Money 20/20 – Laughing All The Way to the Un-Bank

As we approach 2015, bank accounts, like cellphones or those annoying Facebook quizzes, seem like something we should take for granted as part of the fabric of our life. Yet you may be surprised to learn that more Americans actually own and operate a cellphone (90%) than have a bank account (80%). In fact, there’s a lot about banking today that might surprise you.

According to the FDIC and my friends at PayNearMe here are some pretty shocking statistics:

  • 50 million US adults don’t have a bank account at all (That’s more than don’t have health insurance — 41 million)
  • 68 million are ‘underbanked’ i.e. they may have a bank account but rarely use it, instead relying on cash transactions or alternative financial service providers
  • A quarter of US households are financially under-served

“Aha!” I hear you cry “but unbanked is like undocumented right? These are probably illegal immigrants we’re talking about!” Well, actually, no. 80% of the unbanked are US borncitizens. 43% of them own their own homes. 50% of them are white (compared to 26% Black and 20% Hispanic). And 27% of them make over $50,000 per year.

Still not surprised? How about the fact that unbanked or underbanked are 30% more likely to use mobile payments than the rest of society. Or that 57% of them own a smartphone compared to only 44% of the overall US population. Starting to sound less and less like the stereotypical undocumented migrant worker to me.

The underbanked market is a vast (with a buying power of more than $1 trillion annually) but rarely discussed. At over a third the size of the Federal budget, it is a shadow economy which encompasses a growing number of young, digitally savvy, millennials with entrenched dislike and distrust of the traditional financial services model.

Luckily for them there’s Money 20/20. The Money 20/20 conference is to financial services what TechCrunch Disrupt is to technology design and development. Over 10,000 people gathered in Vegas 3 weeks ago to discuss the latest in payments, ecommerce and financial innovation – and what I noticed there, besides the amount of money I lost at the blackjack tables, was the sheer number of providers who are trying to create a better world for the underbanked.

PayNearMe for example enables users to pay bills in cash at local stores, like 7-Eleven or Family Dollar without having to use the gas money to drive to the bank.

Paytoo, another exhibitor at the show, has created a mobile wallet solution for the unbanked which along with classic banking services like bill pay and direct deposit is offering unbanked consumers access to leasing and vacation financing packages.

GlobeOne also offers banking to the unbanked via a mobile app but has additional cool features like free international wire transfers, no late fees or minimum balance and below market interest rates. In addition, 50% of the interest GlobeOne earns is reinvested into its community of users.

But why are so many people seeking out alternatives to a system that has stood for the best part of 4000 years? Well, the consensus seems to be because people think banks are mostly terrible.

Results of a survey released last week show that, currently, only 13% of Americans believe bank systems are capable of preventing another scandal. And according to this New York Times article traditional banks are actually becoming more expensive to use. Only 39% of noninterest-bearing checking accounts were free in 2011, down from 76% in 2009. You read that right; during the worst period in banking since the Great Depression, over a third of banks have removed free checking options on non-interest bearing accounts.

Oh, and the average overdraft fee is now $32.74.

The article tells one particularly illuminating story of a professor who took his daughter to open a savings account at their local bank:

“We put in $50, and I had the idea that we would go to the bank every month and make a deposit. We would watch the money grow along with interest. The next month we went back to make the next deposit, and lo and behold there was only $45 in the account. Turned out that the bank was charging for low balances. End of lesson.” He got the bank to return the $5 and closed her account — and his own.

Against this backdrop it isn’t surprising that the young and relatively affluent are joining the ranks of those looking for a better way to manage their money.

I’ve talked before about the gap that traditional banks are creating through a lack of innovation. As long as they continue to stagnate, millions of Americans will continue to seek out alternative solutions and conferences like Money20/20 will continue laughing all the way to the un-bank.

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The Financial Industry Is Getting Nicer: Here’s Why

Last week’s Money20/20 conference delivered further evidence that it really is a new day in the financial industry. There is not just a technological change afoot but an ethical change: a feeling that finance can do more for people than simply move their money around.

