Long Take: Betterment launches bank accounts into a world that has changed completely

Hi Fintech futurists --

This week, we look at Betterment launching a bank account and payments feature. They are not the first, but they could be the best! Still, it feels like the world has moved on. Barriers to entry around digital finance have collapsed, and shifted industry goal posts. Hundreds of companies are integrating API-based solutions that connect to banking and investment entities. Amazon, Google, and Apple are there already. And let's not forget the incredible pressure from the COVID recession: 20MM+ unemployed, $100 billion decrease in global remittances, 1 in 8 banks being unprofitable. Is it time for incremental improvement, or a sea change?

These opinions are personal and do not reflect the views of any other parties. Thanks for reading and let me know your thoughts here!

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Long Take

Betterment launched bank accounts. I remember when this would have been a really big deal. Knowing their approach, I believe that the company took its time to get the product, messaging, and positioning polished and right. The website is beautiful and well crafted, using human words like Spend, Save, and Invest.

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It's a long way from 2010, when the interface resembled a direct banking app, and mixed the vernacular of investing with the drip feed of direct deposit. You could see the seeds of this convergence in the concept already, focused on lowering the minimum account size and choosing simplicity over sophistication / complexity. Whereas I always like the tinkering involved in selecting an asset allocation, Betterment knew that this stuff was theater to create the impression of prestige, and not what many people really needed. It is an optimization on top of the core problem -- moving money somewhere is more important than 1% or 2% in returns in one or another direction.

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Personal Capital went the sophistication route, and remains a mass affluent-focused business. Their website is a self-directed, budgeting geek's dream -- steeped in tools and data, throwing out calculators and pie charts. That yields a premium price today, but I have to believe that it does not yield a premium price for much longer as the space continues to become commoditized. The collapse of Motif Investing teaches the timeless lesson to solve the important problems first (saving at all) and the unimportant problems later (fine tuning direct indexes).

Notably, much of the thing I love -- decentralized finance -- has fallen into the tinkerer's trap. Even in the aggregation apps that should simplify user experience, there is a confetti pack of nonsense words strewn across the screen. No Main Street user can interact with this much abstract insider jargon, even though it is the basic vocabulary of the emerging financial system. See below yellow highlights of words and symbols that create friction for adoption.

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I love what Betterment has done from a number of perspectives. First, I wish I had done it with NestEgg / AdvisorEngine. Spending much of 2012-2014 talking to small banks and credit unions about integrations between wealth and banking, it felt like the gap should be bridged. But the infrastructure on which each sat -- wealth management on the investment custodians like TD, banks on core platforms like Fiserv -- meant massive integration costs to build directly. What I did not know was that being in business another 10 years would yield fruitful, integratable infrastructure that abstracts away the divide. You just need to rent your bank and integrate them through APIs today, an increasingly trivial task.

The other comment is that banking and payments economics are very helpful for a low-priced roboadvisor. The cash portion of someone's net worth could be anywhere from 5% to 500% of that amount, effectively doubling assets. Roboadvisors are charging 20-50 basis points on invested assets, and could be getting anywhere from 10s to several 100s of basis points on net interest income. On top of that, having payments tied into the offering may give access also to the interchange fee (depending on set-up), which is another 10 or more basis points depending on transaction size. You are potentially doubling your assets, and tripling your economics.

Of course, investment firms have always known and implemented this. Investment management divisions of the large investment banks had debit cards, trust bank accounts, cash sweep, order flow payments, and all the other magic tricks hidden in 2020 Fintech already figured out. Here is a slide I dug out of 2005 Lehman decks -- 15 years ago!

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So even though I am glad to see this bundling, whether by Betterment, or Wealthfront, or N26, or Monzo, or Sofi, it also seems now largely irrelevant. Why is that?

First, the consumer tech companies are fully in the game and are far better at customer acquisition that anyone else. Last week we talked about the Google debit card. Last year we talked about Apple/Goldman and Uber Money. Just now Amazon is increasing its reach into payments and merchants online, which implies control over the web payments wallet, which implies money at rest, and therefore banking and savings and investing. How will any mobile app compete with the default payment mechanism across millions of websites?

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But to think about the tech companies as causal agents is a mistake of logic. It's not that tech companies somehow determine finance -- it's just that they happen to be in the business of serving products to consumers on a very large scale. Instead, the cause is that the barriers to entry into finance are falling apart.

Let me repeat that, because this is the key takeaway.

The Internet blew up the content businesses by lowering the barriers to entry to generate content. As a result, supply went infinite with digital files, and price went to free. Only now have we found a new equilibrium at a price of $10 per month (i.e., Spotify).

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The barriers to entry in finance -- regulation, trust, financial capital, human capital, network effects -- have been eroded too. Open banking, or banking-as-a-service, or whatever you want to call Plaid, Galileo, Tink, Drive Wealth, Stripe, and the rest of the API suite, have filed away the banking interface into the same standard software packages that power everything else. The regulatory entities from the early neobanks like Simple and Moven, or pioneers like CBW and Bancorp, stand ready to support lots of indistinguishable Millennial mobile front-ends.

Anyone can launch a bank account integrated into their mobile app. If I raise a large venture check to build a neobank, I can pull in pre-paid cards, deposits, investments, and insurance products without much fanfare. It is no longer unbearably hard. This means supply goes up, price goes down, and features are commoditized. And you compete with the tech companies, the global banks (JPM) and asset managers (BlackRock), and the Chinese super apps, because they are doing it too.

Let's close this out with an even stronger finish. The financialization of all technology is a clear and present trend. But I don't think even that matters in the context of COVID and our melting economy. It is just not sufficient to put money-juice into everything and hope things bounce back. Maybe you haven't seen the latest figures?

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American unemployment claims have reached 20 million people, which is starting to approach the 10-20% range for the labor force. Remittances, the global money movement between workers and their overseas families, will fall by over $100 billion or 20%. About 1 in every 8 banks will face losses this year, and return on equity will fall from about 10% to negative this year and well below the historic average next year. Banks are our financial appendages; they are mere derivatives on the work regular people do in our collective society. There is a lot less work being done, and a lot less need for appendages.

Digital channels for distributing government bailouts is not a future-proof business model.

I admire Betterment for the dedication to its craft, and its beautiful execution. I am reminded of the Pianist of Yarmouk, playing song after song in his bombed-out Syrian neigborhood. The war is here, and nothing will be the same. But let's pause for the moment and enjoy the music.

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