Here at the Ynext Incubator, every year we get a new batch of applicants for our upcoming class. Although our applicants are, by definition, interested in working with Yodlee’s platform of consumer and SMB financial data, we do a fair amount of outreach so that we can get a variety of applications within that constraint, from a wide geographic and sector spread. So our applicant pool is a pretty good proxy for what entrepreneurs are building in consumer and SMB fintech. Building on that proxy assumption, I thought it would be interesting to look at this year’s applicant pool compared to last, to see if there has been any change in what entrepreneurs are working on. And at the highest level, there has been no change.
Broad product categories remain constant. PFM applications (broadly defined) were the biggest player both years: 45% of applicants in 2014 and 44% in 2015. Lending applicants increased slightly, from 11% to 18%. That’s barely even statistically significant. Payments applications went from 10% to 8%; I’m going to call that unchanged. So in terms of sectors, fintech entrepreneurs seem not to have changed their view over the past 12 months of what they find attractive. But if we make the analysis more granular, going down one level from sector to strategy within sector, we can see clear fintech startup trends emerge: 1) alternative lenders targeting narrower slices of their target markets; 2) robo advisors getting more specialized; and 3) a focus on millennial consumers.
Trend one is that alternative lenders are attacking narrower and narrower slices of the borrower market. So in 2015 we saw applications from companies offering credit specifically to SMBs selling into big box retailers, to consumers shopping for clothes, and to non-US citizens living in the US. This makes some sense: since one of the big challenges for lenders is to find borrowers in a cost-effective way, designing your entire company as a targeted low-cost customer acquisition vehicle is a logical move. On the other hand, if your targeted slice is too narrow, you can never reach scale. The narrowness of the slice in question was a factor we considered as we reviewed applications.
Trend two is that robo advisors are getting more and more specialized. In the same way we saw ETFs go from following an index like the S&P 500 to taking a particular slice of that index, so robo advisors are moving from a basic balanced portfolio to providing much more sophisticated investing. Examples include socially conscious portfolios based on your personal beliefs, or adding alternative assets to your robo-created portfolio, or letting you pick your favorite stocks and then building the portfolio around those holdings. This makes sense: entrepreneurs have realized that the code to build a sophisticated portfolio isn’t that much more complicated than the code to build a simple one. And once the code is built, the cost to deliver the fancy portfolio isn’t significantly higher. I should note that the second trend is actually really similar to the first. Specialized portfolios let these nuevo robos target specific consumer audiences. Both of these fintech startup trends reflect a desire to lower the cost of customer acquisition.
The last trend coming out of our applications, and this trend was clearly the strongest in terms of number of applications, was the growth of fintech businesses specifically targeting millennials. We had a three-fold increase in the total number of applications for millennial-focused businesses. This was true in both the lending and the PFM categories. We’re not alone in seeing this trend – CB Insights has a whole graphic on millennial fintech – but the tripling in one year puts the trend in stark relief. The current thinking among fintech startups is that the millennial generation overspends and doesn’t know how to manage, or even think about, money. Here are a few key quotes directly from applications:
- “Millennials spend $1.02 for every $1.00 they earn”
- “America’s millennials are considered financially illiterate”
- “Millennials choose instant gratification over future goals”
- “Such consumers spend 30% on purchases they don’t even remember”
Our applications came mostly from millennial generation entrepreneurs, so the above quotes do not come from a crotchety, “kids these days” sort of attitude. In fact, studies show that millennials are financially unstable (see this PWC report) and I think our millennial entrepreneurs are tapping into the zeitgeist of their peers. They look around and feel that their generation is financially lost, and can be saved by fintech apps. In other words, like great entrepreneurs everywhere, they see a need and are building businesses to fill that need. Looking at applications for the class of 2016 compared to the class of 2015, we see no new product categories, or shifts in product categories, but three new approaches to targeting a customer base. On the one hand, because of the cost structure of software, targeted customer strategies can work in fintech in a way they might not in traditional finance. On the other hand, does the emphasis on narrow slices imply that the market is already getting saturated, forcing new entrants to aim at ever smaller segments? We’ll be keeping an eye on fintech startup trends as we review applications for cohort 3; that process begins in June. Click here to be notified when applications open.
