Many people are in a better financial position than before the pandemic.
At least by some metrics.
They’ve paid down debt. Perhaps they’ve padded their savings cushions with funding from the waves of stimulus payments. And yet the pressures of daily life remain. As PYMNTS’ data has found, as many as 57% of US consumers live paycheck to paycheck, struggling to make ends meet.
Emmalyn Shaw, managing partner, Flourish Capital — a $500M global venture fund that focuses its investments on financial services startups that drive financial health — said that digital-first companies can give individuals and families the tools they need to break that cycle.
Digital challengers are particularly suited to the task, Shaw said, because they’re adept at providing affordable access to financial services to consumers who haven’t been served well by traditional financial institutions in the past.
In many ways, challenger banks are fundamentally shifting the infrastructure for delivering financial services. Shaw pointed to one of Flourish’s holdings, Unit, which operates as a banking-as-a-service player, complete with embedded payments solutions that allow client firms to build those functionalities into their own offerings.
Banking as a service, she said, fundamentally shortens the amount of time to market to weeks and not years, and cuts out millions of dollars in development costs. This lets forward-thinking companies are able to target niche audiences (such as students or gig economy workers) to unlock new use cases and expand financial access.
Such innovations couldn’t come at a more opportune time, Shaw noted. Stimulus payments have petered out, and more and more consumers are having to once again focus on expenses like monthly rent and student-loan payments — the new “steady state” that awaits them as 2022 takes shape. And platforms and challenger banks can help incentivize consumers into behaviors that they might not otherwise embrace.
Automatic savings accounts and other features can serve as a kind of financial “intervention” that leads to better financial standing. Along the way, as FinTechs reorient individuals to new behaviors, they wind up changing the very fabric of the financial services industry itself.
And thus, though direct to consumer and infrastructure firms may have wildly divergent metrics by which to manage success, Shaw pointed to “the one thing” that should be top of mind this year: Outcomes. For consumer-facing companies, those outcomes might rest with ballooning savings accounts; for enterprises focused on infrastructure, the focus may be on reach and scope — and how many new use cases they can help unlock.
A Portfolio of Disruptors
Shaw noted that Flourish currently has nine global challenger banks in its portfolio, and held up Chime as an example of spurring paradigm shifts within financial services as consumers increasingly desire to be served in real time by their providers.
Chime, she said, has focused on low- to middle-income customers with features like overdraft protection, high-yield savings accounts and credit-building solutions — “meaningful innovations that help drive financial outcomes.”
Shaw said Chime customers have been able to raise their credit scores by 30 points on average, and users of the platform have built savings of as much as $100 million in aggregate.
Another holding, the embedded finance startup Jetty, gives customers more flexibility when paying rent. Flourish led a $23 million investment funding round in Jetty this past September. She noted that the rental market has been marked by pressure in the pandemic in an environment where more than half of one’s paycheck can be slotted toward housing costs. Jetty, she told Webster, offers renters an alternative to expensive security deposits, and also offers a payment mechanism where it will pay landlords a consumer’s rent on the first of the month — and where the renter pays back the FinTech within 24 days. In this way, rental payments are more evenly matched to income.
“The consumer gets what they need, and the property manager gets what they need, too,” said Shaw. “It’s a win-win.”
Notably absent from the Flourish portfolio, observed Webster, has been arguably the most visible seismic shift within financial services: buy now, pay later.
As Shaw noted, “What surprised me was not that BNPL was so popular [this past year] but that it was so broadly accessible.” Indeed, PYMNTS’ own data has found that as much as 29% of the population has had experience with a BNPL product in the past year.
But Shaw sees cause for caution, as some reports say that 40% of BNPL consumers have defaulted on payments and are in arrears. Her concern is whether those consumers are also juggling several BNPL obligations concurrently — a challenge when so many people are living paycheck to paycheck.
Against that backdrop, she said, BNPL lenders should be more discerning about who they extend installment plans to — lest they simply push consumers further into debt.
Crypto’s Sticking Power
Shaw noted that while the crypto sector has been volatile, she believes we’re headed toward a world where centralized and decentralized finance co-exist. It may remain to be seen whether crypto can truly foster financial inclusion in emerging markets, and everywhere much remains to be done in terms of regulation and compliance.
Looking ahead, Shaw said, we’re going to want to remit capital — money to friends and family — on a crypto exchange with tokens or stablecoins. Yet we’re also going to want to pay our mortgages with our normal bank accounts — so the collective payments ecosystem will be challenged to sort out the plumbing for that seamless co-existence, she said.
The Days of the Overdraft are Over
Shaw expects that the backlash against overdraft fees that entrenched itself in 2021 will continue. The challenger banks have been putting pressure on incumbent banks to reconsider the tens of billions of dollars levied annually on consumers (a number of big banks have eliminated those fees in recent months).
“We’re at the beginning of an exciting, important shift — not just the digital bank consumers, but the 77% of the population that is still served by traditional banks. They are the ones that are going to benefit from this shift,” she told Webster.