Direct to consumer business models have shaken up many sectors in the last few years, but disruption has been slower in reaching the investment industry. Betterment is one of a number of startups seeking to change that.
Many of the world’s biggest startups today – think Warby Parker, mattress brand Casper, or Dollar Shave Club (bought by Unilever in 2016 for US$1bn) – disrupted their industries through offering a direct to consumer model (DTC). Yet the financial industry – arguably one of the sectors most in need of disruption – seems to have lagged behind, with new entrants touting a DTC approach taking longer to reach, let alone penetrate, the everyday consumer market.
Magpie spoke to Jon Stein, co-founder and CEO of Betterment, one of the fastest growing American fintechs, to hear his view on why that might be the case, and why it won’t be the case for much longer.
Launched in 2010 in New York, Betterment is the DTC version of an investment company. Cutting out banks and brokers, it offers customers unbiased advice on what they should do with their savings. During the sign-up process the service asks you questions – it doesn’t take more than five minutes to answer them – to assess your needs before offering you options of preselected investment portfolios. You can see exactly why you are being suggested those funds and what they are made up of. It’s quick, transparent and easy.
Thanks to his previous Wall Street career, Stein has had a ringside view of trends in financial innovation. And he suggests that while there certainly wasn’t a lack of brainpower, what was missing was a lack of consideration for who was actually benefitting from these innovations.
“You know, in the crisis of 2008, I had the pleasure of working with some of the countries largest banks and brokers. And I saw a number of things first hand there where they were really mistreating customers. Charging them ridiculous fees and hiding those fees, in what I would consider criminal ways. I saw that most often they weren't thinking about how to make the most money for their customers, but how to make the most money off of their customers.”
Is this perhaps why it has taken so long for companies like Betterment to disrupt the financial space? Stein concurs. “If you think about crypto, expensive hedging products or options trading, that is innovation that is great for the company, but bad for customers.” He adds that this is perhaps to be expected, suggesting that it isn’t surprising when your driving motive as a financial company is to make money – the customer becomes a secondary consideration. Betterment, he stresses, was founded to flip the priority back to serving the customer.
People join us saying, "I was sick of making rich people richer.
Starting with the customer as one of the twin engines of its purpose is, Stein believes, a huge driver of Betterment’s current success. (The other is “pursuing happiness,” according to Stein.) It has also proved crucial in attracting talent to the firm. “People have come here from all the traditional financial services incumbents,” he says. “They left those firms because they felt they weren't having a real impact. They say when joining us, ‘I was sick of just making the big institutions richer, or making rich people richer. I want to do something that is good for the world.’”
The $5,000 question
But even if you are creating a truly innovative service that is designed around consumer needs, you still need to communicate the difference between you and what has come before. In the investment industry, that can be complicated.
Consider that the average person on Main Street is pretty well versed in the nuances of their day-to-day banking needs, and it’s straightforward for them to articulate how it can be improved. For example, UK-based startup Monzo has an open blog through which they’ve crowdsourced some of their best innovations. People can easily suggest where improvements can be made, for example doing away with the annoying fee when paying back your friend for dinner.
But that ability to be articulate falls away when the average customer starts to consider the act of investing. Understanding the lexicon in use let alone the nuances of the system is immediately a higher barrier of entry. As a result, people naturally turn to institutions they trust. As Stein puts it, “When people have these hard, difficult, painful decisions to make about the long term, one of the easy ways to make them is just to rely on known brands.” He cites Marcus, the recent DTC personal savings offer, as an example of this, which carries the heft and explicit reputation of the Goldman Sachs brand.
In comparison Betterment is a relatively unknown entity. So how does a startup build consumer trust when understanding is limited and the stakes – your personal savings – are so high?
It's up to us as providers of financial advice to make that advice acceptable and relatable to anyone.
Stein thinks education isn’t enough. “I've always said I think financial education only goes so far, because education is often a thing that we think of as during your school years, or a one-time thing. That kind of education isn't super valuable when it comes to ‘Hey, what should I do with this extra $5,000 that I have right now?’”
Even the word education implies theoretical knowledge, not practical applications. And as Stein says, “Really, you need great financial advice as you go in the moment about these things. Of course, you need the education and the mindset to be able to understand that advice. But ultimately, it's up to us as providers of financial advice to make that advice acceptable and relatable to anyone, so that they can implement the right things.”
Winning the long game
Stein believes that the most effective way to build trust at the start is to explain the basics, be honest and transparent about why your company exists, and then let the service and results speak for themselves. And so Betterment has taken that approach from the start. “They [customers] start to see oh, this is easy, this company is working for me, and we talk about the kinds of smart things that we're doing for you all the time. The automation, the rebalancing, the tax optimization and reduction work that we do. All of that we make transparent so our customers understand the value that we're providing.”
And while it is clear that Betterment’s approach, one that puts genuine customer-centric innovation front and center, is something that plays well to the reduced levels of trust in financial brands post the 2008 financial crisis, Stein highlights a bigger challenge: the rise of short-termism in our lives. “Nobody likes to think about their finances or retirement or long-term things,” he explains. “It's just the last thing on our minds. We're evolved to think about whether we're going to eat something good for dinner tonight. So thinking about long term, and even talking to people about the long term, is uncomfortable and awkward.”
Just getting people to listen, to converse and engage on this topic is one of the biggest barriers to overcome. But while there may be no instant gratification with fintechs in the same way as other DTC models, the benefits might be farther reaching and longer lasting.
For more information about Betterment, visit betterment.com
Image courtesy of Betterment