Betterment

Success Story: Stash

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After a break focused on hitting a few key milestones in my role at a FinTech startup, I’m back to share thoughts on FinTech for 2017 and one exciting startup in particular.

2017 vs. 2016

As my first post in 2017, let’s first look back at what I predicted for 2016: I expected a year of consolidation, which proved the case with Lending Club and layoffs at firms like Avant and Prosper and the recent capitulation at Betterment.

But consolidation isn’t always such a bad thing. In many ways, the category is doing well with Stripe adding growth capital at double the private valuation (now $10B).

Betterment Breaks Down

But first, it’s worth reviewing some recent big news from Betterment.

Betterment built a brand and a reputation for innovation, but I grew worried as gurus such as Michael Kitces pointed out the challenges to growth, high CAC and difficult to ever get to a breakeven level of scale ($40-50B AUM).

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Last week, Betterment finally “blinked” at conceded it couldn’t succeed as a so-called digital wealth management company (or roboadvisor).

Nerd’s Eye View, the best blog for independent financial advisors, has great insight worth reading about Betterment, but for this first post of 2017, I’d like to focus on Stash.

Stash Springs Forward

I’ve been following a FinTech startup, Stash, which recently announced a breathtaking $25M Series B, less than a year after raising a $9M Series A round from a group of investors including a fund co-founded by Peter Thiel.

Customers choose where to invest their money, starting with as little as $5, and receive ongoing guidance. Based in New York, Stash was started in February 2015 by Wall Street veterans Brandon Krieg and Ed Robinson.

stash-founders

For those who don’t know them, Stash seeks to serve a new generation of investors by providing wider access to investments to less affluent investors.

I spoke with Ed intending to write about them for Money 20/20, but I’m glad I waited given its big funding round news in Q4.

Underserved Market = Competitive White Space

Stash has hit upon an underserved market with a timely and innovative offering that’s winning customers quickly. With 150,000 clients by mid-2016 after launching in 2015, Stash is well on its way to helping the underserved to invest.

Robinson came from an institutional background but has the energy of a startup CEO. He told me, “I want to be the wave of change coming to finance and serve people who are not served and new to investing.”

He’s passionate about investor education. Although Stash seeks those “who’ve never invested before or might be intimidated by investing” to invest is starting off with ridiculously low balances for those might be earning $30K or less, its goal is to grow by educating clients and helping them succeed.

compliance Robinson told me Stash was not at all put off by becoming regulated, which is surprising since a lot of FinTech firms take pains to avoid it. Smart decision by Stash.

Stash, in fact, decided early on to become a Registered Investment Adviser (RIA).

How Did Stash Grow So Rapidly?

Simple: By targeting an underserved market who can commit only to $5 minimum to get started. Stash also makes investing intuitive by offering groups of ETF’s that are “as personal as you”, such as Clean & Green or The Techie.

stash-types

From a marketing standpoint, Stash has been smart at relationship marketing and word-of-mouth. Stash uses offers, such as three months fee and referral bonuses.

They do spend a fair bit on marketing which runs the gamut from online advertising, social media (e.g. Facebook), affiliate marketing, and content marketing.

From here, Stash plans to have clients move up a ladder expanding from its core product of ETFs and low pricing of $1/month to a suite of products, coupled with higher balances.

Check out Stash’s website or download its app to learn more about its mission of serving a more diverse group of investors, bringing some fun and lack of pretense to the world, as part of their mission of serving the next generation of investors.

2016 Predictions

2016

Hello. It’s me. As we kick off 2016, look for consolidation as private companies are forced into the arms of larger players, along lines of last week’s purchase of Jemstep by Investco, or the acquisition of Yodlee by Envestnet, BillGuard’s purchase by Prosper or BlackRock’s acquisition of FutureAdvisor.

It’s incredible how much is written – still – on Robo’s being “on fire” when the facts are so different. Look for capitulation in 2016, among startups in the robo advisor category and continued dominance by a handful in the lending space.

Robo advisors are private, so it’s hard to know how much case they are going through but the themes of recent news (e.g. lowering investment limits) suggest we may see one of the bigger players disappear in 2016, if not 2017.

