Alex Johnson works as a Director of Marketing at FICO. He has 15+ years of marketing, business development, and market research experience in financial services. So, in his spare time, he’s recently decided to try to make sense of the rapidly changing world of Fintech in a biweekly newsletter — Fintech Takes.
In September, Johnson wrote a post “Why Self-Driving Money is So Hard” which dove into the technological and psychological hurdles that the self-driving money offerings will face. It was a fascinating read and we wanted to reach out to better understand how Johnson views financial automation and how he views the Fintech space as a whole.
Johnson: Well, there's so much good content out there, but for me, it was more of a forcing function just to figure out what was going on. I mean, there's a lot of news, there's a lot of startups, there's a lot of funding, there's a lot of acquisitions; just all kinds of stuff happening on a daily basis, and it was kind of overwhelming, honestly. Writing the newsletter was just a really good way to force myself to figure out what was important. The process of writing helped me to figure out what themes or ideas connected the different things I was seeing pop up, and to make sense of what I think it all means.
So, for me, it's really been more of a learning mechanism to try to figure out what's going on in Fintech. People seem to enjoy it, which is great, but the most important thing is that it's helped me get a handle on the industry as it changes.
The analogy I used in my newsletter was self driving cars. And that's actually a pretty good analogy, because I think much like self driving cars, the promise of self driving money, in its fully realized state, is pretty cool. You work with the provider. Your money goes to all the places it needs to. It finds the most yield that is in line with your goals and your risk tolerances. You don't have to push any buttons. You don't have to think about it. You don't have to manage it. You just get to your destination. And that's the description that I kept seeing pop up when I would read about different companies that were getting started with self-driving money, or we're sort of pushing in the direction of this concept.
What it reminded me of was self-driving cars where that same experience was also kind of the Promised Land. You get in the car. You lean your seat back. You take a nap and then, an hour later, you end up at the office. You didn't have to do anything or think about anything. But you know, we're not very close to that for self driving cars, as much as Elon Musk would like us to believe that's right around the corner.
And it's a pretty tricky problem to solve, right? There's a lot of technical barriers that get in the way. But one of the things that was really interesting reading about it was that there's also a lot of human behavior that gets in the way as well. When you think about the experience of driving right now, it's very much based on the idea of control, and the comfort that you get from having control. While there are huge benefits to a car that drives itself in terms of traffic and ability to get time back in your day, and maybe even your car can go out while you're at the office and can go get a job and drive people around and earn money and fill itself up with gas. There's all kinds of advantages. But it's going to require a big mental shift for us as consumers to let go of the steering wheel.
If you look at the framework that the Society of Automobile Engineers uses to define self driving cars, the big jump there is between level four and level five. Because that's going from, 'Hey, I'm in the car and it's mostly driving itself, but I still have my hands on the wheel' to 'I've taken my hands off the wheel, and I don't know what the car is doing, but I trust it.' That's a huge, huge leap. And, for me, the question that I was really interested in looking into was: what does that leap look like in financial services with a concept of self-driving money? Where is that big jump, both in value, but also in the way that people think about their money?
There were two breakpoints that I identified when I was looking into self-driving money. The first was: is the self-driving money system based on rules that are set by the customer or is it based on an algorithm that drives itself? There's a huge distinction there in terms of the amount of control that people feel over that experience, and the amount of responsibility that the provider has to take over that experience if they're offering it through an algorithm versus rules. The other big break point will be: is the self driving money solution closed (meaning that it can bring money in, but then it doesn't really give you a lot of options in terms of where to put your money) or is it open (in the sense that your money can come in from any account, and can go to any account based on what's best for you)?
One of those distinctions is a technical distinction — I think we just have to wait a little while for algorithms to get good enough that we can really trust that they'll do a good job of driving our money without any intervention. The other one is more of a business model — some providers are very focused on self-driving money that keeps deposits in their walls, while other providers are more focused on self-driving money that can kind of go anywhere that it needs to. That part will be solved based on the business model. How are you monetizing the service that you're offering to customers?
