Many of you know about my interest in B2B fintech, but I’m also passionate about solving issues for consumers. One of the biggest problems our society currently faces is the crushing financial distress that many families experience. Almost 40% of the population would go into debt to cover a $400 emergency expense. Often, that debt takes the form of a high interest revolving balance on a credit card or, worse, a usurious payday loan. The interest on these facilities may require an individual to seek even more debt to cover it, leading to a never ending debt spiral. What can fintech do to improve people’s financial health? A lot more than it does today.
The first wave of fintech companies that claim to keep people from going into debt are just peddling a high-interest debt product disguised as something else. Earnin, for example, seems like a wonderful offering, allowing people to get paid up to $100 every single day for hours worked that day. They rely only on voluntary tips for compensation. Now, I have no idea what the average tip amount is as a percent of money they pay out, but say someone tips Earnin $1 for a maximum payout, one week before a regular paycheck. That’s the equivalent of a bank loan that carries an annualized interest rate of over 50%. They’d be better off putting the $100 needed on a high interest credit card and paying it off when they get their paycheck. I have nothing against short term debt offerings like Earnin, Dave, and Brigit. Lots of people love and rely on their products. But debt by any other name is still debt and debt is something people need less of, not more.
Why, then, is it so difficult to find successful fintech companies that help the financially unsound? The answer comes in the form of another question. How do you build a business that makes money helping people who have none to give you? This was the problem we faced at my last startup, Remedy. We negotiated people’s medical bills down in return for 20% of the savings. Well, 20% of a $20,000 medical bill that is negotiated to zero, is still $4,000, a number that is equally unaffordable for most people as the original amount. It’s a transfer of a debt obligation from one party, the hospital, to another, us. So if you can’t charge your users for your product, then what can you do?
I believe the right approach is to find entities with deep pockets whose interests are aligned with the people you’re trying to help. Instead of selling financial health to people, sell financially healthy people to businesses. A company that knows how to keep people from missing credit card payments can sell a product to banks, who have a vested interest in keeping their cardholders solvent. Some companies like Brightside find paying customers in large employers, for whom they mitigate the productivity drain that comes from financially distracted employees. Others, like Alice, have figured out even more ingenious business models that effectively get the government to foot the bill. The common theme among all of these companies is that they don’t charge a cent to people who need every single penny. They charge entities whose interests are served when those people are in a healthy financial situation.
I’m hopeful that entrepreneurs will think of creative, new ways to help people find financial health. The first wave of companies may have repackaged debt in friendlier, albeit more expensive ways, but I think a new generation of companies is coming that will build lucrative businesses helping people without charging them.