Fintech Newsletter: July 2019

Autonomous Finance

We are entering the era of autonomous finance. In the future, instead of drowning in a sea of finance complexity and confusion, you’ll be able to navigate your finances as easily as Google maps navigates you to your next destination. For some, that future is actually already here—it just isn’t evenly distributed. Those with a large asset base tend to be able to afford accountants, investment advisors, and/or tax attorneys who can advise and abstract away the complexity of the financial world. For the rest of the world, we need something with a far lower cost, and that something is software—the marginal cost of which is racing towards zero.

One of the biggest opportunities for automation involves credit card debt. Even when overall interest rates fall (as is the case with today’s news about the Fed cutting rates), those rate savings are are rarely fully passed onto consumers. And even if they were, that doesn’t help automate all the confusion and complexity around this enormous issue for many Americans. Our credit card debt currently stands at over $1trn; banks are in the business of selling financial products (card companies shipped over 3 billion pieces of direct mail promoting new cards in 2018 alone); and the average rate for credit card interest has increased by 35% over the last 5 years. Add to that late fees, different payment schedules and accumulating debt and you have a tangled web it’s hard to find your way out of. Tally (an a16z portfolio company) recently announced how they will be automating this very important aspect of consumer’s financial lives. Users first connect their credit cards, and the service then takes care of paying all those cards (avoiding late fees), and prioritizing which payments, when (starting with high interest rate cards first (helping you get out of debt faster). The solution here for credit debt is automation, not another financial product.

There are many areas of fintech ripe for the kind of automation that Tally and others are building. How could we help consumers automatically enroll in insurance (auto, home or life)? Cancel unwanted bills, or negotiate lower bills? Top up savings funds, adjust 401k contributions, automatically rollover old 401ks into new ones, change your student loan repayment plan, refinance your mortgages automatically when rates change, etc., etc? Some of these problems are more tractable than others—but all represent big opportunities for both innovation and for entrepreneurs.

The Incredible Case of the Vanishing UI

One of the trends within autonomous finance is UI’s journey from long paper forms, to long digital forms, to short digital forms… to becoming entirely invisible. Let’s take the example of buying an e-bike online: You search for a bike on a website and see the price is $2k. Not having $2k immediately available, you input your cell phone number into one form field and voila, are shown that you likely qualify for a loan at 0% APR for up to $5K. If you had gone to a bank for a personal loan instead, you would have had to provide employment and residence history, bank statements, W2s, etc., etc. Companies like Affirm have made the UI of personal loans nearly vanish; Bank of America less so.

Of course, not all financial products have managed to get down to a handful of fields. If you apply for a mortgage today, you still have a long digital form to fill out (though some startups are working hard to shrink that form as much as possible). We believe that form, too, will eventually dwindle down to perhaps one or two input fields. Making the UI for the American mortgage disappear and lessening friction in the mortgage process is not just a question of increasing convenience, but of potentially shifting important economics. As a16z’s general partner Alex Rampell recently suggested, in addition to making it easier for folks to get mortgages and become homeowners, it could mean more folks would refinance into lower rates, in turn lowering payments by an estimated 0.75%… resulting in $19bn in annual savings.

There is still a lot of infrastructure for mortgages that needs to be built—from e-closings to employment and income verification, to name a few. But as this new infrastructure comes online and covers an ever increasing number of applicants, the UI around the mortgage will also, one day, slowly disappear.

The War for Deposits

We tend to think of the lowly deposit account just as a convenient place to keep your cash and make payments from—hardly a money-generating financial tool. That’s because the interest these accounts pay is so low for a consumer: most accounts pay 0.01% interest, best in class offer 2%+! But cumulatively, those deposit accounts pack quite a punch. If consumers were to put their estimated $12 trillion (yes, trillion) of cash in best in class deposits accounts, they could earn an additional $200bn in interest. That’s a very large opportunity, and a lot of fintechs are starting to realize it. Wealthfront, Betterment, and Affirm, just to name a few, have all recently announced accounts paying 2% or more.

These fintechs are finding novel new ways to bundle services in ways incumbents find difficult. Bank of America or Charles Schwab are dependent on net interest income on cash (or cash-like) accounts to make their business models work (Schwab, for example, earns 57% of their revenue from net interest margin). Essentially, traditional financial institutions can’t offer high rates on cash, because low rates on cash is how they make money. Interestingly, for robo advisors, the opposite is true. They have an AUM (assets under management) based business model for investments, which means offering a high interest rate account is a great complement to their business model. If the $10 trillion in deposits start to migrate to high interest accounts, that has tremendous implications for the whole financial system. If deposits aren’t cheap, we may see a whole industry re-bundled in interesting ways as fintech transforms financial services and, potentially, save consumers hundreds of billions along the way.