost than actively managed funds.
Business Insider recently met up with Goldstein in his Manhattan offices at BlackRock headquarters to get a sense of where he thinks fintech and passive investing are headed.
This interview has been lightly edited for clarity and length.
Rachael Levy: Do you think that the robo advice, or wealth-management space, in terms of using these new tools for risk management and transparency — do you think that it’s becoming crowded at all?
Rob Goldstein: No. Just so you know, I’ve never been asked that question before. I don’t believe it’s becoming crowded at all. I believe that — I don’t think we should underestimate how much opportunity there is.
The way I look at it, if you think about, who’s the best in the world at something? In today’s world, if you just said, who’s the best in the world at building portfolios? At managing money? The reality is, it will likely be institutions and the opportunity to democratize tools, democratize data, democratize capabilities; that’s what technology is all about. I think we’re in the bottom of the first inning or the top of the second.
When you look at these cycles, there are a lot of companies that get flushed out in every inning, but I don’t think it’s at all crowded relative to the opportunity — forget about the financial opportunity — just the opportunity to help really bridge that gap. It’s tremendous.
Levy: The reason I ask that is I know there are several that come across my radar. You know, there is Personal Capital trying to expand into that space; Ellevest is specializing in targeting women. There are others I could rattle off, but that’s why I wonder on the consumer side if there’s ever maybe confusion with “What are all these new brands coming to market?” and “Why should I choose FutureAdvisor versus Ellevest, which I saw on TV?”
Goldstein: I answered, “Is it crowded from a business perspective?” If I said from a consumer perspective, it’s confusing from a consumer perspective, and I believe the winners will be people who have both established brands and have other services.
It’s confusing from a consumer perspective, and I believe the winners will be people who have both established brands and other services.
And we shouldn’t underestimate the importance of, if you are managing your investment portfolio, it’s sort of helpful to get a checkbook type of thing as opposed to each of these are stand-alone.
The reality is, from a consumer perspective, this is all one thing, which is, this is your money and how do you leverage your money to both live and achieve certain outcomes you are striving for? And I think that the more the various elements of that can be brought together, the greater the value proposition from a consumer perspective.
Levy: How does active management fit into this? If more people — you know, mom and pop, Main Street, however you want to call them — have access to better tools now, is there any role for an active mutual fund or a bond fund and how is it going to play out for active money managers essentially?
Goldstein: I actually believe better tools make it better for both funds that are trying to generate alpha as well as people who are trying to use index products to try to generate alpha.
Risk transparency doesn’t favor one investment strategy. It’s a concept that extends across all investment strategies. What’s interesting is that, in many regards, if you look at something like an ETF, it is a technology to just give you very efficient, cost-effective exposures. But even the way that people use ETFs are in the context of making active decisions.
And as we look at these capabilities, we think it helps to build portfolios blending the two because we believe very strongly it’s not a one-size-fits-all model in sort of one direction or another. We actually believe that it’s a fund debate, but it’s not a portfolio-construction debate.
Levy: So this doesn’t necessarily change money flowing to one type of strategy over another necessarily?
Goldstein: I don’t believe so. I think that the nature of risk transparency and technology, what it should do — and this is a point in time statement — if you look at this unprecedented liquidity, the numbers are staggering. Seventy trillion dollars. I don’t know what the most recent number is, but the last I’ve heard is sort of $70 trillion in sort of cash. It helps people migrate that savings to investment and, again, it’s very hard to achieve most financial outcomes through keeping your money in cash.
And if anything, if you look at the period from the financial crisis, and you know next year will be the 10th anniversary, for example, of Lehman Brothers, if you look at those that put their money on cash for that period or those who kept in their investments, I’m not saying the risk taker who bought a bank the next day. I mean, just if you kept at it recognizing investments are a long-term game, and particularly for retirement savings, longevity in terms of being able to invest, being able to save and invest over a long period of time is your greatest asset. The people who stuck with it relative to the people who didn’t have dramatically different outcomes.
Levy: And all the losses they would’ve remade and more, right? If you look at 2008 forward.
Goldstein: But even if they wouldn’t have had such a good outcome, you know the outcome has been extraordinary, but it still would’ve been — over a 10-year period — it still would’ve been greater than keeping it in cash. So I picked a good 10-year period because it’s the most recent 10-year period, but at the same time, just relative to keeping it in cash, over a long period of time through a cycle, that’s the right thing to do.
