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How fintech startups can succeed in an increasingly competitive space

This is Ask a VC, where we quiz venture capitalists on the latest trends in finance.

It’s been said that nine out of 10 startups fail, and given the growth of financial technology companies that have sprung up since the financial crisis, a path to long-term profitability is key. RRE Ventures, a venture capital firm based in New York City, has invested in a number of high-profile players including Ripple, OnDeck and Avant. Its investments also include technology companies such as Palantir, Giphy and SocialFlow and media outlets including BuzzFeed, NerdWallet and theSkimm.

Founder and general partner Stuart Ellman spoke to Tearsheet about what he looks for in entrepreneur pitches, the challenges of building a sustainable business model and the evolution of products for consumers and businesses.

How can investors tell the difference between the next big fad versus the next big thing?
Experience and judgment. It’s extremely difficult to figure out what’s a fad and a thing; theoretically a thing is a fad that lasts a very long time. The question is how long is something going to last, and are you going to be able to take what you have and create a lasting competitive advantage and then be able to build a business out of it.

What trend is most exciting to you right now?
Robotics. The ability to get robots to perform tasks that are helpful to people and [also] get a return on investment is really just coming online.

Is there one that’s particularly overhyped to you or has lost your attention?
There are many. Amazon’s announcement about the closure of Quidsi [parent of diapers.com and soap.com] certainly helps delineate how hard it is to be a retailer that doesn’t create its own products. Not sure if this is overhyped, but as compared to the last 10 years when we funded a variety of media startups like BuzzFeed and Business Insider, it’s much harder to break into the new media market because so many of those then-startups have become very large companies in and of themselves and have partnered with much larger companies with big distribution. And obviously, there’s been a lot of hype in insurtech as well, because you have a number of new insurance companies that are managing general agents, which means that they’re using the insurance plans from insurers and marketing them differently. There’s a lot more risk in being a managing general agent as a startup against seeing what some of the incumbents will do to combat them and compete against them.

Personal finance is getting increasingly competitive. What will the winners need to have?
Over the past 10 years, you’ve had an unbundling of products and services. You had Mint which helped you understand and learn what your financial picture looked like, and you’ve had people doing savings, like Digit, and people doing bill negotiation, like Truebill and Billshark.  

Each of these point solutions created value, but it was hard to achieve significant scale on any of them. What Clarity Money is trying to do is create the next generation by being an API that uses all of these different services. I would rather not have one thing that does the saving and one that does bill negotiation and another that does subscription management — I would rather one that integrates all of them.

For those that are underserved by the financial system, what can startups offer that’s different than the banks?
I have a personal belief that it’s not my job to make money off of people by putting them into debt that they cannot afford to have. On the other hand, getting people credit that were previously underserved is something that’s important and obviously technology is well suited to do.

What’s the biggest mistake that entrepreneurs make when pitching you?
The belief that prior success will lead to future success. It’s clear to me that every good entrepreneur fails, and failure allows you to see things more clearly.

What’s the biggest lesson you’ve learned from a failed venture?
Be careful about how much money you put into companies that may have once been a good idea but cease to have been after a certain period of time.

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Investopedia now wants to ‘match’ financial advisers with readers

Far from just a how-to guide to financial and investing terms, Investopedia has evolved into a media brand in its own right. With coverage ranging from bigger economic stories, advice on investments and budgeting, and entertainment with a finance lens (“Investopedia’s Guide to Watching Billions“), its reach is growing.

Now, the publisher is looking to drum up more interest with a new service that will match some of its contributing writers, mostly financial advisers, with readers.

“After talking to a lot of advisers, clearly building the brand is important, but what they really care most about is driving leads and new client acquisition — their goal is to grow their practices,” said David Siegel, Investopedia’s CEO, in an interview with Tearsheet.

The move could help solidify the publisher’s Advisor Insights platform’s reach among a specialized community of advisers and investors, making it even more valuable to advertisers and ultimately generating additional revenue.