This development is not specific to digital wealth management, so consolidation and capitulation is my prediction for all areas of FinTech.

pac man In 2016, look for consolidation within the most crowded areas (e.g. alternative lending, robo advisors) with too many ‘me too’ companies. Look also for some acceleration of Product innovation at bigger firms, as they try to respond to the to FinTech startups who’s captures headlines over the last few years.

Advisors: Where the Action Is

The real story is slow demise of the big name firms like Merrill Lynch and Morgan Stanley, as they lose top advisors and clients to RIA’s (not robo advisors).

Less covered by tech media, look for RIA’s to continue to take share from brokerage firms, even as firms like Morgan Stanley explore automated investment services.

What’s behind Morgan Stanley reportedly planning to introduce its own ‘robo advisor’ service is not competing with Betterment, but trying to stay relevant and nimble as it loses share to RIA’s that offer better services, products and technology.

FinTech industry followers are better served to listen to Michael Kitces and Bill Winterberg rather than read press releases from robo advisors.

Financial Data Comes to the Cloud

Is Market Data as exciting as marketplace lending or mobile payments? Maybe not, but it deserves attention, especially as one innovator, Xignite, behind Wealthfront, Betterment, Personal Capital, Motif and StockTwits –is looking to shake up an industry.

xignite

I recently sat down with the Founder & CEO of Xignite, Stephane Dubois, in San Mateo. He noted how robo advisors were among early clients of xIgnite, but that his target market now includes larger financial institutions.

I asked him whether xIgnite was like Stripe for the market data world? My rationale was Stripe has been successful in payments in part due to its focus on developer community.

Stephane_Dubois

Dubois saw the parallel, noting that xIgnite is focused on API’s, innovation and targets developers, while financial data incumbents (e.g. Thomson Reuters, Bloomberg, S&P) often seek to sell products, not delivering the actual data clients want.

But he emphasized Xignite targets both developers and businesses (both startup and larger companies at this point in the growth trajectory). As Dubois expressed it, xIgnite’s goal includes growing its business through enabling more responsive front-end tools for financial institutions, and helping it slash back-end costs.

Is Xignite the Stripe of the market data world?

From my experience at Morgan Stanley, I think there’s opportunity. Although there is a lot of focus on controlling market data expense, in light of reduced profits in many trading areas, executives such as Morgan Stanley’s Ken Brady are smart and strategic, looking to control expenditure but also enable the business.

Focus on the Apps, Not the Integration

Screen Shot 2016-01-18 at 10.17.18 PM

This illustration from xIgnite captures the essence of its value proposition and also highlights one issue for large financial institutions.

Banks do a good job managing their third-party expenditures and risk; teams focused on partners on Wall St. (ranging from Operations, Market Data, Tech Risk, Vendor Risk, Corporate Services, COO Teams). What big banks can learn from startups is to focus on the apps, not the integration (and using xIgnite can help with that approach).

Morgan Stanley legend Merritt Lutz jokes that in a post Dodd-Frank world, you can find a risk officer hiding under every desk on Wall Street. But the red tape on risk and expense management, has slowed down execution. Clients using Morgan Stanley Online can’t see basic portfolio performance reporting online, in contrast to most of its competitors.

As a result, wealth management units of banks suffer from too long development cycles. Instead of navigating bureaucracies, expense approval and risk teams, developers should be able to focus on apps and the data they need to serve clients.

Bigger banks should be more API-centric approach and embrace Agile in order to enable faster time-to-market on Wall St. and compete with FinTech firms.

2016

Final thoughts on 2016? I’m looking forward to incumbents moving faster, adopting API solutions like Xignite, during consolidation since as one executive from J.P. Morgan Chase said, ‘Do we really need 1,000 mobile wallet startups?’

I also don’t foresee any big IPO’s in the FinTech space, given the state of the markets, although SoFi and Stripe have all the right pieces in place. For now, I can see Financial Technology Partners being busy with lots of deals focused on the middle market.

2016 should offer a few surprises. I look forward to telling you about them.

Weathering the Storm

volatility

During all the recent stock market market volatility, I’ve been thinking about the long-running debate that tends to come up in the world of FinTech on the value of having an advisor.

