How FinLab is Transforming Financial Services’ Most Underserved Market
The Center for Financial Services Innovation (CFSI) was a startup non-profit when the recession hit in 2008. CFSI Vice President Sarah Gordon saw the transformation in the industry immediately. “The impact was felt everywhere,” she says. “That’s when our phone started ringing off the hook.” People were struggling to manage their finances and in need of tools that could safely and affordably get them to financial health.
Unfortunately, the state of Americans’ financial health has yet to improve. “When you say 57 percent of Americans are financially unhealthy, people’s jaws drop,” says Gordon.
In fact, 43 percent of Americans describe themselves as struggling to pay bills and make credit payments, according to CFSI’s Consumer Financial Health Study. In the event of a job loss or other emergency, only 30 percent of Americans say they could make ends meet for three months or less — and 22 percent did not know how long they could make ends meet.
So how do Americans cope with poor financial health? CFSI’s 2014 Underserved Market Size Report found that underserved customers spent a staggering $138 billion a year in fees and interest using alternative financial services like payday loans, check cashing services, and subprime auto loans. “We went through such an enormous crisis, yet we are missing the mark on so many levels,” says Gordon. “It’s only natural that people would wake up and say, ‘Wow, there’s a ton of money to be made and there’s a huge problem that needs to be solved.’”
CFSI understood that to change consumer-spending behavior, tools needed to be in place to help. “People are saying: ‘We have to do things differently but we don’t know how.’ We realized that it wasn’t enough to inform or educate consumers. We need to help them take action. This is where technology comes in,” says Gordon. The result was the Financial Solutions Lab (FinLab) — a 5-year, $30 million effort created in partnership with JPMorgan Chase & Co. — to surface new technology-enabled financial products.
Innovation: The Missing Piece of the Puzzle
In 2014, the Financial Solutions Lab began developing a model that would help bridge that gap between financial services for underserved consumers and the technology they interacted with daily. “We were really interested in the idea of creating a cohort which allowed us to bring a suite of solutions to a discussion that is driven by the very real problems consumers are facing,” says Ryan Falvey, Managing Director of the Lab. FinLab’s first class was announced in 2015, with nine winning startups each offering their own tools to help address cash-flow challenges for consumers.
Of the 298 applications received for the Lab, 150 were for personal financial management apps, says Falvey. And of those, the startups that took the next step and found a way to actually move money for consumers had six times the number of users. Making it through the maze of regulatory hurdles necessary to move money is precisely what’s held so many back from innovating in the space. “These are really complicated companies to build,” says Falvey.
With CFSI and JPMorgan Chase’s resources and deep connections to industry players, FinLab set out to help overcome those barriers to entry, particularly by bringing startups, industry players, and bank executives together.
“Technology is reinventing the financial services landscape with better data, products, and channels,” says Colleen Briggs, Executive Director of Financial Capability and Consumer Initiatives at JPMorgan Chase. “The innovators leading this change need access to patient capital and technical assistance to help bring these solutions to the millions of Americans who most need them.”
A Whole Greater Than The Sum of Its Parts
The inaugural group of nine FinLab companies aims to help low-income consumers better manage their money across all aspects of their lives. For example, PayGoal, run by New York nonprofit Neighborhood Trust, helps hourly wage employees allocate their paychecks; SupportPay (founded by single mother Sheri Atwood) gives divorced parents an easy and digitized way to exchange child support; Ethan Bloch’s Digit provides users with an automatic savings tool run through text messaging; and Puddle offers an alternative lending platform based on group borrowing. The companies — which also include Ascend Consumer Finance, Even, LendStreet, Prism, and Propel — each tackle particular cash-flow issues with the goal of helping consumers improve their financial situation. Each of the nine companies has been carefully vetted for quality, consumer protections and impact.
But the goal of FinLab is greater than just seeing nine financial products succeed in the marketplace. “This is a real opportunity to build something massive,” says Falvey. “Beyond the incredible impact of the companies that are in the Lab, we’re seeing so many companies now who could have been — they’re making their products more consumer friendly, and aligning themselves with us on financial health.”
Impacting the industry also means resonating with the largest stakeholders in the market and getting them onboard. “We see this awesome potential of technology to help change the way providers do business,” says Gordon. “Ultimately, it can help providers serve more customers that they traditionally thought were too costly to be served.”
Indeed, the role of banks and their changing relationship with consumers is one of the main reasons that bringing these stakeholders together is so critical. “This is about creating a more robust ecosystem of consumer products,” says JPMorgan Chase’s Briggs. “FinLab not only informs and helps our understanding of what the best tools and technologies are to promote financial health, it also helps us build an on-ramp for some of the most vulnerable populations.”
But without the umbrella of CFSI in partnership with stakeholders like JPMorgan Chase, that on-ramping might not reach the magnitude of customers out there. It’s not about disrupting the marketplace, insists Gordon, but rather finding a way to fit into it. “I don’t like the word ‘disruption,’” she says. “It’s more about collaboration — helping the new interests and incumbents come together to solve the issues of our time. It really only matters if you can do that at scale.”
Watch the FinLab impact video: youtu.be/VBVDY13Y9u4
The Financial Solutions Lab is now accepting applications for its 2016 class. Eight winning companies will be chosen, and each will receive $250K in capital as well as access to unprecedented resources to help them scale their solutions. Learn more — applications due April 7, 2016.