We reported on slowing growth in the fintech ecosystem on Tearsheet. A recent study from research consulting firm Escalent shows expansion stalling across payments (mobile and P2P), investing (robo-advice and micro-investing) and crypto.
What's interesting about the slowing growth is that it's happening across the board. If you compare usage trends in 2016 to 2018, from early adopter Millennials to boomers, the population of people who have tried mobile payments at least once isn't growing significantly.
And in certain demographics, usage is actually going down. Interestingly, across all Millennials, which includes older and younger ones, mobile payment users have shrunk from 57 percent to 54 percent. And this is a population that grew up using technology. Gen X and Boomers appear to be slowly moving into mobile payments, each experienced a 1 percent uptick over the past few years (35 percent to 36 percent and 16 percent to 17 percent, respectively).
"Consumer habits and personal economic behaviors are at play here," said Escalent's chief product officer, Chris Barnes. "Credit cards work really well. What's the net gain or upside to someone to switch? To make a change as a consumer, you think about what you get and what you risk."
Robo-advice growth driven by converting existing brokerage clients
There was an old saying in the industry that insurance wasn't a product people generally bought, it was sold to them. That's similar to what's happening with robo-advisors. While standalone firms like Betterment and Wealthfront launched the industry, the growth now is coming from incumbent players converting smaller brokerage accounts into automated, fee-based accounts.
Fidelity (20 percent), Vanguard (12 percent) and E*Trade (10 percent) together have nearly half the market after only launching their automated investment platforms over the past few years. Small accounts don't generate much revenue for these firms and it's not efficient to pair these clients with advisors. So, robo-advice service clients through automated advice while also creating new fee-based revenue for the brokerage.
This is another case of consumer habits standing in the way of more mass adoption. Some of the pure plays, like Betterment, had to go back and create connections to human advisors to move along their adoption curve and increase growth. "When there are problems, people want someone to yell at," said Barnes. "The folks who are interested in robos are already in. That's why we saw over a two year period completely flat growth in adoption of robo-advisers."
Stashing small investments away
Micro-investment platforms Acorns and Digit were founded upon basic behavioral finance principles. People don't save on their own and these technologies automate or nudge consumers to squirrel small sums of money away either after making a purchase or periodically throughout the month.
This model leaves micro-investment platforms with a lot of users with small accounts. To be able to scale these businesses, companies like Acorns will need their customers to stick around longer as they get wealthier and save and invest larger amounts of money. This is a long term play and one that hasn't yet proven itself out.
The data show that consumers aren't sold on micro-investing, either. A little more than a quarter (26 percent) of people surveyed said that they felt micro-investment apps are as trustworthy as traditional brokerages. A similarly small population felt that micro-investing is a legitimate way to save for retirement. Trust sells in finance and underlies every transaction. Without their trust, it's hard to grow a customer base.
Scoring the ecosystem
Not all fintech is created equal and even if growth is stalling broadly, individual sectors remain better positioned for future business. Neither payments, robos, or micro-investing platforms have found the killer functionality. Without a good reason to switch, people are going to stick with what they know, explains Barnes.
Mobile payments is probably best situated in terms of consumer awareness. The big marketing pushes over the past few years by the wallet players like Google, Apple, and Samsung mean that people know about mobile payments. Apple Card's recent launch will continue to drive home mobile payments, even if a physical card is used as part of a transition period. Robo-advisors have also used the billions of dollars of equity they've received as investments to raise awareness of their offerings.
In terms of safety, consumers seem to worry solely mobile payments. The plastic credit card works really well and people understand how it works. Moving to mobile is still rife with questions.
And on trust, the ecosystem all fails, except for p2p payments. It could be that the social aspects of apps like Venmo create a feeling of shared safety. But outside of peer payments, the fintech ecosystem lacks general trust from the public. These firms and the industry in general will need to change that if they want to reignite growth.