Despite a drumbeat message to ‘ditch your advisor’ from robo advisors like Betterment and WealthFront, the reality is more and more are using advisors, who play a vital role at times like this.

While startups make a cost-comparison argument, research shows individuals working with an advisor often do better in terms of overall returns, in excess of fee difference.

This week saw a watershed moment in the world of robo advisors, with acquisition by BlackRock of FutureAdvisor.

Rather than cover this topic, I encourage readers to check out the analysis by RIA Biz.

Why Advisors?

There’s value in having a person to turn to and keep you on track. An advisor can help you plan for the future, control your emotions during times like these (e.g. market corrections) and as you enter different life stages, e.g. buying a house, planning for your kids’ education or preparing for retirement.

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A recent Q&A on Periscope hosted by Chris Sacca with long-time friend and financial guru based in Austin, Owen Brainard, made this very point.

RIA’s vs. FA’s

Brainard, like other RIA’s, emphasized an argument that a big firm’s advisors only push product, and have a lower regulatory standard of suitability (i.e. putting clients in products that are suitable, but not necessarily in their best interest, or the so-called ‘fiduciary standard’).

Fees matter – but aren’t everything

While the regulatory issue is true, so-called warehouse advisors can serve clients well if you ensure the advisor is paid in a way that addresses conflicts (i.e. a wrap fee). But there’s been a lot of growth in the RIA segment, which I’ll address in a future post, since working with an advisor 100% who must be aligned with your interests makes a lot of sense.

Starting Out

robinhood app

If you’re a Millennial or don’t have a lot of assets, there’s nothing wrong with an app like RobinHood to buy stock (although I wish they would offer custodial accounts).

Or you can choose to set up a self-directed brokerage account at Schwab, Fidelity or any of the new-style automated investment services (many of which tend to invest you in low-cost ETF’s from the likes of Vanguard).

Market vs. World Volatility

Despite the turbulent times in the stock market, it’s important to remember all the other issues we face around the world – especially the refugee crisis in this week’s headlines.

I encourage readers to be mindful for everything they have, even with the stock markets recent dips, and consider making a donation to UNICEF or a charity of their choice.

Here’s a short video from David Beckham on the current crisis in Syria:

Please consider a donation to UNICEF or any organization helping those in need.

Interview with Betterment Co-Founder & COO

The FinTech Blog publisher, Michael Halloran, caught up recently with Eli Broverman, Co-Founder and COO of Betterment to talk about its recent success and find out what inspired him and Co-Founder Jon Stein to create Betterment.

MH: Eli, it’s been a couple of years since the two of us met at Morgan Stanley’s offices. There’s been a lot of growth at Betterment, but to begin can you share what inspired you and Jon to start Betterment?

EB: The “problem” in the financial industry inspired Betterment. The problem that we saw was companies were not thoughtful about how to deliver the best products or be aligned with their customers.

At Betterment, we want to be the obvious answer to the question “What should I do with my money?” There was no great option on how to invest the right way: automated, low cost, with a great user experience.

We built this company out of the need we saw in our personal lives. Friends would ask for recommendations wanting the same type of service we wanted and it did not exist – so we set out to build it.

MH: I know one of the big differences between you and some of the others out there is the way you chose to make a big upfront investments in what you built. Can you tell me more about that?

EB: Absolutely. When we started thinking about how to really rebuild the entire customer experience, we quickly realized that we needed to start from scratch. We could have just built an online-based advisor as a front end and sat on top of a legacy broker-dealer, but that would not offer the type of experience that we thought customers deserved.

MH: How hard was to build our your platform from scratch? What were the key challenges?

EB: The key challenge was time. It took us nearly two years to build the systems and receive SEC and FINRA approval. Betterment handles everything: trading, cash movements, statements, basis tracking, tax statements, and everything in between, so naturally it takes time.

MH: Can you share any key moments, when you felt like the Betterment team achieved a big breakthrough, in terms of getting the platform to be a MVP?

