A new study from Escalent, a research consulting firm that works in financial services, shows that growth is slowing across the digital ecosystem. It may be easy to wave this off but for fintech firms, this is extremely troubling. Startups that fail to consistently grow frequently pivot away from their original market or product or fade away into the ether.
Chris Barnes, chief product officer and managing director at Escalent, joins us on the podcast to talk about his firm’s findings. Specifically, we discuss growth trends and trajectories in payments, robo-advisers and micro investing, and cryptocurrencies. Chris also shares what he thinks fintech firms competing in these fields need to do to reinvigorate growth.
What prompted the research
We’ve been monitoring growth of digital financial products for a long time. We’re really seeing an ecosystem emerge where companies are trying to connect various digital offerings — sometimes to their non-digital products and other times to their other digital services. So, we started asking whether this is a true ecosystem, how is it forming, and how is it growing?
We’ve been monitoring individual growth of these platforms — crypto, robo, micro-investing — for a long time. We just wanted to bring them all together and look at the big ecosystem.
Growth is slowing across the ecosystem
The biggest takeaway is that growth has slowed substantially. We’re not seeing large leaps of adoption or expansion of use in many areas. As a result, we’re offering some advice as to how to reignite growth. For a lot of players in the space — whether they’re a robo startup or a big player in digital payments — they’re looking for new ways to invigorate growth.
Our findings were surprising. We had expected to see a continuous movement along the adoption curve. We see some specific products in that danger zone across an adoption curve. If you don’t get past 16 percent adoption for a technology, it often stalls out, becomes something else or fails. In this case, I don’t think we’ll see failures across any of these categories but we could see substantial transformation necessary to make them viable.
What fintech sectors were surveyed
For payments, we looked at it two ways: mobile or digital payments and peer to peer payments. We looked at micro-investors, like Acorns, and the robo-advisers which we’ve been tracking since their emergence. We also looked at cryptocurrencies. Those are what we see as the pillars of the financial ecosystem.
We didn’t include challenger banks. We view them not as a product but as a change in services offered. It’s more a channel piece. We’ve looked at them carefully around issues of trust and adoption. The move away from banks to challengers is an important issue in the US because it threatens a lot of small and regional banks.
What this means for the money center banks
I think these findings line up well for the big banks. It buys them time. They are in a position where slower growth is fine for them, so they can now manage a transition in ramping technology and deciding what they want to do with physical locations. They have the easiest time pulling all of these together under one roof, with the exception of crypto. This slowing gives them an advantage.
Why payments have stalled
Consumer habits and personal economic behaviors are at play here. 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. There’s still some unknowns, especially for older folks, about what could go wrong with a mobile payment when they’ve literally done thousands of transactions with a physical credit card. I’ll go back to my habit until something changes. Without disruption or an obvious net benefit, you slow adoption.
Growth is stalling for younger generations, too. And when you see that generational effect, you have to start worrying about what’s next. Apple is trying to solve for this. They’ve launched a physical card that isn’t like the other cards, because it’s really designed to be a transition from card to the mobile payment ecosystem. Apple’s trying to solve for the fact that the benefit and habit have been so hard to break.
Robos and micro-investing look for new growth
Right now with robo, people are more likely to be nudged into it by the business than they are to go shopping for it themselves. If you’re at Schwab or Fidelity and you’re not a huge customer, they want to get you into an advice system but don’t want to spend at the advisor level to have enough advisors. The margins for advisors on smaller accounts are very small, so they’re more likely to nudge you into robo by changing the parameters of your account.
It’s another case of consumer habits. Some of the pure plays, like Betterment, had to go back and create human connection to move along their adoption curve and increase growth. When there are problems, people want someone to yell at. 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.
On the micro-investing side, these are platforms that are offered to new savers. They work on behavioral economic principles that enable you to stash a small amount of money with a scraper that puts all of your pennies in an account. The idea is to grow slowly over time. These platforms need to have significant adoption for folks who won’t only start with them, but will stay with them. Otherwise, they’re really playing with a large number of small accounts. This is why I think we’ll see the link between micro-investing and robo grow.
How to reinvigorate growth in the ecosystem
First and foremost, companies really have to hammer home the actual benefits of using a digital tool. The phase where being sexy and cool attracted new users is over across the board. You have to really push the reasons to believe and the benefits. If you can’t come up with a solid case for benefits, you will still have slow growth and see people fall away because why bother?
There should be a push toward greater differentiation. That’s why the moves by Facebook with Libra and Apple with Card are so interesting. They’re sort of occupying the space in between the areas they want play in. That’s a tough place to play in. Unless they have solid transition plans to move people quickly, they could see those efforts stall and not take off.