I believe entrepreneurs will use technology to reinvent the way financial services are provided to consumers this decade.
I agree and here’s why. First, if anything, the crisis has taught us that our nation’s financial system is utterly broken. From real estate to insurance to credit cards to banking to Wall Street, no area has been immune. It all needs a radical makeover. Second, consumer pain is incredibly high. Take financial advice as one example. Do you have a financial advisor? Most people don’t. Chances are unless you have minimum level of investable assets say $50K or $100K you will have a tough time finding one or at least a good one. Most brokers will turn you away because you are an unprofitable customer. Companies like FiLife and Financial Engines have recognized this gap. Last, the market opportunity is enormous. There are many billion dollar market opportunities in the sector. Online payments alone is pegged at $600B and PayPal has less than a tenth of the market.
Change is coming, but I think it’s going to require major disruption. Historically, companies in the sector have seemed to follow the adage: “He who has the gold, makes the rules.” Maybe a bit of an exaggeration, but the general principle applies. Banks get your deposits so they decide on fees and interest and can do whatever they like with your money (e.g. lend it out at a higher interest than they pay you). Legacy business models were set up to protect revenue streams. Monopolies are rampant. Look at the investment banks and credit card companies. The list goes on and on.
With all that being said, I’m optimistic and believe now is great time to be a tech entrepreneur in financial services. Incumbents aren’t going to change any time soon and many have massive cost structures to maintain. Their cash cows have plenty of milk left (look at inter-dealer brokers). That’s opportunity and a significant advantage for nimble startups. It’s up to entrepreneurs to re-define the rules and how we think about our finances. While it’s impossible to predict the future, I can guarantee you this: it will look very different than it does today.
I’m dedicating a series to this topic and we’ll take a closer look at new business models and startups in Payments, Banking, Capital Markets (Trading, Wealth Management, etc) and others like Insurance or Real Estate. Stay tuned.