*This is a response to Why is there so much idea recycling in fintech? by Nik Milanović (This Week in Fintech, January 31, 2024)
Where is that magical bot that manages our money and makes us rich while we sit on the beach? In a world where technological advancements and GenAI-everything copilots have most of us dreaming of possibilities, one might wonder why fintech is still struggling to create the ultimate solution for personal financial planning and budgeting.
Turns out we’re not the only ones wondering why folks are still struggling with the same fundamental issues. In his January 31 post Signals: Why is there so much idea recycling in fintech?, Nik Milanović discussed how many foundational product ideas in fintech (e.g. automated cash flow management) have been attempted repeatedly–and often, unsuccessfully–by multiple companies over the past decade (TL;DR: All ankle-biter fintech apps end their VC pitch with a slide that says: “and then we’ll get full share of wallet…”). He argues that none have achieved this end state because there are often “deeper underlying structural issues” to be solved first before consumer-facing products can work as intended, and many founders try building obvious solutions without fully understanding why previous attempts failed.
Agreed. And we want to take it one step further. These “deeper underlying structural issues” boil down to a fundamental lack of understanding of one common denominator: human behavior.
Over the past 11 years, Irrational Labs has worked with fintechs and financial institutions, from Grove, Charlie, MoneyMap, and Xero to Digit, DoubleNet Pay, Simple, Varo, Chime, Dave, Clarity, and of course Mint. We’ve come to deeply appreciate just how difficult succeeding in this space can be. And it’s time to spread the wealth. Here’s our take on the top 3 behavioral hurdles innovators in fintech will have to overcome if they want to dream up the next great idea that sticks.
1. The Burden of Upfront Work
Fintech’s dream of putting finances on autopilot (or co-pilot??) has a common stumbling block – the substantial upfront work demanded of users.
In behavioral science, we talk about a phenomenon called “the intention-action gap”. More colloquially, this “say-do” ratio means that even when there’s a collective demand and genuine desire for personal finance management tools and budgeting apps, the reality is that individuals may not ever get around to using them if it’s effortful to do so. We’re biased toward the present, and it’s very hard to get us to do something that will ultimately benefit us in the future at the expense of what feels good right now–namely, NOT working on our budgets and say, watching Netflix instead.
Having just recently signed up for Rocket Money–one of the easier tools out there–we can personally attest to how painful signing up can be. To onboard, you must first:
- Search for each financial institution you have a relationship with, one by one
- Once you find the right entity, you need to log in. Though Plaid has simplified and unified the approach for many fintechs, you STILL need to remember your credentials.
- 2FA is also often required, which is extra annoying if your bank requires a phone call for validation like mine does (RIP First Republic).
- You then have to specify which accounts at that organization you’d like to link.
- And THEN you can hit submit.
One down, and if you’re anything like us and our fragmented financial pictures, approximately 15 more to go. Phew.
This is sadly the reality that most users will face. From inputting utility bills to setting up direct deposits, the “nirvana’”of a unified personal finance management tool requires significant user commitment to extract any value.
But, once it’s set up, there is access to the dream. Platforms like DoubleNet Pay or Simple attempted to be set-and-forget. You could get to your “safe to spend” number but it took work! The challenge both these companies faced was motivating users to navigate the initial setup. The golden rule in behavioral science is that friction increases drop-off – people do things less if they are hard. Both these companies are now in the graveyard. They were arguably too hard for the user.
So that’s issue number one–getting to the magical land of automation is too much work for the user. The underlying infrastructure of financial accounts is very fragmented and lacks consolidation. Until this is solved, from a behavioral POV, it will be a hard sell.
Still, there’s cause for hope. Last year, newcomer Rightfoot announced a $15M raise to support the launch of their offering Connect Magic, a “zero-login consumer-permissioned data product”. Their hope is to solve the 40% dropoff associated with getting users to provide financial institutions with an accurate picture of their finances by making the notoriously hard task of linking bank accounts a thing of the past. If their tech does what it advertises it can do, there’s finally cause for celebration
2. The Need for Control and Agency
A fundamental human inclination for “control” drives the second challenge.
We get nervous when money moves without our input. And rightly so. The allure of a magical budgeting tool clashes with the reality that many users, especially those struggling with financial instability, desire agency over their finances. The root cause of this desire for agency tends to be a scarcity mindset. Financial scarcity creates hesitancy and causes people to focus on potential losses and overweight immediate value versus potential future gains.
When users have a scarcity mindset, there are two main barriers you need to solve if you want users to get comfortable with the idea of setting their finances on autopilot.
Barrier 1: Uncertainty. Users worry about insufficient funds– money may not be there on the day the fintech autopilot/copilot wants to make moves. Uncertainty in this regard is amplified because we can easily picture the possible outcome of overdrafting. As behavioral scientists, we refer to this as “regret aversion” – when a customer or user anticipates the potential of future regret and attempts to minimize its likelihood.
