The battle between the incumbents and the rising challenger banks and fintechs is well underway, with the year to come predicted to be one of democratising post-PSD2 financial services transforming the landscape, and possibly leveling the playing field, leaving the banks no choice but to adapt or decline.
Of course, it’s not all doom and gloom for the banks. It’s hard to imagine the big players going belly up without a fight. But in the aftermath of the legislative changes that will define 2018, startups are finding gaps in the market for consumer-focused financial solutions.
With this in mind, I spoke to the co-founder of one such startup – Garrett Cassidy of ‘income smoothing service’ Trezeo about the gap in the financial market they aim to fill, and to get a better idea of how startups are navigating the new landscape, and how the agile mindset foresees the challenger vs. incumbent race to innovate playing out.
How did you come to form Trezeo?
Myself and my co-founder got together to look at financial problems around small businesses and self-employed people. After speaking to freelancers, people working in the gig economy and general self-employed people, the primary issue we uncovered was a real underlying issue around dealing with uncertain or variable income. But we were also looking at the landscape more broadly. The scale of the growth in the sector is accelerating. It’s projected that self-employment will overtake normal employment in the next ten years. It’s grown over 25% in the last ten years and this is very likely to increase. Despite this, self-employed people still face a lot of challenges – for example, there’s a real issue around the ambition to own a home among the self-employed.
A lot of self-employed people aren’t business people, they don’t have business plans or accounts, they only really have their tax return at the end of the year. We found that a lot of people don’t see any point in saving or trying to get credit simply because they don’t know how much they’ll have next month after paying their rent, let alone putting £10 aside to make a small contribution towards savings.
What is an ‘income smoothing service’?
If you’re somebody who has variable income, our service essentially allows you to receive a regular, consistent pay cheque. Through a combination of savings and lending – when we’re authorised to do so – interest-free top-ups are added to the customer’s income, as part of a regular paid subscription.
It’s as simple as an unstable income coming in at one side, and a regular pay cheque based on the customer’s sustainable average coming out of the other. During quiet patches if the customer was, say, a taxi driver, we could top up their income a little more, which they would pay back when they can afford it.
What will the traditional banks make of it? Will trust be a problem?
They certainly won’t think any worse of self-employed than previously, based on their own affordability criteria. We don’t know for certain, but we would look to partner with mortgage providers to this end at some point in the future. Some of the early indications we’ve had is that using the service might be perceived as an indication of sensible financial behaviour.
Because we would be a lender, it will be a credit building product, so we’ll be updating bureaus. If people don’t have a credit file, it’s an opportunity to build that credit file. People who are missing payments because they’re coming in on a week when they don’t have the money to pay it aren’t hardcore defaulting, they just have to make a late payment, but this damages their credit score. All things being equal, having the stabilised income should make it easier for them to make payments, so there’s a natural opportunity to repair their credit score. That will take time though. But we’re also very focused on encouraging the consumer to save.
A major factor for consumers in the adoption of new services like Trezeo is trust – many will feel wary about trusting new financial solutions. How do you think this can be solved?
One of the major factors is time – proving yourself. We’ve been building communities for a while, and on that pure direct front it will take time to develop trust. To use the service fully, the consumer has to make a reasonable leap, but we’re looking at ways to allow the consumer to play around with the service to make them comfortable with it.
The other major element is working with partners – by which I mean the people who our potential customers “work for” – cab companies, for example. Companies who have self-employed contractors working for them who face these issues. Most of them want their contractors to be sustainable, because it’s in their interest. They can never formally recommend a financial service because that brings them into regulatory challenges, but in theory we’d partner with some of the bigger operators and they would help us get to the customers. It is a challenge, one that we’re very conscious of – we know we’ll have to build some of that credibility early on – but building trust in a particular sector is hard and takes time. It’s multifaceted.
New payment technologies are leveling the playing field, in terms of people’s financial lives. Where do you think this trend is headed next?
I think the next twelve or eighteen months will tell a lot with Open Banking and PSD2. There may be an appetite for hundreds of services, or it may ultimately narrow into a few winners. I think we have a different approach. In the UK there’s quite a lot of noise about the gig economy, and quite a lot of negativity. By large the people who are moving into self-employment are doing it out of choice, knowing the downsides. It’s happening, whether people like it or not, and it’s unstoppable.
Yes, the government needs to act and there needs to be the right protection in place to ensure that people aren’t exploited, but if the industry doesn’t come up with solutions that work for this growing population, there’s a huge problem coming down the line, because these people will fall on the state. We could end up with 50% of the population, every time they get sick, falling into to disability benefit. We’re going more after this than pure financial management. But my gut feeling will be that there will be a small number of winners, and a lot of them will be the big tech companies swooping in – Google, Facebook and so on. Will we get lots of niche services focused on lots of different things, or will they consolidate among fintechs, or among banks?
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