Levy: Can you speak to how BlackRock views active versus passive more broadly?
Goldstein: Sure. It’s incredibly simple in terms of how we view it in that our goal is to construct portfolios that achieve our planned outcomes. And we believe that often, in building those portfolios, you’re blending active management and you’re blending index product. We actually believe one of the greatest misnomers is this word “passive” because we don’t believe any investment decision is a passive decision. You could buy an index fund but you’re not doing that passively. You are making a judgment about asset allocation and other things that impact your portfolio. So when we look at it, we look at it really from, “What is the objective the client is striving for and how do you build the most efficient portfolio to get him or her or the institution to achieve that objective?” Most of the time, you see a role for both active product as well as index product in constructing that portfolio.
Levy: So you don’t think there’s going to be a “death of active” necessarily?
Goldstein: Not only do we believe there’s not going to be a “death of active” but I think quite strongly, we’ve been investing in our active businesses and we’ve been quite transparent and vocal about some of the investments that we’ve made.
Levy: In the sense of expanding them?
Goldstein: So for example, we’ve been very focused on how we could leverage — funnily enough, this could be its own technology discussion — but we’ve been very focused on how we can leverage technology, big data, and other concepts to generate more alpha in portfolios. That’s been a huge thrust of what we’ve been focused on.
Levy: In actively managed portfolios?
Goldstein: In actively managed portfolios, and obviously technology has changed so many things. I mean, look, you’re recording this on your phone. The whole thing is amazing, where the world is. If I would’ve told you 10 years ago you would have a device that does all those things, you would’ve thought I was crazy. And the irony is that when you look at the devices on “Star Trek,” what you have is actually cooler than many of the devices on “Star Trek.”
When you look at one of the major changes, it is this combination of the data that’s now available, the technologies that are available to analyze the data, and access to computing power at the price points that you can access computing power and put them together, the opportunities that creates to identify themes, trends, market paradigms is just — it’s limitless.
My sales pitch is very simple: BlackRock is a growth company. BlackRock is a growth technology company and we’re growing our technology functions. We have a very ambitious plan that we call “Tech 2020.” And as part of that, we are looking to extend the 2,000-plus technologists we already have within BlackRock. And we’re really excited about the opportunity to take a company like BlackRock, which is already, I’d say, at the forefront of technology in its industry, and, if anything, keep expanding that.
Levy: Do you anticipate buying more wealth-management-type startups? How do you see that being implemented?
Goldstein: It’s a great question. I see it implemented in a variety of ways. First is, hiring and building the current capabilities that we have. Engineers, analytics, financial modeling. The second is we will continue to look at opportunities to expand our technologies through acquisition. And lastly, we have actually taken, made investments in firms that we believe have interesting technologies that we think the notion of having some sort of partnership with can accelerate client outcomes.
Levy: Are these asset-management firms?
Goldstein: No, these would be — I’m in fintech land — so, for example, we’ve taken an investment in a company called iCapital, which is trying to democratize access to alternative investments. We’ve taken an investment, we’ve made an investment in Scalable Capital, which is the leading digital advice platform by far in Europe, so leveraging all three of those capabilities or tools, I guess, leveraging all three of those tools in terms of continuing to accelerate our technology capabilities.
When we see interesting capabilities that we think we could help the capability and they could help us, that’s what’s exciting to us.
Funny enough, I wouldn’t call it diversifying. I would call it extending our capabilities.
Levy: And would the common thread be that they all somehow cater to the Main Street investors versus the institutional? Cash Matrix is institutional, but the other three?
Goldstein: The other three, yes. The other three would be more on the wealth-management side.
I would just say that the starting point on the wealth-management side is such that there’s so much more opportunity to help relative to the institutional side. I think they’re in very different parts in terms of what the starting technology point is.
Levy: And that’s just because historically retail clients have been underserved?
Goldstein: No, I don’t think it’s so much underserved. I always had this saying, which is, in my career, I saw on the institutional side risk go from a nice-to-have to a must-have to a must-have-the-best. I saw that cycle on the institutional side. I think that on the wealth-management side, risk, they’re sort of in that middle bucket. It went from a nice-to-have to now it’s becoming a must-have.