“Our aspiration is to have every one of the 300,000 advisers [nationally] work with Investopedia as part of their daily workflow,” he said. “If we have hundreds of thousands of advisers who are using Investopedia, and if we have tens of millions of users who are asking questions of advisers, there is significant monetization in being the intermediary,” he said.

Siegel, who took over as Investopedia’s CEO two years ago, has been working to build a more socially-inclined, specialist audience for the site. It’s an approach that draws 27 million unique monthly visitors and a ranking of 6th among the world’s top investing sites globally, according to SimilarWeb. The site has also beefed up original news content, including video.

IAC-owned Investopedia launched the Advisor Insights section of the site a year ago as a platform to allow accredited financial advisers to answer questions from users, for no fee. While Investopedia doesn’t pay the advisers for answering questions, it said it offers perks and exposure to help them grow their reach — after 25 answers or articles, Investopedia staff will shoot a marketing video about the adviser, and after 50, Investopedia gives them additional visibility by letting be the sponsor of the term of the day.

“They’re not paid and they don’t pay us, but by publishing content, they get tremendous digital exposure and traffic,” Siegel said. “But what they really care the most about is driving leads, driving new client acquisition.”

The new matching service (called Priority Leads) is available to advisers who have contributed at least 200 articles or answers. In response to requests from clients to connect with advisers, Investopedia staff will tap into its pool of top contributors to find a suitable match. Only 50 to 100 of the 25,000 advisers using the platform today have access to this service, but Siegel said he expects it to grow quickly.

Investopedia has quadrupled its staff over the past two years and now has 115 employees — 12 of whom focus on Advisor Insights. Siegel said he intends to keep the online advisory service free, as the site generates revenue from advertisers. The move to offer free curated advice from accredited advisers is one way for Investopedia to distinguish itself among a family of sites dedicated to personal finance and investing, including NerdWallet, Kiplinger, credit.com and others. It’s just one step of a larger strategy to drive audience engagement, he said, and future plans include the launch of Adviser Insights as brand on its own; continuing education content for financial advisers; and the creation of a online community for advisers who could discuss industry issues such as succession planning.

“Our focus is how we can create content in a differentiated way, and engage with users such that users are coming back on a more frequent basis and are engaging much more deeply with our content — Advisor Insights has proven the answer to that for us.”

 

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Ask a VC: How startups are turning away traffic from payday lenders

This is Ask a VC, where we quiz venture capitalists on the latest trends in the finance space.

The name of the game in the financial industry right now is simplification. But the growing plethora of apps and startups claiming to simplify people’s money game has created a crowded market.

Core Innovation Capital is a San Francisco and Los Angeles-based venture capital firm that invests in companies that figure out how to cut down the red tape around personal finance. It’s invested in companies including NerdWallet, Trim and CoverHound and a recent exit from the portfolio is bill payment company TIO Networks that was acquired by PayPal last month.

Tearsheet spoke to managing partner Kathleen Utecht about the problems innovators are working to solve, what she looks for when deciding to invest in a company and what’s coming next in the financial inclusion space.

How can investors tell the difference between the next big fad versus the next big thing?
Sometimes people say it [financial technology] is a fad, but it’s not. There’s major structural inefficiencies in financial services as a whole. For example, if I hand you a check and it takes three days to cash and if you don’t have enough money in your bank account, it costs you money. It’s based on ACH technology which is really old, and in between banking systems that’s based on Swift technology and again that hasn’t been slowly updated. They’re not just fad businesses. There’s normally real unit economics and people are solving a need. We avoid things that are only small incremental improvements. We’re looking at things that are really going to cut costs, save time or create upward mobility for people and are not incremental — a significant value proposition to their lives.

Core Innovation Capital supports ideas that generate an attractive return on investment and aim for upward mobility for Americans — can you do both of these, from day one?
Our whole thesis is that you can do well and good at the same time. We’re on track for that. We also want to have a major impact on people’s lives. When you think about it, the best companies are the ones that bring true value to the end consumer. We look at how much money our companies put in people’s pockets or make them upwardly mobile, and we look at the revenues and what their profitability is — those two things go hand in hand.