EB: We have had many moments where I feel the team made a big breakthrough. Launching at TechCrunch Disrupt was a moment neither of us will ever forget. Some of the most notable ones are when we surpassed $1 billion in assets and more than 50,000 customers

Betterment on Mac

MH: You’ve also been called the Apple of online investing. Can you say more about how the team feels about user experience and the UX design process?

EB: At Betterment, delight is one of our core values. We have invested a lot of time and talent to make sure we provide the best experience for our customers, whether that is mobile or online.

MH: Why do you think others, especially large companies in financial services, seem to fall short in terms of UX?

EB: Often times the traditional industry doesn’t want to deliver a clean, easy-to-use experience. By making things complicated, companies can make more money by overwhelming you with options. It can also be challenging for companies that just keep building on top of their legacy technology. The way their technology stack is structured, it can be nearly impossible for them to create a good experience without tearing it down and completely rebuilding.

MH: Can you share any big insight you gained from the process of building out your platform that might help others in other sectors of FinTech, who are just starting out?

EB: My biggest piece of advice would be to remain patient. Building in FinTech can be incredibly challenging and a slow process at the onset.

MH: How do you see the industry for online investment management unfolding in the next few years, e.g. in light of legacy players like Schwab rolling out Intelligent Portfolios?

EB: I think everyone has taken notice that there is an enormous demand for a product like ours. The category will definitely become more crowded which most people would consider a challenge, but we really only see opportunity. As more of these companies enter the space, people will research the various options and we are confident that we’ll come out on top with the best product on the market.

My biggest piece of advice would be to remain patient. Building in FinTech can be incredibly challenging and a slow process at the onset.

MH: How do you feel about being part of the NY tech / FinTech startup scene? Do you envision having other locations, or do you think you’ll stay focused on NY?

EB: We love being part of the NY tech/FinTech startup scene. There is incredible talent in this city and it is one of the core reasons we chose New York to start Betterment. We have no plans to open offices elsewhere at this time.

MH: How would you describe the culture at Betterment?

EB: Incredible, we pride ourselves in having a great culture. We have a very fun, hard-working team. It is a very open, transparent environment.

MH: What keeps you awake at night?

EB: I think about our customers nonstop and what the next thing should be that we build for them to continually improve their experience.

betterment mobile apps MH: Can you share anything about the future of Betterment?

EB: We are growing so fast at the moment and seeing so much opportunity! We will continue to grow the team and expand our current offering and advice.

MH: What is the number one suggestion you would give to any FinTech startup?

EB: Don’t rush the process when first starting out. Take your time and make sure that you have built the best possible product you can before launching.

MH: Thanks for sharing your “founder’s story” and best wishes for continued success.

Note: Betterment will be a host company for John Battelle’s NewCo NYC event in May, so engineers, product managers, designers (or any fan of Betterment) can visit NewCo’s site to sign up for to visit Betterment’s offices (seating is limited).

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Key Themes: API’s & UX

I’ll keep it brief, since I have guest blog post on Yodlee’s web site this week.

In it, I discuss a couple of themes I see as important to startups and incumbent players in financial services: the growing role of open API’s and UX (or focus on the user experience), a traditional strength of consumer Internet businesses like Yelp.

I’ll reiterate few points. Although API’s have been around for many years, my experience is that big banks have seldom focused efforts on them for internal or third-party integrations due to security, being slow to adopt modern development frameworks, and a need to focus on legacy systems. That simply needs to change.

I recently spoke with Joe Floyd, a principal at Emergence Capital about FinTech. We agreed many functions of financial services companies risk being disrupted by startups (such as LendingClub) and the role of API’s.

We envisioned – in the context of today’s mobile solutions and app-centric world – a world in which the user grants permissions to their financial apps – just as you allow apps like Twitter to access your contacts.

In this world, your financial apps – which may be from your bank or not – e – might have the ability to see your bank balance and move money between accounts. Solutions would focus on the user’s priorities, e.g. budgeting.

I also met up with former work colleague working in customer experience strategy at Wells Fargo. While Wells Fargo excels at this area, he was open about how far the bank has come.

Our talk reinforced my view that banks are seldom naturally strong at UX, given their focus on annual budgets, long development cycles, and numerous stakeholders.

