Building products that help consumers improve their financial health is hard. Finance is complex, the space is regulated, and consumers tend to be reserved about sharing their financial information, limiting viral loop options. So why would anyone try to build a product in this space instead of another food delivery app?
Here are five reasons why this space is so exciting:
#1: Money is really important.
Money isn’t just a thing like any other possession; it is actually a proxy for how much we expect to get back from everyone else in society for our work. What most of us do for forty or more hours per week is reflected in how much we earn — or, put another way, the favors we can expect from everyone else in compensation for all of that work.
Money is what makes our society function; it is what enables an engineer who has never touched a scalpel to get heart surgery and what enables a surgeon who has no idea how a transformer works to get electric power delivered to his home. Managing that precious resource effectively is one of the most important things we as a society can do. More than that, how we spend our money determines where our society collectively spends its energies.
By building a business in the space, you are interacting with one of the most important aspects of people’s lives and generating unparalleled customer loyalty.
#2: Money management is a huge problem for hundreds of millions of people.
Losing control of money is one of the most terrifying and disheartening things that can happen to a person. 30 percent of people in this country could not make ends meet for three months without an income. Again, that isn’t just a number: someone in this position literally cannot stop working even for a few weeks without going into back-breaking debt. The psychological burden of that is extreme. To be clear, these are not people on the fringes of our economy or those flirting with poverty; these are solidly middle class Americans. Many people you meet day in and day out are few weeks from a financial wipeout.
Talk about solving a big problem for people — this is it.
#3: The more our society advances, the harder it becomes to manage capital.
It is getting incredibly hard to manage our money. Here’s an example: how much does an iPhone cost? Verizon will sell you one for $200. But over two years, it actually costs about $2,650* (thought process below this post). And that just gets you two years! The 1950s analog here is probably something like a washing machine, which while expensive, lasts twenty years and needs only a dollop of cheap detergent each cycle to keep working. You don’t need to spend 200 words explaining what a washing machine costs to own; you can pretty much just take the cost at face value.
Let’s take something even more extreme: retirement savings. Historically, American workers were much more likely to stay in their jobs and have defined benefit plans (pensions, generally). This process makes retirement pretty simple: work hard; stay loyal to your company; spend your income responsibly; get a predictable stream of income once you retire. There’s not much planning involved assuming things go well. However, our economy doesn’t really work that way anymore. Since the mid-1990s, only about 10 percent of American workers remain in a job for more than 20 years, and defined benefit plans are rapidly giving way to defined contribution plans that rely on workers to figure out how much they want to allocate to their own retirement (401(k)s being the most typical example).
Now, I don’t think that any of this is bad. In fact, I feel quite the opposite. We have much more freedom than we used to. We don’t need to devote our lives to a behemoth corporation, slowly climbing the seniority ladder. We can pick and choose our employers, letting them bid against each other for our skills. We aren’t patronized to by corporate bureaucrats who decide how much we need to retire, and we aren’t reliant on the continued existence of some giant corporation for our retirement (a reliance, notably, that has decimated many lives). iPhones are pretty awesome, and even if the total cost of ownership for one is staggering compared to the sticker price, that doesn’t mean it’s not worth it to most of us. But for all this, our economic lives have become orders of magnitude more complex than they used to be.
#4: It’s not just about helping individuals.
We are living in a time of unparalleled prosperity for humanity, but it doesn’t feel like that to many. The reasons why are numerous, and many are well beyond the scope of this post — but there are also many that are within our grasp to change. Income volatility, health expense shocks, poor or nonexistent retirement decisions, bad savings management, and limited access to financial products — these are just a few things that are profoundly harmful and yet addressable by us. And there are some terrific companies already working on these problems, some of which are part of the Financial Solutions Lab at CFSI, including Even (solving for income volatility), Bee (solving limited access to financial products), WiseBanyan (better retirement accounts), Digit (“automagical” savings), and Remedy (helping solve health expense shocks).
One of the greatest gifts of a free society is that it gives us the opportunity to solve other people’s problems and rewards us for doing so. Such societies aren’t doing so well right now. Free markets come under fire when people feel marginalized and economically insecure. Take a brief look at the trends around the world and here at home; if we fail to improve the financial health of our country’s citizens, we may not have much opportunity left to innovate at all.
#5: It’s lucrative.
My final appeal: there generally is more long-term value in building critical products than superfluous ones. The underserved financial market has consistently been growing at more than 6 percent for the past five years. The barriers to entry are higher, the competitive challenges less threatening, and the opportunities for value creation more plentiful. There are always exceptions, but it’s better to pick a big problem than a little one, especially if you have the ability to tackle it effectively.
Financial health today is a surprisingly open problem space, and it is a big problem. There are few incumbents. There is a lot of capital available for the right ideas. There are hundreds of millions of users hungry for solutions.
I know that we entrepreneurs aren’t going to solve the most fundamental demographic and structural challenges that we are facing overnight, but we can do a lot to make people’s lives better. We can give people more control, more insight, and enhanced ability to control their economic lives. We can help make impossibly complex decisions manageable, and we can help provide a bulwark against devastating-yet-avoidable mistakes. And isn’t that work well worth doing?
#FinHealthMatters Day is June 29. Add your voice to those talking about Financial Health by responding below, or blogging or tweeting using #FinHealthMatters! More resources are here.
* Here’s my quick back-of-the-Excel-sheet math: to get that $200 price, you need to sign a two year contact, which will run you about $40/month. And you’ll incur data charges, text charges, taxes, and fees (all very, very well-hidden) that put that monthly cost closer to $80. You’ll probably lose the charger at some point, so budget an extra $20 for a new cable and another $20 for the actual charger. I don’t seem to manage two years without breaking the screen of any phone I own. Now, I hate cases, so I have to spend the $100 for a new screen, but I’ll give you, dear reader, the benefit of the doubt and toss in a $40 case instead. If you actually want to do anything with that shiny phone, you’ll need a few apps and some subscriptions. Spotify is pretty popular at $10/month, so let’s just go with that. Average sales tax in the US is about 8.5%, so the total cost is about $2,650. Worth noting is that, given the average income tax, you need to earn about $4,000 to be able to pay for that. Quite a bit more than $200!