What financial technology trend is most exciting to you right now?
There are so many, but we love the stuff going on in the future of work and fintech. When you’re a W2 [full-time] worker, you get taxes taken out and you can save for your 401(k), but for part-time workers or 1099 workers, this isn’t done. A lot of companies are trying to get to this base — it’s a third of the country right now. These startups can insert themselves in the payroll system and do what an employer would do for you — they can take out money for your taxes, they can take out money for your savings and for your insurance.

The second trend we see a ton of is insurance. We’ve made three investments in insurance and we expect to do more. Tech is hitting insurance and every insurance company is creating their own venture capital arm. Insurance companies see all these new startups coming to disrupt them and they want to be part of it. They want to partner with the [startup] companies rather than let new startups eat their lunch.

Is there a trend that’s particularly overhyped to you or has lost your attention?
It will be interesting to see if [financial technology] will be successful in the life insurance space. I like the concept of it, but it’s something the insurance companies might be able to just do themselves and copy. The economics are going to be hard to prove out.

There are many funds that aim to help people who can’t access financial services, in the U.S. and in the developing world. Can startups offer something different than the banks?
Banks have so much legacy infrastructure and so much overhead they can’t serve these smaller dollar accounts — whether it’s investing, saving or lending — as as much as startup can. They don’t have the technology or efficiency. Banks don’t want a lot of the less affluent customers, they don’t treat those customers well, and there’s all sorts of fees.

So what can startups do to add value to the underserved market?
When serving the underbanked, you just need to do better than the payday lender. Do you know how awful payday lenders are? These are terrible experiences. The places are dimly lit, and you wait in a really long line to spend 10 dollars to cash a fifty dollar check. I would be glad to see the payday lenders and check cashers go away. They’re awful. Startups can create a better experience and responsibly underwrite people.

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How one startup aims to help ‘credit invisible’ foreign workers in the U.S.

For millions of immigrants and temporary foreign residents in the U.S., establishing a financial identity here can be complicated and expensive. Since credit reports don’t cross borders, an immigrant with an exceptional credit score in his home country may arrive in the U.S. as ‘credit invisible’ — a status that may render him ineligible for loans or long-term housing.

“From getting a credit card, an auto loan, or getting a mortgage, all those use cases require a financial identity,“ said Misha Esipov, CEO of Nova Credit, a startup that’s developed a product called “Nova Credit Passport,” an alternative credit report that’s based on credit bureau data from other countries. The product launched last summer.

Nova Credit is an alternative score to assess foreign residents’ creditworthiness based on their home country credit data. It can also be used for Americans returning to the country after years working abroad. The company obtains the data through agreements with major foreign credit bureaus, a process that can only be initiated with the customer’s consent, Esipov said. Though Nova Credit is initially focusing on India and Mexico, it’s entered into arrangements with credit bureaus in Europe, Canada, Australia and the Philippines. Its revenue model is based on fees to lenders who request the reports.

“We can enable lenders and landlords to instantly pull consumer credit files from Mexico and India as easily as they pull a traditional U.S. credit file,” he said. Nova Credit’s system works through API integration with foreign credit bureaus. Its model uses machine learning to spit out a score that’s comparable to U.S. credit scores, noted Esipov.

While not commenting specifically about Nova Credit’s tool, David Shellenberger, FICO’s senior director for scoring and analytics noted that FICO’s own efforts to expand access to credit are centered around its alternative data-based FICO XD score in the U.S. and includes efforts to expand access to credit in other countries. TransUnion and Experian could not provide comments by deadline.

One analyst with experience working with two major U.S. credit bureaus said that a score based on foreign credit bureau data may not be reliable enough for U.S. lenders.

“The challenge is that is there enough information to generate a score that a U.S. lender would consider to be reliable enough to use when underwriting credit — that’s the dilemma,” said John Ulzheimer, a Fair Credit Reporting Act consultant who has previously worked with Equifax and FICO.

Even using data from the most sophisticated non-U.S. credit reporting systems may still not generate comparable scores, said Ulzheimer.

“Even Canada is different — there are considerably more lenders in the U.S. than there are in Canada, and we market credit much more aggressively than Canadian banks,” said Ulzheimer. “If you look at the prototypical Canadian credit report vs. the prototypical American credit report, the American one is going to have more information than a Canadian one would have.”