I was lucky enough to sit down with four of the exhibitors and presenters who operate at the intersection of finance and philanthropy and ask them for their perspective on this trend and what further developments we might expect to see in the future:

Kosta Peric, Deputy Director on the Financial Services for the Poor team at the Bill & Melinda Gates Foundation. Peric has a dream job leading the Level One Project, an initiative focused on working with developing countries worldwide to build interoperable digital financial systems that include and benefit everyone.

Michael Thiemann, CEO, Zebit. Thiemann is the ‘poacher turned gamekeeper’ of the financial industry having built a number of hugely successful solutions for banks and card providers including Falcon and ProfitMax before creating Zebit to promote financial wellness and offer as fee-free financing to the underserved.

Andra Tomsa, CEO, SPARE. SPARE is a smartphone app that takes a leaf out of the Bank of America ‘keep the change’ playbook but uses this spare change, specifically on dine-out purchases, to feed the hungry via direct donations to food banks and other charities at the front line of hunger relief. A former financial advisor, Tomsa, is determined to use her finance and economics background for good.

Arjuna Costainvestment partner at Omidyar Network where he focuses on the firm’s investments in emerging markets financial services. He leads Omidyar Network’s investments, and has a board role in a number of innovative financial services companies, including CignifiLenddoMicroEnsurePagatech,RUMASegovia Technology, and Zoona.  He also leads the engagement with several policy and research initiatives, such asAFI GlobalGSMA’s Mobile Money for the Unbanked program and the Better Than Cash Alliance.

Dan: Having been to financial conferences for 15 years it really feels like in the past 4-5 years a lot more of the conversation has been on ‘beneficial’ or ‘philanthropic’ finance – that is to say products or solutions which – in addition to making money – also promote some sort of social good. Whether it’s the idealistic promise of blockchain or Bitcoin, or apps to help savers, the underbanked or undeserved, or products to educate investors or make finance more inclusive we seem to be seeing a growth in this part of the industry. Would you agree?

Michael:  Absolutely! Banks have neglected or abandoned the underserved market . That created incredible opportunity for innovative new solutions. At first we saw a plethora of not-so-great options taking advantage of underserved consumers desperate for liquidity. We’ve all seen the high interest rates and penalty “Gotchas!” that often turn into a cycle of debt. More recently, firms have leveraged technology and creative distribution strategies to offer superior service at lower cost. Examples include Puddle for social borrowing, Propel for government services, and (of course) Zebit for financial wellness. These firms are putting profit second to consumer needs and benefits.

Kosta: Absolutely. I first noticed this trend when I was running Innotribe, the innovation arm of SWIFT. The industry overall really didn’t know how to think about financial inclusion-and its impact from a business standpoint-beyond the occasional corporate social responsibility initiative. But over the past few years, the topic kept popping up-it was one of the highlights of Innotribe at SIBOS 2012 in Tokyo, and at SIBOS 2014, where Bill Gates gave the keynote. He really cemented it as a strategy unto itself and positioned it squarely as an opportunity for new business models.

Andra:  I believe there are two complementary trends in process. Traditional capitalist institutions are utilizing increasingly competent technologies to facilitate philanthropic contributions i.e point of sale systems, websites and now apps integrating versions of the ‘check out charity’.  On the other hand, you have non for profit institutions who have begun to shift across the spectrum toward more capitalistic models, i.e the ‘B Corp’ whereby claiming greater financial self sufficiency. It’s as if both sectors are shifting toward a more stable equilibrium that is both profitable and socially conscious.   

ArjunaYes, we are in fact very encouraged by this movement and credit it to the convergence of some big global trends. The first one is the high priority in which financial inclusion has been placed in the global policy landscape. As more nations work to create a sustainable and inclusive financial system and join initiatives such as the Maya Declaration or adopt and execute against the United Nations Sustainable Development Goals, they generate greater tailwinds that push other sectors of society in this direction.

