Imagine you had a bad infection. You were hoping it would go away on its own, but it’s getting worse. Instead of going to your doctor, you go right to the pharmacy. The doors are unlocked, but the pharmacist isn’t there, so you walk in and peruse the aisles of medicine. In this pharmacy, you can choose any medicine you want, no questions asked. If you do have questions about the medication, there are representatives from the pharmaceutical companies waiting at the end of the aisles to talk to you. Seems like a crazy way to choose your medicine, right? It’s a good thing that’s not the system we have. But it is the system we have for our financial decision-making. The last few decades have seen an explosion of new products in the financial services sector. These financial technologies - or “fintech” solutions - provide literally tens of thousands of choices to consumers on how they can save, spend, borrow and invest their hard-earned money. But there have been few regulations put in place to protect consumers. Today, you can get your pay early, borrow against the equity in your car and buy shares of crypto, all by noon. Each product may be useful to the customer, but we’ve left the individual to sort it out on their own. We’ve left the patient alone in a pharmacy, without a pharmacist to guide them.
How We Got Here: The Growth of Fintech
How’d we get here? We have been living with fintech our entire lives - financial innovation goes as far back as the telegraph in the late 1800s. Products that we don’t think twice about -like ATMs - were once massive upheavals in the financial consumer markets. But more recently fintech has exploded. In the second quarter of 2021, VC-backed fintech companies raised over $30B, a 30% year-over-year increase, and the total number of fintech startups increased by almost 2,000 in the US alone. The total value of digital payments grew by over a trillion from 2019 to 2020, totaling $5.2 trillion. Consumers are responding to these developments and not looking back - 2015 was the first year on record that more people used mobile banking than physical branches. Fintech has democratized the financial sector, allowing more people to access and benefit from financial products. This can help improve financial health and stability, as long as individuals can navigate the system on their own.
Where We Are Today: The Fintech Ecosystem
The fintech ecosystem is expansive. There are several different types of fintech options for consumers, and many different products to choose from within each segment:
- Contactless Payments: Apps like Venmo, Cash App, or PayPal allow us to pay our friends and family back with a few clicks, and we can pay for our groceries with the wave of a phone with ApplePay. We can buy faster and with less, but can impulsive buying decisions hurt personal finances? Does not seeing the money leave your pocket make it harder to save?
- Digital Banking Services: Chime is a digital bank with a $14.5 billion valuation that serves a lower-income population: the average income of their customers is $39,000, compared to $63,000 for all Americans. Apps like Providers help people manage their paychecks along with benefits like disability or WIC. But, does removing the human being make it more difficult for individuals to get support and ask questions?
- Credit Builders: Apps like Credit Karma, Self, and Credit Sesame help consumers access their credit score for free and offer products and services to help them improve their score over time. These products have even introduced additional reporting to credit bureaus that help show creditworthiness for the historically underbanked. But, do users know what to do (and not to do) with better credit?
- Paycheck Access: Companies like PayActiv and One@Work allow consumers to access their paychecks early. Sometimes referred to as “earned wage access” or “EWA,” these products allow employees to get ahold of money they’ve already earned but haven’t received yet through paycheck deposits. This creates more flexibility in spending and offers support in an emergency. But, can getting paid on-demand make it more difficult to budget?
- Loans and Credit Cards: Affirm allows consumers to make big purchases and pay them back on their own timeline using monthly payments (sometimes referred to as “Buy Now Pay Later” or “BNPL.”) Stripe and Sivo offer businesses flexible credit and debt services for low cost. Yendo gives you a credit card tied to equity in your car. About a third of “Buy Now Pay Later” customers miss payments and hurt their credit scores, so how do consumers know which of these products are right for them?
- Investing: Crypto and NFTs, and the millionaires they’ve created, can be accessed on Coinbase, Gemini, and Robinhood, although most people don’t fully understand them. Robinhood even offers free stock trades and allows users to participate in IPOs. With easy access, how do individuals know what is or isn’t a sound investment?
