This year was significant for the financial services industry. From the rise of Bitcoin and Kickstarter to new initiatives from the Consumer Financial Protection Bureau (CFPB), there is a fresh entrepreneurial energy in and around financial services.
The 7 financial services trends below aren’t predictions. Rather, this is a list of opportunities and challenges worth watching in the coming year. How will these trends affect your financial business’ strategy?
New Regulatory Initiatives
The new CFPB isn’t going anywhere. They have a technically astute team and they are committed to doing things differently to achieve their objectives. In practice, this means the government is trying to be proactive rather than just serving as the “enforcer” through policies and rule-making. It’s smart for the CFPB to avoid being seen only as a punitive legal enforcer and instead establish themselves as thought leaders who know what Americans want. Unfortunately, large financial institutions consider fines and legal action as the cost of doing business. If the CFPB can stay ahead of the industry - even in a small way - by connecting to Americans directly, it can help change the existing dynamic; from reactive to proactive regulation. Regardless of where you stand politically, if executed well, their strategic plan would positively impact Americans. Expect new regulations this coming year, especially around short-term lending and direct-to-consumer marketing tactics.
Cost of Financial Data
Unlike traditional software businesses that rely on Moore’s Law and economies of scale to earn high-margins, financial services companies are expensive to start and operate. In addition to high customer acquisition costs, our businesses have high financial data costs. As financial data becomes increasingly valuable, it’s going to get even harder to build new sustainable financial services businesses. Access will improve but costs won’t go down. Financial services companies that depend on their own data resources will be at an advantage here but because historical financial data is so valuable (your credit history for example), financial data will continue to be expensive.
Easier to Understand Financial Products
Mandatory regulatory disclosures and the CARD Act aside, it’s becoming clear to financial services companies that transparency can create longer-lasting business relationships with customers. A transactional perspective can be useful for growth but, within the financial services world, customers now have a lot more choice. Companies like Lending Club and Square have proven how clear marketing and compelling terms can create value for everyone. Tricky marketing of complex financial products is much easier to sell than easy to understand financial products that are useful. The industry's challenge will be in creating more of these better and easier to understand financial products.
Automated Financial Tools
In the very early days, software products like Quicken were criticized for being too advanced for the average consumer and had too limited a market to be a worthwhile business. That turned out to be wrong. Today, the same arguments could be made about new automated financial tools like FutureAdvisor, ReadyForZero (our product), Betterment, ShareBuilder and others. But they would also be wrong. People don’t like dealing with finances and software will automate common money management activities. We will see this automation and convenience trend continue throughout 2014.
Better Financial APIs & Interfaces
If you’re a developer, you know Stripe has created a better interface for processing payments online. This kind of processing service itself isn’t new, the interface is new. This applies to new services like BancBox and Balanced Payments which provide better interfaces to existing, legacy financial services infrastructure. This is a recent developer-centered trend within financial services. Take existing services and improve the interface for technical teams to build upon quickly.
New Payment & Credit Options
Regardless of where you stand on Bitcoins and other virtual currencies, we’ll see how these technological advances change the way we do commerce this coming year. Online and offline stores have already started accepting Bitcoins and other alternative payment types. Meanwhile, new credit options like Affirm are taking into account unconventional data sources, like who you are and what you buy, to extend credit in a way that wasn’t possible before. This trend will benefit both customers and merchants, making it easier to execute all types of transactions.
Crowdfunding
Crowdfunding is making it easier to raise capital. For investors, crowdfunding has opened up new opportunities and simplified the traditional investment process. Kickstarter has proven - without a doubt - how crowdfunding can help bring independent products to market faster and without the traditional hurdles. We're now seeing crowdfunding models for real-estate investing, scientific research, and angel investing. This trend is particularly exciting because it means more talented individuals and teams will have access to the capital they need to tackle big opportunities.
What financial services trends do you think will impact your business in 2014?