The second one is a saturation and greater competition on the higher net worth consumer segments, while at the same time emerging markets are showing greater economic growth driven by an underserved aspiring middle class. Combined with ubiquity of mobile phones—which are helping to make middle- and low-income consumers discoverable and reachable—incumbents in the financial sector are realizing that there are good business opportunities in the mass market.

The final trend driving this movement is the coming of age of “millennials” and their venturing into entrepreneurship. The trademarks of this generation—connectedness, sense of global community, greater use of technology, desire for purpose and impact—are now translating into approaches to tackle big challenges and how they conduct business.

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Penney Wise: Q&A With Dynasty Financial Partners CEO, Shirl Penney

If you’re ever tempted to doubt the power of the American Dream, or feel the odds too stacked against you to succeed, consider Shirl Penney. Penney, 38, is the founder and CEO of Dynasty Financial Partners, a game-changing integrated platform of technology and services for top independent financial advisors. His rags-to-riches life story is too incredible to do justice in a single paragraph and will be the subject of another article (and no doubt book and movie).

Penney rose from incredible poverty, the kind of poverty we like to believe no longer exists in the developed world, to become one of the youngest directors at one of the world’s largest financial firms. Then, he become the successful CEO and founder of Dynasty with a blue chip client roster and a board of directors that reads like the who’s who of Wall Street.

Simon: Your personal backstory obviously shaped so much of who you are today. What specifically did it teach you about successful entrepreneurship?

Penney: I think adversity sometimes builds character. We all face adversity in our lives, just some of us earlier in life.  It helps define and shape our character.  In my case, it also helped me build a very strong self-confidence early in life and, when I realized I could get through difficult obstacles, it allowed me to grow and be ready for the next ones.  I remember people saying to me when I was raising capital for Dynasty that I am facing enormously difficult odds in raising money for a new model in financial services right after the financial crisis.  I remember thinking my life has been a battle against the odds, so what’s one more battle?  My step-grandfather who raised me was a rough and tough man who had not spent a day of his life when he was not poor. But he taught me some valuable lessons that have served me well about integrity and commitment. If you say you are going to do something, your word is your bond and when someone needs you and is counting on you, then stand and deliver and surround yourself by those that would do the same for you. That is the core of what defines family and a team that acts like a family.

Simon: One of the things you obviously learned growing up was work ethic and today you still routinely work 16-18 hour days. Today, we hear so much about the importance of working ‘smart’ but how important (or unavoidable) is working hard?

Penney: If you spend time with top entrepreneurs, the very best ones often have insane work ethics.  No one outworks me.  I got that growing up dirt poor in Maine.  I worked various jobs that were hard manual labor from when I was 11-12 years old.  Sure, we have smart people at Dynasty, but we also have the hardest working team in space. When you can teach people to be very efficient, prioritize the things that matter, have a common purpose, and layer over that a culture of accountability, good things happen.

Simon: You started your career inside some of the largest firms on Wall Street. What surprised you most about going it alone to found Dynasty?

Penney: I went from one of the largest financial firms in the world to my garage!  All my friends who were successful entrepreneurs told me it would be harder than I ever imagined and they were right!  When you go out on your own, your business card has just your name on it. Period. And to a certain extent what you did in the past does not matter.  Raising capital, attracting people to make your vision theirs, convincing clients to come onboard early, managing expectations at home, and not wavering on your belief in yourself can be difficult.  In my case, it took 2.5 years to raise capital, get the founding team in place, launch the business and sign up our first clients.  Then, when you launch, it gets harder!  Those first five years (2.5 pre-launch, and first 2.5 years post launch) were incredibly difficult.  Much harder than I imagined and, frankly, I think a huge barrier to entry for us as I don’t know too many people as crazy as we were to do what we did!

 Simon: In order to scale their great ideas, entrepreneurs need to partner with and ultimately hire people. How difficult was this for you? What did you learn about picking the right people to collaborate with?