Clearly, each of these products can add value to consumers’ lives when used in the right situation at the right time and in the right combination with other fintech products. But, structurally, the lack of decision support amongst the myriad of apps who aggressively compete for users feels irresponsible.
The Path Forward: A PCP for Fintech
The fintech train has left the station, and the innovation and disruption it brings will generally be positive. Still, leaders and innovators must establish checks and balances that truly help individuals identify the right products at the right time. Similar to the limitations of WebMD for diagnosing medical problems, "Google" can not be the only financial support tool for consumers. We need to create a primary care physician for financial health. This neutral, third-party guide can help consumers navigate the existing system to support their financial health. This financial PCP can be a combination of digital tools and human support. Moreover, it can sit within existing experiences - nudging people in the right direction and assessing what’s best for them at various decision points. So, what would this PCP entail? The following three components would establish a strong foundation to level the playing field:
1. Just-in-time education: In the same way your PCP writes you a prescription and the pharmacist educates when you’re picking up your medicine, a fintech PCP can offer consumers the information they need when they need it. This guidance could come in the form of a short video about common financial challenges and the fintech solutions that can help, or an online, searchable library of resources that give an overview of different types of fintech. In either instance, the education should offer the tradeoffs or "side effects" of selecting a specific financial product or pathway. Using data from a longitudinal study of older Americans, Annamaria Lusardi and Olivia Mitchell found that offering targeted financial literacy resources to people just in time can help increase their overall financial stability. With this decision support embedded within the user’s experience, great products can help them execute on their goals.
2. One-on-one coaching: A PCP helps set a strategy for your health. They guide you on a topic you don’t understand. Similarly, great financial coaches and advisors are, at their core, strategists. They can design a student loan payoff strategy and then determine the right payment plan and/or refinancing, drastically improving someone’s quality of life. Or they can assess retirement readiness and offer investment advice to help someone achieve their future goals. This strategic coaching can also be applied to any fintech product, with coaches highlighting the risks and benefits, helping someone use the product effectively, while also making any necessary behavioral or budget changes. All in all, personalized coaching gives users a trusted voice and a financial friend.
3. Consumer protections and regulations: All physicians are held to both moral and legal standards for their patients, like the “do no harm” Hippocratic Oath or HIPAA privacy laws. Similarly, the CFPB provides some basic standards of care with respect to financial products. For example, they have prevented credit card companies from charging consumers hidden fees and helped homeowners better understand the terms of their mortgage. While the agency has been weakened in the last few years, it still has the power and structure to ensure the explosion of fintech doesn’t become a "wild west" scenario where consumers need to be wary of any product they choose. Regulating marketing messages, how APRs/interest rates are disclosed and greater oversight of cryptocurrencies can be great places to start.
Hope: Democratizing Ability to Build Wealth
Having the ability to walk into a pharmacy and select any drug you want could be justified as an expression of personal freedom. Yet, we recognize the dangers of this approach and have an established system to limit it. Similarly, as more and more fintech products, fueled by millions in venture funding, hit the market, dangers exist. User growth can become an overwhelming driver for leaders. Product innovation driven solely by what the user wants can drown out the voices of what the user needs. Fintech’s promise is that through greater choice we have greater access to financing, income and, ultimately, wealth, but we know that more and more choices may not lead to better outcomes alone. This is the paradox of choice. As a result, it’s critical for financial health advocates and organizations alike to consider embedding a Financial PCP into the ecosystem. This approach should not curtail innovation but, instead, ensure it’s happening in a way that holistically helps users. While, today, you can get your pay early, borrow against the equity in your car and buy shares of crypto, all by noon, the PCP can help you figure out if it makes sense to do so. And, as a result, our system will evolve from allowing users to pursue the aisles of financial medicine on their own to ensuring users are getting the right product at the right time and in the right combination. This simple addition can help realize the true potential of fintech, democratizing the ability to build wealth.