Case in point: Contrast your average bank’s user experience with what you see at Betterment. Check out its web site or try its service and you’ll see why they’ve been called the “Apple of Finance.”

Yet banks can – with their deep understanding of client needs – achieve similar UX success by being more agile and user-centric.

As a glimpse of what it might be like, imagine instead of Microsoft Word, Excel and PowerPoint, your team uses modern collaboration tools, like Asana or Slack (winner of last week’s TechCrunch Crunchie award).

Cue video!

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FinTech in New York

While I focus on SF / Silicon Valley, since I am based in San Francisco, last week I spoke with Jonathan Lehr, my former co-worker at Morgan Stanley who is now working in venture capital (along with my former colleague, Julian Levy, who just joined Index Ventures) about New York’s FinTech ecosystem.

For the last few years, Jon has been running the New York Enterprise Tech MeetUp (NYETM.com), which he co-founded with another ex colleague, Rubi Gaddi, who continues to work at Morgan Stanley’s Technology Business Development team.

After speaking with Jon about the great deal flow at his venture fund and incubator for enterprise technology, Work Bench, I wanted to devote a post to New York.

I was reminded of the strength of the New York-based FinTech start up scene, which is many ways not surprising given the concentration of banks and talent.

Here’s some geographic analysis I did this week, after analyzing the Decemer 2014 Periodic Table of FinTech, which had a list of about 100 FinTech companies, and their main backers and potential acquirers, from CB Insights.

Source: CB Insights; graphic by theFinTechBlog

As you can see, SF Bay Area leads, but NYC is a close second (which makes sense given the characteristics noted above). Here is a snapshot of the Periodical Table of FinTech from CB Insights. Click here for the full-sized version.

(I liked the infographic, but SoFi, Stellar, and NerdWallet are obvious omissions. Also while chart had Level Money, it didn’t put Capital One as a potential buyer — and they announced its acquisition this week).

Since it’s hard to see on this page, if you don’t want to click through the full version, the list of New York FinTech firms was OnDeck, CAN Capital (whose head of People Operations is my ex colleague, Mandy Sebel, from Scient), Mozido, Betterment, LearnVest, Kapitall, BillGuard, Estimize, Axial, and IEX.

I noticed that SF/Silicon Valley has edge in Lending, Payments, Personal Finance, but NY wins out in tools used by banks. There’s a more comprehensive profile of NY-based FinTech Firms from Jesse Podell which you can see on his slideshare.

It’s worth keeping in mind that last month’s IPO of SF-based LendingClub last month was larger, but NY-based OnDeck, a provider of small business loans, raised more than $200m. While startups like Plastiq that were founded in Boston will tend to relocate to Silicon Valley (following in the footsteps of WePay), New York has a critical mass of FinTech firms and is growing.

One other reason NYC is a hub for FinTech is the support of groups like Made in NY and the FinTech Innovation Lab, an accelerator backed by Accenture and a consortium of banks, with operations in New York (as well as London and Asia).

As I’ve posted earlier, I’ve attended lab events in New York, and was impressed by the caliber of the startups in the accelerator and the quality of advice, from mentors at banks, to talks such as “How to Sell to Wall St.” provided by Merritt Lutz.

(Merrit is a mentor of mine at Morgan Stanley and advisor to its SF-based private equity fund, Morgan Stanley Expansion Capital, run by tech investors Pete Chung and Lincoln Isetta, with whom I also worked at Morgan Stanley).

So, for New York entrepreneurs considering entering FinTech, it would be smart to investigate the FinTech Innovation Lab. There are more details on the Lab’s site at www.fintechinnovationlab.com.

But since the Lab’s accelerator just closed for applications — I’d tweeted to my followers about last December’s deadline — any aspiring entrepreneurs should look into the 2015 FinTech Hackathon and the New York Enterprise Tech Meetup.

I’d read last week that New York’s FinTech Hackathon has had over 1,000 participants since it was started.

Impressive. I also saw that sign up’s for 2015 hackathon will start soon, and you can sign up online to find out more here.