Penney: One of the other things I learned about growing up in a small fishing village in Maine is the value of community.  We have been focused on building a first rate community from day one at Dynasty.  We are defined by the quality of people at Dynasty, our investors, our strategic resource partners, and our clients.  We spend time thinking about how is this client or new partner we are hiring going to be additive to our collective community.  We have an acceptance committee to review new teams we onboard to Dynasty network, our employee interviews take forever as we want to socialize them throughout entire firm, and we do a tremendous amount of due diligence on new resource partners before adding them to our platform to be used by our clients.   When you are trying to build a company with a premium brand in its space, controlled growth that allows quality control is very important.

Simon: You made a deliberate decision to offer your staff equity in the business. Why was this important to you and how do you think it has helped the firm grow? (Do you for example have a good retention rate, higher employee engagement etc.?)

Penney: Equity ownership is a core part of our culture at Dynasty.  While our Board of Directors has been a significant source of capital in Dynasty via their personal investments, almost all employees at all levels at Dynasty have bought equity in the firm.  We also have a generous equity program that rewards commitment over time, client service, and driving results.  People at Dynasty spend money like it’s their own because it is!

Simon: You’re still relatively young for the CEO of a successful company. Has that impacted your ability to hire and grow people? Presumably a number of your employees are much older than you?

Penney: I am 38 years old now and starting to get a few grey hairs so want to hold on to that young CEO thing awhile longer!  I am sure when people heard my pitch at 31 years old, when I started this journey, some people may have thought I was young or crazy or both!  Winners surround themselves with other winners and I only surround myself with positive forward-looking people so maybe I just ignored any negatively in my career because of my age as I was always a young man in a hurry.  That said, I have always found that sophisticated people (clients, partners, employees, investors, etc.) evaluate people based on their competence and character more than their age.

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FinTech Gets Traction: Five Questions For The Industry’s Leaders

I’ve been working in this sleepy little backwater of the financial industry, called FinTech, for longer than I would care to admit. For the majority of that time, I’ve had to endure awkward cocktail parties as I told people that I worked in finance or public relations or technology. Quite often I’d say “it’s complicated” and leave it at that.

Then about a year ago something strange happened: people began to drop FinTech in to casual conversation the same way they talked about “cloud” or “the Internet of Things.” For those of us who’ve dedicated most of our professional careers to the space, the sudden recognition is both gratifying and somewhat irritating. How I feel about it is best summed up by an email I received from a friendly competitor who’s been in this industry for about as long as I have:

“My colleagues were passing around the following [FinTech Report] excitedly today … it’s like we discovered cheese!! How can something boring and stuffy that you and I have been doing in our sleep for decades now be the hot new tart in town?!?!?!?”

To understand why FinTech has suddenly shot from president of the chess club to star quarterback, I spoke with six leaders of the FinTech movement: Jon Stein, CEO & Founder of Betterment, Justin Brownhill, Managing Partner of SenaHill, Alex Tabb, COO of the Tabb Group, Jean Donnelly, Executive Director, FinTech Sandbox, Jon Zanoff, Founder, Empire Startups and Evan Rapoport, CEO & Founder of HedgeCoVest. I asked them what was accounting for the surge in interest in this space, what this meant for their recruitment efforts and what got them interested in FinTech in the first place.

This is what they had to say:

Daniel P. Simon: It feels like FinTech has really broken through the public consciousness in 2015. Would you agree?

Jon Stein: Robo-advisors – what the press calls Betterment and its imitators – broke through in 2015, I think that’s fair to say. When we launched back in 2010 at TC Disrupt, we were a voice in the wilderness, saying, “What everyone does with their money is going to change.” But, no one believed us then. We were the only ones saying it – and many had failed before us. Now I think people see that the change is real and immediate, and the question is how fast will everything change, rather than whether it will change. The change has become inevitable.

Evan Rapoport: Absolutely. 2015 is the year FinTech has gone mainstream thanks to a number of tech innovations (which didn’t exist a few years ago) but also an influx of VC money and consequentially a major marketing push around all these products. Some of these solutions – such as Robo advisors – have been around for longer than a couple of years, and predate the Betterments of the world, but it’s been the recent marketing around the host of FinTech solutions that has really pushed the industry to the forefront.

