All The Fintech - 3.27.18 - Customer Acquisition in Fintech
Happy Tuesday from Toronto! The last couple of weeks have been a bit of a whirlwind due to a lot of traveling (including Vegas for an entire week and NYC later this week), so unfortunately I didn't have time to send out the weekly newsletter. If anyone wants to grab coffee this week in NYC, shoot me a tweet.
Ryan Calbeck, CEO of CircleUp, recently tweeted some thoughts around Wealthfront and robo-advisers, questioning the long term strategy on how companies such as Wealthfront or Betterment can continue to compete in the space. In the thread, Ryan highlights Robinhood as having a unique business moat of free brokerage trades, which incumbents will be slow to adopt because they're dependent on fees as revenue.
In my opinion, I view that as more of a unique acquisition strategy rather than a moat. When Wealthfront and Betterment came on the scene, the value proposition was low-fee wealth management services powered by technology that significantly undercut older-school providers in the market. Once the business model was somewhat proven, Schwab launched Intelligent Portfolios and in less than 2 months had more assets under management than Wealthfront and Betterment combined.
As various fintech companies start to mature their business models and prove out acquisition strategies, it will be interesting to see how larger financial institutions compete. One common acquisition strategy has been to give away a huge amount of value for free to acquire users, and then offer other products that generate revenue, with some technology spread throughout to lower the cost-basis across all products (free and revenue generating). Examples including Credit Karma giving personal credit scores & monitoring for free to monetize with financial offers/lead gen, Wave offering full stack financial software to SMBs for free to monetize via payments and payroll, Robinhood giving away brokerage fees and monetizing via premium subscriptions/services, etc.
My hunch is that paid customer acquisition has become increasingly expensive, as more and more vc-backed fintech companies compete for the same keywords and consumer demographics. As a result, I think there's been a bit of a shift where money that would have historically been allocated for digital acquisition is being diverted over to product development instead. The key question is really what's more important when it comes to "fin-tech" - the financial aspect or the technology aspect. If it's a financial/business moat, I believe that large financial institutions will be able to compete quickly once the business model has been proven, given that FI's have the unique advantage of consumer brand recognition + distribution.
If the financial/business moat is backed by real tech, whether in completely novel product offerings or being able to drastically reduce cost, that's a much more powerful value proposition and thus a more unbreachable moat.