When was the last time you got a crash course on finances?
I’ll answer that for you — probably never.
In fact, 4/5 adults say they were never given the opportunity to learn about personal finance. 76% of millennials lack basic financial knowledge.
Making major personal finance decisions can be daunting for anyone — or in my case: starting a company and somehow getting funding to sustain it.
Whether the decision is with paying back student debt, or investing for the first time, the outcomes of these decisions have a long-term impact on our lives. Understanding how this market works is important. Case in point: two-thirds of American adults can’t pass a basic financial literacy test. 😬
Even though it’s clear that financial literacy is important, there’s a big problem: it’s actually been dropping for years.
Literacy is just one aspect of the problem. Getting access to financial services is an even bigger one. The barrier to entry into this market has been growing especially for people in developing nations.
I can throw some stats in for you but I think we’ve all heard it as this point: the poor keep getting poorer, and the rich keep getting richer.
Learnings from Interning at TD Bank
This summer, I was a high school intern at TD Bank (one of the largest banks in North America). I met A TON of people and learned a lot about basic bank services and functions.
This by no means is a comprehensive guide but will hopefully help you better understand this industry.
What I realized is that, banks provide a lot of different services other than banking. Let’s start by understanding the basic services that banks provide.
How do Banks Work?
Here are some of them summarized:
Individual Banking — these things help people in managing their finances:
- Checking accounts: usually use day-to-day: can be accessed using checks, automated teller machines, electronic debits + other methods.
- Savings accounts: account used to save money over a long period of time.
- Debit & credit cards.
- Insurance: company or the insurer, agrees to compensate the loss or damage to another party.
- Wealth management: A mix of financial planning, investment managing + other financial services offered by asset managers, banks, financial planners and others.
Business Banking — these are usually for business owners who need help differentiating professional and personal finances.
- Business loans
- Checking accounts
- Savings accounts
- Debit and credit cards
- Merchant services (credit card processing, check collection etc.)
- Cash management (payroll services, deposit services, etc.)
- Web, mobile, and tablet banking
- Mobile check deposit
- Text alerts
- Online bill pay
Loans — Loans are pretty common for a banking service offered, and there are many different types.
- Personal loans
- Home equity loans
- Home equity lines of credit
- Home loans
- Business loans
Keep in mind: although it can be flexible, generally it is difficult to get access to most of these services if you don’t have a proper credit backing or positive past transactions, to proof your viability. Most traditional banks are very risk aversed.
This can make it difficult for self-employed workers or low income individuals to get involved. Different FinTech’s are working on coming up with unconventional models to help resolve this gap.
What are FinTech’s?
FinTech’s offer services very similar to those of banks but they are not banks. They tend to operate more like startups working in the finance space, unlike traditional banks.
The tap you use on your phone, apple pay are all innovations that would fall under this market.
Interesting FinTech’s Providing Different Services
These are some innovative FinTech’s working on providing new methods for the same services as banks:
- Insurance: Root (get a more personalized rate based primarily on how you drive), Lemonade (unconventional home insurance — they take a flat fee, pay claims super fast, and give back what’s left), Metromile (car insurance based on how much you drive. Pay a low base rate then just pennies per mile).
- Deposits: Digit (analyzes your spending and automatically saves the perfect amount every day, so you don’t have to think about it), Stashinvest (a new banking service which makes investing easier and helps you save long-term), Acorns (set aside the leftover change from everyday).
- Investment: Wealthsimple (easy way to invest).
- Lending: a lot more complex because there are a lot more products (e.g., mortgages, student LOCs, credit cards, payday loans, consolidation loans, etc.) and all of these generally have their own unique processes.
- Funds transfer (at a consumer level) can be done directly or via mobile wallet
- Mobile Wallet: Square Cash, Venmo
Alternative Ways to get Money
There are various unique lending methods in ways that increase inclusivity, allow for more options and break down the barrier to entry.
P2P lending is the idea that individual borrowers can take unsecured loans from other individuals. Main benefit: Allowing individuals to access low-cost quick loans at a rate they can afford.
Allows businesses and individuals an opportunity to get early-stage investment, presell products, obtain market validation and social proof, crowdsource creative ideas, + engage customers, secure partnerships etc. (fun fact: originated in Europe).
B2B lending is similar to P2P lending but for businesses. Helps SMEs to receive the necessary funding for growth directly from a set of online investors (both individual and institutional).
Main benefit: cuts the intermediaries like banks + B2B lending offers competitive rates.
This model enables entrepreneurs and startups to raise early-stage capital in an online marketplace directly from individual investors, angel investors and VCs in barter for equity in the company.
Helping SMEs through the participation of local communities.
Microfinance entities are usually focused on supporting small businesses in their communities that don’t qualify for a bank loan.
Invoice trading is the idea to allow small businesses to sell their invoices or receivables to individual or institutional investors at a discount for working capital.
Unconventional Business Models
1. Alternative credit scoring
Many self-employed people or low-income families don’t pass conventional bank loan screenings. Nova Credit and a few other companies are taking a new approach by considering alternative data points like social signals + comparing to other scoring.
These are lead by an intelligent and self-learning algorithm which get’s better over time.
2. Alternative insurance underwriting
- Two individuals with the same weight and height, both non-smokers and who don’t drink will be given the same life insurance premium. BUT one person might be an exercise freak, while has no physical activity and might be more likely to die of diabetes.
- Our system right now is very normalized. Companies like Carpe Data are building systems with other variables + alternative data points such as social signals, lifestyle, and medical history. Combined with similar intelligent and self-learning algorithms, these companies can personalize the insurance.
3. Small ticket loans
Banks and other lenders typically don’t want to underwrite smaller ticket loans because low margins + high costs. Companies like Affirm are delivering other buying mechanisms (buy now & pay later) and one-click buy buttons on websites.
These loans will typically be underwritten at 0% interest so that almost anything can be purchased outright with the option to pay in instalments.
— > Money is made by sharing customer data with the original equipment manufacturer (OEMs). Data = the interest on the loan.
4. Digital wallets
A user can pre-load a certain amount of “virtual money” into their wallets and use this virtual money to make either online or offline transactions with merchants who accept digital wallets as a payment mechanism.
— > The business model is allowing users to make payments for a small fee and via the float that they would make on the money lying unpaid in customer/business accounts.
5. Asset Management
Buying stocks or mutual funds without having to pay a commission fee. Companies like Robinhood are enabling investors to trade for free in exchange for their data.
Deep Dive into FinTech
FunTech;) is SO HUGE. These are just some of the interesting ideas that have been coming out, but I’m pumped to see how we can advance even more.
Over the next few months, one of my goals is to continue learning about this space, developing my basic financial literacy and identifying some $$ billion opportunities I can start exploring.
I’ll be continuing the human accelerator program, TKS where I’ll use a framework to to accomplish this.
Also — upcoming I’ll be releasing an in-depth reflection about my internship experience at TD Bank and some of my key takeaways.