Justin Brownhill: We would agree. The macro trend that we are experiencing is that the distribution efficiencies of the web is providing consumers both choice and digestible financial education/information for the first time in history to a much wider audience. Whether it is for borrowing purposes (ie. P2P lending), financial planning (ie. Robo-Advising), buying stocks or bonds (ie. online brokerage) or efficient payments (ie. mobile/electronic payments), the consumers now have the power to make a BUY decision, rather than being SOLD financial products. This represents a seismic change from the brick and mortar and  other historical relationships. There is a whole new generation, the millennials, who are self serve, and inclined to conduct business differently than other generations. It’s a significant trend.

Jean Donnelly: FinTech has certainly attracted a lot entrepreneurial talent and a lot of capital in the last few years. As customization of financial services becomes more prevalent, and folks are using advanced technologies in other areas of their lives, people become more aware of the need for improvement in this space. However, some of the best FinTech innovations will be invisible to consumers and seamlessly integrated into their lives.

Alex Tabb: There is no doubt about it, FinTech is one of the hottest areas of technology investment and a whole lot of people are paying attention. There are a whole new group of non-traditional investors and innovators looking at the FinTech space and developing new technologies and services that have the potential to revolutionize the way we think about the sector.

Jon Zanoff I don’t see HBO doing a FinTech spinoff any time soon. That said, we have seen a surge in interest in several sectors. For instance, every major government organization we work with are spending time and resources to ensure they’re sponsoring innovation in FinTech.

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What VCs Are Looking For In 2015

With a new year comes new resolutions and, for many entrepreneurs, that means a commitment to finally starting their own business or growing the one they already have. Of these, a lucky few will receive investment and strategic partnership from the likes of Erik Rannala, Managing Partner and co-founder of Mucker Capital, a west coast-based venture capital (VC) firm which provides companies with their earliest stage institutional funding.

I spoke to Erik about what he and other VCs are looking for in potential investments this year and how entrepreneurs can best position themselves for conversations with the venture capital community.

Simon: What’s the state of the VC market in 2015 – generally are you (and other VCs) planning to make more investments this year?

Rannala: We plan to remain quite active in 2015. We continue to see very compelling businesses led by extraordinary entrepreneurs, and as long as that is the case, we will be actively investing in new companies. In general, we believe that this is one of the most exciting times in history for technology entrepreneurship. The rate at which technologies and business models continue to evolve — and in the process, transform existing industries and create new ones — makes us feel very fortunate to have the privilege of working with some of these extraordinary entrepreneurs.

Simon: How much of the strategic investments you make originate from firms pitching you vs you looking for and seeking out specific offerings to complement your portfolio?

Rannala: It’s certainly a combination of both. There are areas of particular interest to us where we actively seek out new companies and entrepreneurs with whom we can develop relationships, with the goal of ultimately investing in the company. But likewise, we are fortunate to meet companies and entrepreneurs in the course of our work whom we otherwise might not have known, who are often working on ideas we ourselves never would have conceived of.

Simon: What do you look for in a potential investment? Eg the strength of the idea, the quality of the presentation, established customer/user base etc?

Rannala: We are very focused on markets and teams. In particular, venture investments typically require that companies are pursuing very large addressable market opportunities of at least $1B, ideally in markets that are somehow in transition and/or poorly served by existing players, making them more susceptible to disruption. (Incidentally, this does not mean companies pursuing smaller addressable markets are not good business opportunities, they just may not be a fit for the economics of venture capital funds.) And, we also look for entrepreneurs with deep domain expertise who have accomplished extraordinary things in the past. The deep domain expertise may be self-explanatory, but the reason we look for a pattern of accomplishments is that starting and scaling a company to become very large is so difficult, and takes such commitment and endurance, that individuals who have accomplished similarly unlikely achievements in the past often are well-suited for the challenge of successfully building a company.

Simon: How important is the person pitching you vs the product / idea / market potential? Put another way do you find yourself backing someone because you believe in them more perhaps than the idea? Or conversely, might you see a great idea or product but demur from investing because you don’t believe in the founder/founders?

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