The startups trying to transform the financial industry are eventually going to run into a very big problem: They’re boutiques in an industry dominated by megastores.
You can go to Lending Club or Prosper to replace your credit cards; OnDeck or Kabbage for your small-business loans; Wealthfront or Betterment for your retirement accounts—but you can’t do all of that at one of them.
Big banks, meanwhile, have become really good at this. (Ask a Wells Fargo banker about “cross-selling.” Or don’t—she’ll bring it up in approximately 6.2 seconds.) New laws have cut back on the fees banks can collect from their customers, so they’re trying very, very hard to sell you a mortgage, credit card, savings account, and brokerage account along with your unprofitable checking account. And it works, generally: Only 27 percent of U.S. bank customers “defect” from their primary bank to buy financial products elsewhere, Bain & Co. found in December.
This supermarket model isn’t necessarily the best or the most customer-friendly idea out there, of course. Much of the appeal of new online lenders and other “fintech” upstarts is that they’re smaller, more focused, and friendlier—more artisanal, if you will. But if the fast-growing cohort of next-generation finance companies wants to become a viable long-term alternative to the big-bank establishment, it will need to branch out.
Some of the most successful financial startups recognize this, and are bolting on new businesses. For example, Lending Club last year introduced medical, education, and small-business loans; e-commerce lender Affirm recently expanded into student lending for coders; and on Thursday, Prosper Marketplace said it would buy BillGuard, an Israeli personal-finance company that makes software similar to Mint.com’s.
“We’re not a bank, but philosophically we do want to have a long-term financial relationship with our customers,” Prosper CEO Aaron Vermut told me Thursday.
He shied away from the term supermarket but acknowledged that Prosper wants to offer a broader array of consumer finance products. “To the extent that we can be more useful to consumers," he said, "we’d like to be there and have that conversation before they go out and start shopping around.”
The deal bodes well for Prosper, which nearly died during the recession but is now No. 86 on this year’s Inc. 500: It’s now so far into its comeback that it has an extra $30 million to burn on buying another company. But what really strikes me about this deal is what it says about the future challenges facing financial startups.
It’s not their most immediate problem. First there are regulators, who are starting to nose around what these companies are doing. And if and when the Fed finally does raise interest rates, the cheap and plentiful money fueling online lenders is going to become a more expensive resource.
But for the smart artisanal fintech firms looking beyond those hurdles, it may be time to start thinking about building a much bigger store.