He added that some emerging markets have limited credit reporting infrastructure that may not generate a comprehensive enough picture upon which U.S. lenders can rely. U.S. credit reports are based entirely on financial services data, while foreign reports may include utilities and housing information, he added.

Despite these challenges, Esipov said the uptake from U.S. lenders has been positive so far, adding that Nova Credit has been working with U.S. banks, credit card issuers, and property management companies.

“For them, this is an opportunity to solve a problem that a lot of their customers have been looking for a solution for for decades,” he said. “It’s ridiculous that even for our friendly neighbors to the north and south, we can’t help citizens from those countries or even Americans coming from those countries land on their feet — we’ve finally created a global system that allows that to happen.”

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‘Sick and tired of no one innovating’: Confessions of a financial tech entrepreneur

Sunshine is the best disinfectant: We trade anonymity for honesty to get an unvarnished look at the people, processes and problems inside the industry.

It can be hard to keep track of all the apps that help users save money or get access to credit. Financial technology entrepreneurs have an impressive track record of developing products for underserved, low-income populations. Big banks are increasingly offering startups big money and advice to build these products. But in the startup sphere, some feel pushed by the banks to work on products for lower-income customers. To them, this lets the banks to appear like they’re giving back, while keeping the startups out of the more profitable high-income customer segments.

For the latest in our Confessions series, we spoke to a startup entrepreneur with considerable experience in the banking sector. Here are the excerpts, edited for clarity.

Big banks are supporting startups working on products for poor, underserved populations. Do you think this is because they actually care?
The financial inclusion thing is ominous. It’s because the banks have high fixed costs and aren’t able to reduce them. We do all the things they don’t want to do, picking up the pennies in front of the steamroller. But don’t come into the high earning area.

So banks are making more money off of high-income customers, and are pushing the startups to take the lower income ones they don’t want?
They would much rather get their tax breaks and give to charity and say they’re doing good for the country than get their hands dirty with a bunch of very subprime demographics. The fintech guys have to go to high risk. If you’re a bank, you can cherry-pick all the rich people and not have as many defaults in a downturn.

Do you have to work with a bank to be successful in the startup world?
Really, there’s no getting out of it. Even if you’re a money transmitter you still need a bank account — you still need to hold your money at a bank. If you’re doing something with cards, you have to have a card issuer and the card issuer has to be a bank and a member of Visa and Mastercard if you use them as well.

What about accelerators and incubator programs where the banks mentor startups. Doesn’t that show their goodwill?
They just steal your ideas. They’re not doing it for the good of their soul. They’re doing it to take a chunk and or steal the idea as you build it and do it themselves.

Are there areas where startups can get into that banks aren’t addressing?
You see things like student loans like SoFi. They realized that banks didn’t understand the difference between a Harvard grad and a whatever local college grad. They’ve managed to get into a spot where the banks are too lazy to even sift through the data.

If it’s so hard to get your product to market, what’s the objective of a startup entrepreneur? Is it just to cash in when you’re acquired by a bank?
If you’re looking to make a little bit of money quick, it’s probably not a bad play, but if you’re actually looking for any kind of change in the world, and you believe in that, it’s not a good move. That’s the reason why people go into this, and I believe I’m one of them. I am bored and sick and tired of no one innovating in the space.

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Bank of America is testing employee-less branches to serve digital-first customers

The thought of going to a bank branch and chatting with an employee that knows a customer’s name and life history already feels antiquated, a scene right out of “It’s a Wonderful Life.” The final nail in that bygone era’s coffin is coming as banks adapt to younger customers – those who may choose to do their banking on their phone or interact with a non-human to manage their personal finances.

Enter the stripped-down, employee-less branch with just an ATM and a meeting room for video conferences with bank employees. The yet-to-be-named mini-branches are part of a Bank of America pilot program, with two located in Denver and one in Minneapolis. After a senior executive mentioned the concept at an investor conference last week, rumors proliferated as to whether this was a sign that the bank branch may be going the route of the bricks-and-mortar bookstore, the CD shop or the mall. The Washington Post even suggested bank branches may become what it calls “robo-banks” – automated and impersonal.