And to be clear, it’s a harder problem in many ways on the wealth-management side because there are many more objectives that people are trying to fulfill. There are many more portfolios. There are many more constraints that you have within the portfolios. So it’s just a harder problem. I believe the new technologies that have emerged over the past two or three years — you know, the ability to access compute power at different price points — just a variety of new technologies have really unlocked the opportunity to do it at scale in a whole new way. It’s just a different scale factor.
With assistance from Raul Hernandez. This article was originally published on Business Insider. Copyright 2017.
#ScaleStrategy Q&A: Borrowell’s Co-Founder on Why Scaleups Need Values More than Culture
Eva Wong discusses how the credit and fintech company keeps applying their values to support growth.
“I remember having a half hour conversation about building a sales team with our OneEleven office neighbour. He took me into a board room and wrote out everything that he learned and the mistakes he made in the nine months it took to build out his team. That’s just one example of our first value: humility. Admitting there’s someone 15 years younger who’s been in business way less than I have been, but who knows way more about this than I do,” she recalls.
Wong says values and the culture that emerges from them can help companies scale by bypassing cumbersome process and bureaucracy that can slow growing organizations. As Borrowell has grown from 4 to 45 employees, Wong says she has learned that values are more fixed — and crucial — than culture.
“In the early days, we talked about culture fit. Now we talk much more about culture contribution. [New team members] don’t have to fit into the existing culture. As we grow and change, the culture will too. The values are more important to hold true to,” she says.
Recently, John Ruffolo, the chief executive officer of OMERS Ventures, caught up with Wong to discuss why scaleups need to pay close attention to culture, how it impacts hiring and how to scale it as the company grows.
John Ruffolo: Why is culture so key for scaleups?
Eva Wong: There’s a really popular quote that says “culture eats strategy for breakfast.” Culture is what keeps larger companies agile. If people don’t intuitively do the right things on their own, you have to add process and that slows companies down. For us, as we grow, a really strong culture involves ensuring people understand how they help us continue to scale in a way that avoids bureaucracy.
Ruffolo: How would you describe the culture at Borrowell?
Wong: Culture isn’t about perks. It’s not about things we do for fun. Or how the company has shared interests. For us, it’s clearly tied to our values. Our values are:
- We’re high-performing and humble.
- We’re trustworthy and team-oriented.
- We love learning.
- Act like owners.
- Diversity makes us better.
Ruffolo: When the initial team came together, did all of you share those values?
Wong: I don’t think it was as explicit. When you come together as co-founding team, you just click. It was more implicit. We did read the Netflix culture deck and said “that’s what we want our culture to be!” We knew we’d have to articulate it one day because people were asking what our culture is and we wanted to be consistent in how we described it.
Ruffolo: How did the culture shift as you grew from 4 to 45 employees?
Wong: We didn’t have our values established or written down when we were four people. That came when we were maybe 16 to 20. It was a collaborative, organic, bottom-up approach where we asked employees, ”What’s different about working here than other places you’ve worked?” People shared different things and we came up with the values that way.
But as we continue to grow, culture is naturally going to change and we’re okay with that. It has to change. What we don’t want to change are the values. We want to add people to the company who add to the culture, not necessarily stick in the lanes. We recognize that as we grow and become more diverse those values can manifest differently. We still want people to act like owners, but it just might look different compared to where we were when we started.
One thing our VP Talent, Larissa Holmes, launched within the company is a competency matrix, which explains what behaviours we expect from team members at each level of the organization. For example, if you’re a senior director what does it mean to be ‘high-performing and humble’? It’s also a way for employees to know what competencies are needed to move from a manager to a senior manager to a director and how those things are tied to our values. Employees have to get better at exemplifying the values to move up in the organization.
Ruffolo: Do you think culture is playing a role for talent wanting to work with you?
Wong: One hundred percent it is. A lot of people will check out Glassdoor before they come in, so they already have a sense of our culture and values. We take the interview process seriously as well, since it will be their first real taste of our culture. On Glassdoor, people can actually post reviews of the interview process, even if they’re not hired. There are posts from people who we turned down but who wrote positive reviews of their experience. We try to make sure that people we are interviewing see and meet various team members from different levels within the organization. That’s important to us.
Part of the interview process is doing an assignment, which exemplifies our values as well. It’s not just about who can talk a good game. You have to produce good work, too.
Ruffolo: In interviews, how do you describe your culture to a candidate?
