Blazing New Trails In Financial Services (Or Why PerkStreet Failed)

Once again, I’m late to the blogging party, following on the heels of (yet another) great post from NetBanker, this one about the news that PerkStreet will be closing its doors:

“My guess is they were done in by the problem that every financial startup faces: It’s really, really, really hard to get customers to send money to a web-based startup, especially when there is no immediate short-term gain. Also, while Perkstreet had a great consumer-advocacy positioning, “use debit, avoid credit,” that was a bit of a mis-match for the customers they were targeting, big-spending rewards junkies which could afford to park $5,000 at the startup. Most existing big spenders are fond of using credit card programs with similar rewards, so changing their behavior was a continual challenge.”

My take: The reality for financial start-ups is that while blazing a new trail through an uncharted forest, sometimes you run into a brick wall. You can cut down a tree, but you can’t cut down a brick wall. PerkStreet hit a brick wall. And the sign on the wall read “Caution: Consumer Apathy About Financial Services Ahead.”

—————

PerkStreet wasn’t targeting big-spending rewards junkies.

Big-spending rewards junkies are typically over the age of 45, earn more than $100k a year, and have been with their preferred credit card issuer for a long enough period of time that switching their spending to not just another card, but from a credit card to a debit card, just wasn’t going to happen.

Instead, PerkStreet was targeting consumers who are fed up with traditional banks and bank accounts, and looking for an alternative. In other words, they were targeting the Debanked.

—————

The Debanked are (relatively) young, and while they don’t earn as much as rewards junkies, that’s more a factor of age than anything else. The Debanked are a highly educated group of consumers. They might not be earning much today — but they’re likely to in the future (if the economy ever gets back on track, that is).

The problem for banking pioneers is that the Debanked is a very small segment of consumers. NetBanker may be correct that “It’s really, really, really hard to get customers to send money to a web-based startup,” it’s also really, really hard to succeed when the number of consumer who are willing to send money to a startup is small.

The questions banking pioneers must address are: Why is the Debanked segment so small? What can we do to grow the Debanked segment?

—————

My theory for why the Debanked is small is that it boils down to Customer Apathy. We just don’t care that much about financial services to seek out and use new alternatives. We probably spend more time figuring out which restaurant to eat at on a Saturday night than what bank to do business with.

Take a look at this data from Distimo. Nearly 2,300 different game apps have cracked the Top 25 best selling paid apps. Only 30 financial apps have made that list.

20130815 PaidApps

What this data tells me is that If you’ve got a new game app you want to launch, you’ve got a better shot at getting consumers’ money than if you’ve got a new banking idea.

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I’ve got another data point that highlights the problem start-ups have in the financial services space.

While the press (not to mention credit unions) love to point out how disillusioned people are with big banks — and how Gen Yers are going to change and disrupt everything, reality tells another story.

According to a recent Aite Group survey, nearly half of Gen Yers consider a large national bank to be their primary FI. That’s a higher percentage than any other generation.

20130815 PrimaryFI

Just one in five Gen Yers — or Gen Xers, for that matter — consider some “other” type of FI (i.e. not a bank or credit union) their primary FI. For most of them, it’s a brokerage, advisor, credit card firm, or insurance firm that they name as their primary FI — not a start-up alternative.

The self-proclaimed disruptors in financial services would like us to believe that there are hordes of consumers chomping at the bit to leave the big, evil, mega-banks. It’s just not so. Why? Because people just don’t care that much about financial services.  

—————

So what’s the answer to the second question: What can we do to grow the Debanked segment?

I’ve got some ideas about that, but I think my boss would prefer that i not spill all my candy in the lobby. 

Related research: Credit Union’s Biggest Enemy
Related research: The Debanked: The $1.7 Billion Threat to Banks

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10 thoughts on “Blazing New Trails In Financial Services (Or Why PerkStreet Failed)

  1. Ron – thanks for sharing the research on the Primary FI. The fact that < 30% of the population and just 20% of Gen Y banks with a Community Bank or a Credit Union will no doubt be (shocking) news to many Community Bank and Credit Union marketers and product managers.

    Much of this, I believe can be explained by a poorly structured business strategy and lack of a compelling value proposition that could lead to a significant shift from National and Regional Banks to Community Banks and Credit Unions.

    As for PerkStreet – I wonder if this is a one-off failure or if this is a broader indictment of a business model that relies largely on interchange fees (more so now with the looming court decision that looks to slash the fee by as much as 60%).

  2. Spot on. I’d actually go one step further and say that people just don’t care so much about their financial affairs beyond making money (work) or spending money (Saturday night restaurant) – certainly not their financial affairs with banks or financial service startups. Maybe they’ve realized that “no one got rich by saving”.

  3. Great post Ron, as usual. In addition to the points you, Serge and Ketharaman make, it also causes me to reflect on the shift I have been seeing in FinTech for some time– from consumer plays to enterprise plays. It’s difficult for (many) banks to innovate well, and it’s difficult for (most) FinTechs to overcome inertia and apathy to gain scale, so I see continued partnerships, acquihires and the like. Not that selling to banks is easy either, it’s just a different kind of brick wall…

    • To paraphrase Pink Floyd, “all in all, it’s just another brick wall”.

      On a more serious note, this episode also reflects the lack of compelling value proposition in the offerings of most of these new startups. After years of bashing banks for their staid approach, let’s see what great innovation and “help you with your finances” are offered by these new kids-on-the-block: Messy stickers to be affixed to the back of a smartphone; contorted payments by mobile; cross-selling and problem rectification activities disguised as “help”. Oh, give me a break. If they really want to know a thing or two about innovation, help and how that can translate into real revenues, I recommend this FORTUNE interview with the CEO of Walgreen:

      http://money.cnn.com/2013/07/25/leadership/walgreen-greg-wasson.pr.fortune/index.html

      • Whoa, hold on a second there, Ketharaman. What could be more serious than Pink Floyd? :)

        Seriously, though, while I agree in general about your point regarding “value propositions,” in this case I would defend PerkStreet. PerkStreet had (has?) a very compelling value prop. I guess you (or someone) could argue that if it was THAT compelling more people would’ve migrated their accounts to the company. But I never saw PS as one of those “achieve your financial dreams” financial companies.

        • @RonS:

          Good catch about Pink Floyd! I remember seeing a cartoon – was it actually on your blog? – in which a fat lady wearing a dress with horizontal stripes is standing in front of the kiosk of an energy saving startup. The startup offers the following highly targeted, helpful advice to her: Switch to vertical stripes and lose weight. Boy, was that funny. Compared to such LOL value propositions, I agree, Pink Floyd is almost funereal.

          My point about weak value proposition offered by fintech startups was not specifically made about PerkStreet: I confess that I actually first heard about PerkStreet only when it downed its shutters a few days ago! Goes to prove your point about the challenge faced by startups in building a consumer brand.

    • JP: Interesting point about the shift from consumer to enterprise play. That’s been going on for quite a while and is a factor of how much money it takes to build a consumer brand. The reality of the business world is that although social media has helped take the cost of a consumer contact to near zero, it still takes tens of millions of dollars to build a consumer brand. And most startups don’t have that kind of money to put into marketing. The PFM world is a great example of this — Geezeo is still here today because they made the shift from consumer to enterprise early enough, Wesabe didn’t

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