Bank of America’s mini-branches are about a quarter of the size of a traditional branch, said spokeswoman Anne Pace. Similar to an Apple Genius Bar, customers make an appointment through the bank’s mobile app. Once confirmed, the customer can take part in a videoconference meeting with a banking agent. To ensure everything goes smoothly, the bank deploys “digital ambassadors,” or customer service agents who answer customers’ questions about the technology. Pace said that the digital ambassador – a role that’s only been around for a year – is focused on making sure customers are comfortable with the technology and can use the mobile app.

Banks are evolving the way they deliver services to a mobile-first customer while continuing to build brand recognition – a tall order when customers are more open to using a range of products including upstart apps to manage their finances. Other banks are also experimenting with smaller, “smarter” branch terminals, including Citibank.

Bank of America said the mini-branch program is meant to test customer response, and is not linked to any plans to cut staff. SEC filings, however, show that the bank is trimming staff numbers as a whole – at the end of 2015, the bank had 11,000 less full-time employees than it did just one year before.

Still, analysts noted that the move towards smaller branches is about more than just reducing costs.

“It really is about saying ‘look, online and mobile banking are the two most widely and frequently used banking touch points,’” said Peter Wannemacher, senior analyst at Forrester. “That changes the role branches play in people’s financial lives – it’s about changing how you serve customers.”

Others in the industry warned that pivoting too quickly away from the traditional bank branch presented some risks for big banks, including the loss of some high-value older customers and diminished brand recognition.

“You don’t want to steer so far in that direction that you alienate the older generation,” said Raja Bose, svp of global advisory services for banking technology and ATM manufacturer Diebold Nixdorf. “As banks become more digital, they are actually almost undermining some of their key strengths – if the bank is truly digital, then it’s not very difficult for you to switch banks or start using PayPal or blah-blah-blah-bank-dot-com.”

 

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With new finance site, About.com targets the ‘adulting’ generation

There’s no shortage of sites catering to people who have lots of money and want advice on how to spend it. So with a new personal finance site, About.com is going for the “adulting” market.

Half the audience that comes to About.com for financial-related articles are aged 18-34 and skew female. So with its new vertical, The Balance, it’s aiming at young adults making big financial decisions — like opening up a retirement account or buying insurance for the first time — with 34,000 pieces of content around personal finance, investing, money hacks, career advice and small business tips. That content was previously housed in About.com’s business/finance network, which ranked 24 in business/finance sites as measured by comScore. It had 4.8 million unique visitors in July, down 17 percent versus a year ago.

“We help you understand big decisions in your life and tell them in a straightforward, accessible way,” said Neil Vogel, CEO of About.com. “We are financial advice for the 99 percent.”

The Balance is the second vertical that About.com has launched as part of a strategy to unbundle its content into distinct brands, recognizing that as the internet has matured, people are preferring specialty sites over big-scale portals. The first was a health site it launched in April, Verywell. A tech vertical is set to follow later this year.

About.com gave Verywell a friendly, graphics-heavy design scheme and pages that are light on ads and editorial elements. About.com applied a similar approach to The Balance, but played it a little straighter, reflecting the weightiness of the topic. “It looks a little like a finance site, but it’s so much nicer and friendlier,” Vogel said.

about.com's new financial website
The Balance website

Kirk Olson, vp of Trendsights at Horizon Media’s Why Group, a unit that looks at consumer trends and applies them to brands, said despite the fact that a lot of millennials face challenges getting on their feet, a significant number of them are buying homes and planning for their financial future. The challenge for The Balance will be to educate advertisers that still lump all millennials together.

“There are marketers who are aware there are millennials who have entered this phase, but from what I see, a lot of marketers are still stuck on those old ways of thinking about millennials,” he said.

Having fewer ad placements also means The Balance has to sell more of them to make the same amount of revenue. Vogel is confident the demand will be there, though, as clients are asking for financial editorial content for young consumers (for them, The Balance even has a sales package called “adulting.”) His bet is also that having a clean, easy-to-read site will induce consumers will lead them to come back more, which will make up for the loss in ad inventory.