Wong: Like any company, you can put values on a wall. But you need to give specific examples of how you actually live them. Our value ‘act like owners’ is a pretty good way of encompassing us. We really do encourage everyone to think about what they would do to make the whole company successful — to put on their CEO hat and think about what’s best for the business. It encourages people to avoid thinking in a very narrow sense about their role.
Our ‘high-performing and humble’ value is a big part of who we are too. Humility helps us recognize that although we’re all really smart and capable, you can’t just operate as an island. You’re dependant on your teammates, and we need to listen to our customers. Humility allows people to be able to take a step back and have their ideas challenged by others.
Ruffolo: Is there one of your five values that needs to be taken to the next level?
Wong: The value — ‘diversity makes us better’ — is something that we’re working to improve on. Our goal is to have a gender-balanced company, and we’re not there yet. We’re currently at 40%, which is not bad, but it’s not evenly distributed within our company. We’re continuing to track as we grow as a team at different levels and different departments.
Obviously, diversity isn’t only about gender. There are a number of different metrics we measure, including the percentage of employees that are born outside Canada. Since we have this focus on diversity and inclusion, I think we’re more likely to attract and retain diverse talent and to promote people with different backgrounds and experiences.
Ruffolo: Which entrepreneur inspires you the most and why?
Wong: There’s an entrepreneur named Kim Scott who has written a great book called “Radical Candor”. I admire her because she’s been very effective as a business person and operator without losing her humanity. She still cares very much about her team, and I think she would say those two things reinforce each other, whereas some people think you can either be a strong operator or a good person. She said in order to be an effective operator, you have to care about your team and have authentic relationships.
Ruffolo: Are there are books that helped you in your scaleup journey?
Wong: I read a book by Adam Grant called “Give and Take”. He talks about people falling into one of three categories: givers, takers, and matchers. Within givers, there are smart givers and there are pushovers — those who give but not in a smart way. They tend to burnout and get taken advantage of. Of all those groups, those who do the best are the smart givers. At Borrowell, we ask ourselves: “how do I give smart without burning out or being taken advantage of?”
Ruffolo: What is your number one piece of advice for a founder in the scaleup stage?
Wong: Constantly reevaluate what you’re doing and make sure you’re still working on the highest value things. When you’re scaling, things are constantly changing and you have to keep reevaluating your role. Are you spending your time doing the most high value activities?
3 Things to Know About Scaling Culture Through Values
Co-founder and COO of Borrowell on the power of values
As Wong has helped grow Borrowell from a team of 4 to 45, she has learned that being clear on values is more important than maintaining a culture through scale. Culture emerges from a company’s values, she says, and both together help companies avoid the need to create cumbersome process and bureaucracy that can slow down growth.
“Values and culture are what keeps larger companies agile,” she says. “If people don’t do the right things on their own, you have add to process and that slows companies down.”
When Borrowell was first founded, they didn’t have their values written down, says Wong. As they grew, they needed to articulate those same values clearly for the scaling team.
“We first did it when we were about 16 to 20 people. It was a collaborative, organic, bottom-up approach where we asked employees, ‘What’s different about working here than other places you’ve worked?’ People shared different things and we came up with the values that way.”
About a year ago, as growth continued and Borrowell raised another round of funding, Wong and the rest of the management team knew they needed to add one more value: diversity.
“We care a lot about diversity. Checking off a diversity box and getting them in the door isn’t enough. We want diversity of opinions and to retain diverse employees,” she says.
Today, Borrowell’s values are:
- We’re high-performing and humble
- We’re trustworthy and team-oriented
- We love learning
- Act like owners
- Diversity makes us better
For scaleups looking to refine their values and culture, Wong has three key lessons she has learned through the evolution of Borrowell.
1) Values Over Culture
“It’s more about values and less about culture,” says Wong. “We’re open to our culture changing, but want to keep our values consistent.”
In the early says, she says, the founders talked about culture fit, while now they talk about culture contribution. Employees don’t have to fit the existing culture or share the same personalities as current employees because those things will grow and change as the company does.
In fact, Wong wants to see a diversity of culture at Borrowell and is open to seeing their values manifest themselves differently as they continue to grow.
“We want to add people to the company who add to the culture, not necessarily stick in existing lanes. As we grow and become more diverse those values will look different. We still want people to ‘act like owners’, but it just might look different as we grow compared to where we were when we started,” she says.