In and around New York, both in FinTech and related areas, there is just so much to keep track of from startups like yext, whose leadership includes my former colleague Wendi Sturgis, to mobile team collaboration provider Lua Technologies.

Doing work similar to what I did at Scient, I’d like to highlight a top New York-based marketing strategy and execution shop with roots in Silicon Valley, called Cf – headed up by Arthur Ceria, former creative director of Ogilvy in SF and co-founder Michael Quinn. While they can support anyone in FinTech, they also deliver digital strategy and projects for the retail sector as well.

Incidentally, one of the FinTech firms I met with when I worked in NYC was Betterment, which I’ll profile in a future post.

Overall, I miss the days in NYC when Jon Lehr and I brought in outside innovators like Rachel Haot, the first Chief Digital Officer for New York City, and Misko Hevery, inventor of AngularJS framework, to celebrate innovation and technology.

Wrapping up, I’d like to note that while New York-based Moven announced its smart watch app this past week, I don’t think it will be much of a game changer. That said, I am upbeat about Apple Watch and will be tracking smart watch apps in 2015.

Best wishes to all the technologists (including those I’ve worked with), and innovators / startups in New York City.

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FinTech: Who’s In vs. Out?

I think I speak for many when I point out that some of the lists of FinTech companies, such as the American Banker’s Top 100, well, just aren’t especially good examples of FinTech (see list).

Maybe I’m reflecting my SF/tech-centric view, but I’m not alone saying if you did a word association test with FinTech, most are more likely to mention companies like Square or Lending Club – and not IBM or TCS.

Yes – I know, IBM and TCS sell technology to banks. In fact, I negotiated the first core banking system license from TCS for use in U.S. at Morgan Stanley, and used to work as a strategy consultant at CapGemini, so I know that category well. I’ve also worked in Product Management teams launching online services, and new products. Partners are often pivotal to success.

But by saying FinTech is anyone who sells products or services to financial services companies — and including retailers and card/payments and Bitcoin – you may be technically correct, but it’s just too broad a category.

Those selling to banks, especially start up’s in New York and London, such as those helped by the accelerators like the FinTech Innovation Lab, do matter. I’ve attended the NY FinTech Lab’s final presentation, and Maria Gotsch does a superb job. In the UK, Ian Ellis of the London Enterprise Tech Meet Up, and leaders like Silicon Valley Bank and Level 37, are helping to create new technology jobs ithrough their engagement.

But selling services and products to banks is not my focus, which is leading technology-enabled apps, services or digital channel leaders for consumers and businesses. Money 20/20 says FinTech is “enabling payments and financial services innovation for connected commerce at the intersection of mobile, retail, marketing services, data and technology.”

I believe strongly that, by being too inclusive (e.g. including retail), you can define FinTech to the point of it being meaningless. In fact, as I tweeted, magazines like Forbes got it wrong: Pitney Bowes is not one of the FinTech leaders. But a big company, like Wells Fargo can still very much be a leader in FinTech. As I noted, Wells Fargo is actually one of the world leaders from a UX and digital channels perspective.

But I intend to be a little exclusive with the FinTech definition and my scope. I think we are also right to give an bigger voice to the likes of Patrick Collison of Stripe, who spoke last week at the Technomy event on the future of payments and innovation, and maybe a little less to the likes of IBM, BCG and Fiserv.

There’s a lot to learn from start up’s – like Betterment, Personal Capital and Credit Karma – and big company disruptors, like Apple with Apple Pay, than speaking to the average executive at your typical bank or payment company.

I think it’s no coincidence that one of the bigger laughs at Money 20/20 came from a speaker who noted that while Apple Pay dominated a lot of the debates — and American Express and First Data sent their CEO’s to speak — no one senior had come to the FinTech conference from Apple.

The speaker went on say that Apple had apparently sent a couple of product managers to the event, although few had actually seen them, and boasted in jest that he’d in fact been lucky enough to shake one of their hands, telling the audience, “I still haven’t washed that hand.”

Looking ahead, in early December I’ll be reporting live from Future of Money in San Francisco, and will be guest blogging on Yodlee’s blog as well as profiling them in light of their recent successful IPO, and recent positive analyst coverage.

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