“We’re trying to differentiate by appealing to advertisers by not annoying consumers,” he said. “We’ve learned how to say ‘no’ to advertisers.”

This article originally appeared on Digiday.

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Making better financial decisions – with Michael Carvin

Decisions like buying a home trip up even the smartest minds. There are so many variables, so many moving parts – it’s real hard to wrap your mind around it.interview with founder of SmartAsset, Michael Carvin

Today’s guest on Tradestreaming Radio, Michael Carvin, founded a company to assist with just that problem. His recently-launched firm, SmartAsset, provides a next-generation toolset to clearly answer tough problems like buying a home and the decision to buy versus rent.

Michael joins us to discuss his move from private equity into entrepreneurship, why people have such a hard time making tough financial decisions, and how SmartAsset solves these problems.

Listen to the FULL episode

About Michael

ceo of smartassetMichael has a lot of experience in private equity and is the founder and CEO of SmartAsset.

Continue reading “Making better financial decisions – with Michael Carvin”

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SmartAsset raises money after successful launch

I don’t know about you but many of those thousands of financial calculators are pretty useless (for some that don’t suck, check out the 80 financial calculators that FinancialMentor just launched).

Why do most financial calculators suck?

Well, for one thing, they’re not personalized. While I’m in control of the inputs and some of the assumptions, the advice spit out is generic regardless of whether I live in New York City or San Francisco.

Other calculators like those focused on mortgages make outlandish assumptions about the type and size of mortgages I could purchase regardless of whether I’d actually qualify for any of them.

SmartAsset: a better financial planning tool

SmartAsset changes all of that. It’s a financial calculator 2.0. Launched 3 weeks ago, the sweetly-designed site enables people to address specific financial purchase decisions: like ‘How big a house can I buy’ and ‘Should I buy or rent’?

But behind the calculations are some nifty mathematics and data personalization. For example, when I determine how big a house I can afford, the platform sucks in the fact that I’m logging in from NY, which has specific closing costs associated with it. Specific loan requirements for my area. A different tax rate than other geographies.

So, when I click the button, I can be pretty sure that the advice (and it is advice) that’s spit out of the calculator is pretty darn realistic.

Anyway, I think it’s a great tool and apparently so do 14,000 other people — the number of people who have built financial profiles on the Y-Combinator-backed site. The platform is built to rapidly introduce new calculations in the same spirit. The company also announced a $900k financing round.

Check out SmartAsset and let me know what you think.

Would you use SmartAsset for your financial planning?

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App of the Week: HelloWallet

As much as we talk about the advances in investing technologies/platforms on Tradestreaming, personal finance tools are really kicking it.

One of the most popular is HelloWallet. Like the model that its predecessor Mint.com pioneered, HelloWallet is meant to not only track and manage personal spending/budgets, but optimize them as well.

Visualizing your financial life

If you’re like me, you’re a visual person. One of the hardest things to tackle with personal finance is to really understand all the ins-and-outs, money-in/money-out.

Our lives are complex. Spending on individual items needs to be put into the larger context of everything going on in our financial lives.

HelloWallet does a powerful job representing data with useable visuals and the entire service is centered around goals, the guideposts that help determine what we should — and shouldn’t — be doing financially.

After hooking up your bank account and credit cards and filling out simple budgetary items, HelloWallet begins spitting out personalized daily guidance. These zen-like tips are comprised of ways to address lowering spending, reorganizing debt, saving more, etc.

Social benchmarking and conflict-free

HelloWallet also provides social benchmarking by explaining what others in your social/geographic group spend on particular items so you can tell whether you’re overspending or not.

One of the gripes people have with Mint is that its revenue model is to refer its users to 3rd party sites and receive remuneration for any money spent on that new relationship.

HelloWallet doesn’t do that and makes a point of emphasizing that it’s conflict-free. The app comes with a free, no-credit-card-needed 30 day trial. It’s generally $8.95 per month.

Check out HelloWallet.