2) Ask About Values When Hiring
One lesson Wong learned through trial and error was to be explicit in interviews about the company’s values and share what they mean.
“We take the interview process seriously, since it will be a person’s first real taste of our values and culture,” she says. “We embedded our values into the process and we have specific questions we ask during around each of the values to make sure people are aligned with them.”
Part of the interviewing process at Borrowell is to do an assignment, which helps the team see the work a candidate actually produces.
“It’s not just about who can talk a good game,” says Wong. In addition, candidates interview and meet with various people from different levels within the organization who discuss how values are executed throughout the company.
3) Empower Employee Success with Values
Wong and her management team have taken their values one step further in an effort to support the scaling company.
“When we started, people were in contact with the founders every day. But as we’ve grown, that’s less true. So we need to define what each of our values mean at different seniority levels and not just demonstrated by the management team.”
To address this, they launched a competency matrix that defines what skills and behaviours are needed for the values at each level of the organization.
“If you’re a director, what does it mean to be high performing but humble,” she says. “We’re communicating what it takes to move from a manager to a senior manager to a director and what is expected. It’s part of the promotion process. Employees actually have to get better at exemplifying the values to move up in the company.”
The Unbundling & Rebundling of Banks
This story originally appeared on iNovia conversations.
“Silicon Valley is good at getting rid of pain points. Banks are good at creating them.” — Jamie Dimon, CEO JPMorgan Chase
FinTech has made massive waves across the world in recent years, with more than 5,000 companies founded, raising nearly $6 billion in venture capital financing.
Let’s take a step back and reflect on why we have seen so many unbelievable entrepreneurs choose banks as the next establishment to disrupt. Of course, the simple answer is that banking is a large sector, with lots of room for improvement; and millennials desire digital experiences in their financial lives. While those are the most often quoted reasons we see in pitch decks today, we believe the real tailwinds behind the growth of this sector lie even deeper.
First off, an attractive quality of a market ripe for disruption is one where the critical infrastructure is already in place for innovation to be built upon. Matt Heiman at Greylock references that critical infrastructure in this post, citing data APIs like Plaid, Yodlee, and Flinks making it easier to work with financial data; payment APIs like Stripe making it easier to accept payments; and financial market APIs like Xignite, making it possible to pull in live stock prices. Having this foundation in place makes this space all the more attractive for entrepreneurs.
Second is the harsh reality that one’s financial picture today is much different than it was a decade ago.
- Real annual wages have been stagnant since 2000
- Education costs are rising exponentially
- Credit card balances are higher than ever
- Credit scores are lower than ever, limiting access to capital
- Home ownership is at its lowest level since the Census starting tracking it
- High deductible health insurance plans are now the norm
- Populations are aging and retiring older
As Sarah Tavel points out in this post, called “Saving People Money”, in response to these changing macroeconomic factors, people need new ways to save money, manage money, and invest money. Cue the need for tons of innovation.
Lastly, banks have turned into modern-day conglomerates. The large banks today offer every product you can imagine, from insurance to loans, to mortgages, to cross-border money transfers, etc.
This is a prime example of an institution that does a whole lot of things, but does none of those things really well. This is the perfect landscape for a startup to focus its efforts on a select few of those items and execute to perfection.
The ability for a startup to begin “unbundling” some of those banking services is predicated on the notion that a physical presence in banking is no longer at the core of the customer experience. Alex Rampell, Partner at a16z, makes a great comparison between the financial sector and the retail one, citing Amazon as the retailer that caught these same tailwinds and removed the physical presence from the equation, allowing it to displace WalMart as the biggest retailer in the world. He leaves us with a crucial thought in this video, asking “when will banking have its Amazon moment?”.
These factors have opened up the possibility for thousands of startups to transform the way modern banking is done. Every transformation happens in multiple phases, and the first step in this equation is unbundling. The opportunity at hand is for startups to be exclusively focused on only one banking product (say savings or lending). Consider several examples of this being successful:
Alternative lending platforms such as SoFi, Kabbage, and Clearbanc have all taken advantage of the inefficiencies in the lending departments of large financial institutions. These lenders all have similar formulas in the way they disrupt traditional banks:
- High Touch: Start by focusing on a specific user and understand that user really well. This allows the company to underwrite that specific user much more effectively than a bank would. Underwriting more users means more originated loans, and lower loss ratios. For example, SoFi has focused on students, Kabbage on SME’s and Clearbanc on entrepreneurs.