Barrier 2: Agency. Financial scarcity can amplify a fear of the loss of control. For example, juggling multiple bills is difficult. The rational way to pay bills is to prioritize the highest interest rate ones first. This is rational. But it’s not actually what most people want to do. People short on cash might want to pay off what they perceive to be more important bills first or make partial payments on multiple bills. While not rational, strategies like the “snowball method” do provide a sense of progress. And people like it.
But PMs don’t. Historically, the POV of fintech PMs is all or nothing. You either give the user full control and just aggregate data for them with pretty charts (hello Personal Capital) or you try to fully “do it for the user” (call back to Digit). But the reality is that users want a bit of both: Yes we want automation, but we also want to know before it’s withdrawn so we have the option to stop it. Digit and Personal Capital both missed mass-market and escaped via acquisition.
Ironically, the banking system is the core entity that taught us to want automation with a strong dose of control. We can’t fully outsource our bill payments or savings transfers because “overdraft protection” is not actually protection at all. That’s the dirty little secret in banking. You can dig yourself into a hole with fees, and people have figured this out and the result is the desire for more control over their money management, not less.
We’ve seen firsthand just how much a sense of control can make a difference to people who are facing financial scarcity. In collaboration with the Common Cents Lab at Duke University, we
conducted an experiment with Beneficial State Bank, aiming to boost participation in an automatic loan repayment program. Our hypothesis centered around enhancing individuals’ perceived control over their cash flow to increase enrollment. We posited that allowing users to schedule their auto loan repayments so they would be withdrawn on the day of their payday would empower them to better navigate their cash flow. The intervention resulted in the doubling of automatic payment enrollments. Let’s underscore that–users are more willing to let go of anticipated regret and use more automated tools when they perceive a heightened sense of control. That’s huge.
Our experiment with Beneficial State Bank increased customers’ perception of control, doubling enrollment in automatic payments, improving loan repayment, and reducing defaults by 69%.
Unfortunately, even if fintechs wanted to support this, traditional banking systems are just not set up to make this easy. They lack the capabilities required for set-and-forget functionality, making even basic features like balance alerts or timing of bill pay transfers difficult. Challenger banks like Chime and Varo are attempting to fill this void, but their success will still hinge on the lackluster banking backend (props to Chime for making it this far!) or on users overcoming the inertia of transitioning from more established systems. Props to deposit switch providers who seem to have caught on to this and are trying to reduce switching costs (Pinwheel, Argyle, and Atomic).
But overall we’re back to point number one: People don’t want to do hard things. And the sunk-cost fallacy indicates that if users have already invested time and effort in setting up a particular fintech platform, the probability of them trusting a new challenger and going through what they expect to be a lengthy and tedious onboarding process for potentially marginal gains becomes very low. Read: The CPA to acquire customers is shockingly high when sunk costs exist. Even if customers say they want the product, they won’t actually complete sign-up. And if there are very few people out there who will suffer through that process, a budding fintech won’t be able to make a business out of it. You can’t upsell credit cards to your thousand users and drive a sustainable profit. And thus there are very few new ideas in fintech, just companies that are responding to genuine customer demand for products they won’t use.
3. The System is Broken and Doesn’t Pay Off
Unfortunately, even if fintechs wanted to support this, traditional banking systems are just not set up to make this easy. They lack the capabilities required for set-and-forget functionality, making even basic features like balance alerts or timing of bill pay transfers difficult. Challenger banks like Chime and Varo are attempting to fill this void, but their success will still hinge on the lackluster banking backend (props to Chime for making it this far!) or on users overcoming the inertia of transitioning from more established systems. Props to deposit switch providers who seem to have caught on to this and are trying to reduce switching costs (Pinwheel, Argyle, and Atomic).
But overall we’re back to point number one: People don’t want to do hard things. And the sunk-cost fallacy indicates that if users have already invested time and effort in setting up a particular fintech platform, the probability of them trusting a new challenger and going through what they expect to be a lengthy and tedious onboarding process for potentially marginal gains becomes very low. Read: The CPA to acquire customers is shockingly high when sunk costs exist. Even if customers say they want the product, they won’t actually complete sign-up. And if there are very few people out there who will suffer through that process, a budding fintech won’t be able to make a business out of it. You can’t upsell credit cards to your thousand users and drive a sustainable profit. And thus there are very few new ideas in fintech, just companies that are responding to genuine customer demand for products they won’t use.
So What Should You Make of All This?
Tackling the difficulties past and current fintechs encounter when trying to help people automate the management of their finances is not for the faint of heart. If folks are going to build a better mousetrap, we need to appreciate real human behavior challenges like the intention-action gap, scarcity mindsets, and the sunk cost fallacy. As the fintech industry advances, tackling these challenges head-on will be crucial in driving adoption of powerful tools that genuinely help people take control of their financial futures.
Get in touch to learn more about our consulting services. Or learn more behavioral science by joining one of our bootcamps.