That's a good question. There's a really important difference between truly self-driving money and automated money. I think the automation is really important, regardless of whether the algorithm is driving with no intervention from you, just taking all these best practices and applying them to your life or if you're setting rules, and trying to drive the system yourself. In either case, you shouldn't be the one having to push the buttons; the system should do that for you automatically. So, even if it is more of a rule-driven system, where the customer is still in control, and they're the ones driving, so to speak, a lot of the underlying mechanics should be automated, so that money management becomes easier.
The system could inform you when a particular rule fires — for example, X amount of your money out of your checking account has moved over into a savings account or a diversified investment account. But you're not the one having to remember to do that, which means that cognitive load has been lifted off of you. At a minimum, I think automation is going to be the future of money management. I think the open question that I still don't know is whether it will always be driven by rules or if it's going to be more of an algorithm that's doing all the thinking for you. If you look at the market now, the algorithm approach is just very early. Most of the use cases where an algorithm is doing the work is in very limited contexts. Whether we get to something more sophisticated is really a function of how good those algorithms get.
I think the big opportunity for Fintech companies working directly with consumers is around rebundling. The 1% disruption that we've seen so far has really been around driving wedges into specific areas within banking and it's difficult when you're in that wedge stage to really be highly profitable. At that stage, you're focused on growth, you're focused on getting some customers. But going from that into a really fully profitable business that can take a bigger bite out of the market you're trying to disrupt is really difficult, particularly in banking, unless you're able to bundle additional services around that initial product that you use to wedge into the market.
We're starting to see some examples of this from some of the FinTech companies that have been around a little bit longer. It's a maturation process that takes time, but SoFi rolling out additional products, and getting a bank charter is an indication that there are some companies that are starting to rebundle around those products and try to offer additional ones. These companies have been very thoughtful in the way that they cross-sell those additional products to their core customers in a way that reinforces the company's overall value proposition. So, that's probably the best path forward for FinTech companies to continue to try to gain ground in the market.
Realistically, what we're already seeing, and we'll continue to see is banks making strategic investments to try to stop that from happening. So, watching the back and forth between banks and Fintechs as they struggle through that is really interesting. While Fintechs are trying to rebundle and grow beyond that initial wedge, banks are trying to respond to the innovations that Fintechs have introduced into the market. There are some examples of banks being very successful with that, too. So, I'm not sure where we're gonna end up, but that's the dynamic at play.
That's the hope and I'm fairly optimistic about that. I mean, to use your Netflix analogy, I think we may end up at a point where a lot of these different streaming services get rebundled into something that looks like cable, but it's gonna look like cable with some improvements, right? I mean, we forget how truly terrible cable was in the 90s. And Netflix has introduced things that aren't going to go away. They have made huge investments in original content that just wasn't going to get created in the old model under the cable networks — there's content that exists solely because Netflix has changed that model and has been able to invest so much into original content. By the same token, the mechanics of how we watch things are different, too. We can watch things on demand. We can get whole seasons of stuff dumped into our laps all at once that we can binge over a weekend. So, even as things get rebundled, along the way, we pick up innovations that stick around.
In financial services, I'm really hopeful that one of the big changes that we’ll see is a wider bundle of financial products that goes beyond what banks have traditionally offered. There's a whole set of financial needs that consumers have that haven't historically been addressed through any traditional bank products. A lot of FinTech companies have entered the space by just trying to add a better experience on top of existing bank product categories. I think the next wave of Fintech — which will then push the incumbent banks along — is to expand the scope of products that can address different financial needs. I've written on my newsletter about things like estate planning, which you don't tend to think of as a financial-services transaction, but is really, in some ways, the largest financial-services transaction you have in your life. The incumbent banks have never really done anything in that space. But now, with some of these Fintech companies coming in and digitizing that process, that can be a new product offering that gets added to the space. I'm hopeful that as things get rebundled, there will be new products, new services, and new problems solved as a part of that bundle.
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