- Reduce the margins banks earn on loans: A traditional bank accepts money (deposits) and pays a minimum amount of interest (<1%) and then loans that money (primarily on credit cards) for closer to 19% interest. There is a lot of margin there to cut in to for a startup. Given the lenders mentioned above don’t have brick and mortar operations to pay for, they can beat the banks loan rates in most cases, and offer credit to more borrowers.
Robo-Advisors such as Wealthfront, Betterment, and Wealthsimple have automated a routine job that was typically done by financial advisors. Large mutual funds and ETFs were already mostly being managed by algorithms, however clients had to consult financial advisors prior to investing. By removing the advisor from the equation and promising individuals a balanced, diversified portfolio that fits their lifestyle, robo-advisors are able to offer equal returns with much less management fees (typically 0.5% vs 1.5% at traditional banks).
- Savings platforms such as Acorns have found new, innovative ways to encourage people to save money. They are able to offer a fully digital experience, and have ‘gamified’ saving, by incorporating goal setting, rewards points, and a social element. Alternative savings platforms can earn a higher return for clients on their savings all with free accounts that they can contribute to or withdraw from anytime.
These examples continue across every facet of a bank. This image below gives a taste of the FinTech landscape today, and highlights every element of unbundling currently under way. This is the home page of Wells Fargo and it outlines the top startups picking apart every piece of the bank.
Of course, unbundling is not the holy grail, it is merely phase one. Entrepreneurs’ ambitions and world domination plans are much larger than simply mastering one banking product. The first product, or the unbundling, is just the “hook” to acquire customers and begin building trust and brand name. Startups exploit the banks on one simple product as a hook to win the consumers’ business in the hopes of then being able to target that same consumer with other financial products in the future, hence phase two: rebundling. The more startups that begin offering additional financial products, the more those startups will begin to resemble traditional banks. Here are some examples of rebundling happening in action:
- Acorns has now differentiated beyond simply a savings platform by launching Acorns Spend, a debit card product.
- Square began as an easy-to-use terminal for on-demand workers to receive payment. They have now begun issuing loans to their merchants.
- Paypal has launched a prepaid debit card that includes bank transfers, deposits, and cashing checks.
- SoFi has moved beyond just student loans and into mortgages, wealth management, and life insurance.
- Robinhood has extended its trading services to cryptocurrency
- Stash has launched core banking and custodial services
- Credit Karma knows everything (far beyond just credit cards).
What has emerged in the FinTech space is a race to own the end client relationship. Each startup took a different approach, chose a different vertical, and unbundled a different element of the bank. But as all those startups look to layer on, and rebundle the core services of a bank, they will all be vying for mindshare from the same customers. Suddenly, a group of thousands of companies solving various, unrelated problems, will become competitive and will race against each other to be the “go-to” digital bank (or the ‘Amazon Moment’). Despite the numerous examples of rebundling above, we are not quite there yet. As the graph below depicts, we are still at the tail end of the unbundling phase, with startups trying to achieve critical mass in their verticals, prior to commencing the rebundling process.
Once the rebundling phase begins on a macro level, the threat to traditional banks will increase exponentially. Today, consumers excited by digital offerings startups are delivering are faced with the pain of having to piece together all of their financial needs like a puzzle (since every startup only unbundled one product). Getting all of your financial needs serviced, requires interacting with many startups. This pain still generates enough friction for consumers that they maintain their relationship with their traditional bank, and experiment with one or a few new innovative products on the side. Most customers with an Acorns account, also have a traditional savings account at their bank (likewise with investments and loans).
While we don’t expect startups to attempt to put together products that cover everything Wells Fargo offers today, we expect them to bundle a subset of elements that have high synergies. In the past, a HENRY (High Earner, Not Rich Yet) would have one relationship — a big bank; in the future they won’t have 50 relationships (one for each service) but they may have 3–8 relationships with digital rebundlers. Customers will have the opportunity to transfer more and more of their banking relationships to their most trusted digital providers, and will be able to move further away from their traditional banking relationships.
We have yet to see the true threat to banks. But it is around the corner.
Let’s conclude by summarizing what all of this means for inovia in terms of how we allocate capital and make investment decisions in the FinTech space. Here are some of the key elements we look for:
Having a unique and differentiated customer acquisition machine: the ability to acquire customers cost effectively is of utmost importance in the FinTech space. As mentioned above, owning the client relationship is the holy grail, and having a customer not only counts as revenue for the current product, but also allows the startup to target that customer with additional banking products in the future. Here are some examples of unique customer acquisition strategies that have proven successful for FinTech startups;
- SoFi began by targeting students with its loan products. This led them to be able to use universities as distribution channels and acquire students cheaply (this customer profile was being ignored by traditional lenders). They coined the term HENRY to describe their target customer. This profile was not of interest to banks since they were not wealthy enough (yet) to drive a significant amount of business.
- Clearbanc offers revenue-based financing to entrepreneurs. They quickly realized that many small businesses use Facebook as their primary advertising channel and that one of the barriers for small businesses is access to capital. Clearbanc partnered with Facebook to help provide capital to these small businesses (much of it to be re-invested in Facebook ads for customer acquisition). This allows Clearbanc to acquire users cheaply through the Facebook merchant network.
- Affirm allows consumers to pay for large retail purchases in installments. Rather than target consumers directly, Affirm used merchants as their distribution channel. Once a customer reaches the cash, the merchant would ask the customer if they wanted to pay using installment payments (powered by Affirm). This turned the business into a B2B model of selling to merchants rather than a B2C model of competing on customer acquisition.
A well-thought out rebundling strategy that involves owning the end consumer or merchant: Entrepreneurs need to think about pitching the big vision from day one. Building a massive business in the FinTech space will not happen with a series of accidental product additions along the way that we “hope” consumers will enjoy. Owning the end customer should be the objective from day one, it is the core of the business and the reason for existence. Then it is up to the entrepreneur to experiment with various “hooks” to lure in their first batch of customers cheaply. These hooks are more flexible and far less important than the actual master business plan. Here is some advice on choosing the right hook:
- Test and iterate quickly on initial customer segments you are targeting and the product offering you’re selling. Try something and kill it within a few weeks if you are not luring a unique kind of individual. It is crucial to find a differentiated customer base to initially target, rather than going after the same customers as everyone else.
- Pick something that resonates with millennials. For example, Ellevestcreates mutual funds tied to the unique career path of women, OpenInvestallows clients to add social impact stocks to their portfolio and Quantopianallows anyone to create financial trading algorithms. The overall vision of all of these companies is to be the trusted financial partner for their target client base, however they have all approached the market with hooks that resonate deeply with that market they are targeting.
- Once you’ve found a differentiated customer base and a product that resonates with that base you will begin attracting attention to yourself. The idea is that you can use your initial base as a springboard to layer on your rebundling strategies in a more cost effective way. Start with engaged users, build brand awareness among them, garner attention, and then begin rebundling.
Innovate in a new area of banking: Over 40% of all investment dollars into FinTech startups to date have been poured into the alternative lending space, leaving massive industries (such as mortgages and insurance) with few well-funded companies. Additionally, there potentially many innovative ways to improve one’s financial lives that don’t even exist yet and are not even done by banks. Finding a new way to add value financially is a compelling way to disrupt the antiquated banking industry. Examples of radically new financial products are;
- Mortgage companies like Ribbon, Point and Properly that allow consumers the ability to sell their homes more efficiently and even offer the possibility of unlocking some of the equity in their home (things banks don’t do today).
- Contextualized insurance companies like Lemonade, and Slice. Today, an individual may act as a business one day (renting our their home on Airbnb, or driving their car for Uber) and as a regular citizen the next. Insurance needs to adapt to understand the context in which your assets are being used.
Create your own infrastructure and be self-reliant: Many FinTech companies simply add a new layer or application on top of existing banking infrastructure. This is a great way to validate the problem, but in the long-term the majority of the gains will still accrue to the financial institution serving as the infrastructure layer. FinTechs that are self reliant can be more disruptive and rebundle other apps even easier than those that rely on others. This is one example of a well-planned rebundling strategy from the start.
At inovia we look to partner with audacious founders building enduring technology companies. It is clear that the ability to have an impact on one’s financial experience has the potential to disrupt everything we know about our banking systems. Those are the types of ‘big bets’ we thrive in undertaking.
Alex Barrett is a VC at iNovia Capital. His experience in financial services began during his time in Accenture’s Management Consulting practice.
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