OBSERVATIONS FROM THE FINTECH SNARK TANK
In a new round of funding, fintech startup Stash received $65 million from investors. As reported by Finovate:
The Series E was led by an unnamed private institutional investor and featured participation from current investors including Union Square Ventures and Breyer Capital. The new capital takes Stash’s total funding to $181.3 million. The company said it will use it to drive product growth as well as marketing.
Stash also announced this week that it was launching a new rewards program, leveraging its Stash debit card, that will provide users with fractional shares of stock whenever qualified purchases at publicly-held companies are made. The Stock-Back rewards program gives consumers a micro-investment in companies every time they shop [there] using the Stash card. For privately-held companies that do not have stock available, consumers will get their Stock-Back rewards in the form of fractional shares in a broad-based, global equity exchange-traded fund (ETF).”
Will Stock-Back Trump Cash-Back?
According to Stash’s co-founder and President, Ed Robinson:
During the testing period, we saw an overwhelming positive response from users as they pay ordinary bills like Netflix, and in returned received Netflix stock as well as access to dividends, educational resources and financial advice.”
I don’t doubt it. But I do wonder if they asked users if they would prefer receiving stock-back to cash-back, and to what extent users would actually switch their payment card behavior.
The psychology of rewards is important here.
Consumers prefer cash-back rewards to points-based rewards because it’s immediate, more tangible, and easier to calculate in their heads (“10 points is worth how many dollars?”). Stock-back is less tangible–and even riskier, as a decline in the price of a stock diminishes the value of the reward.
But, of course, there’s a potential upside, as an increase in the price of a stock could make that debit card reward very valuable. Imagine if you had a stock-back debit card back in 2004, and bought a few thousand dollars worth of stuff on Amazon, and got Amazon stock as a reward back then. The reward rate on those purchases would have infinitely better than you could have received from any other debit card.
Stash’s stock-back card will definitely appeal to a segment of its current user base. But the reality of payment behavior today will limit Stash’s ability to become the “top-of-wallet” card.
With a Capital One credit card on the market that offers 4% back on dining, a Bank of America card that lets you pick which category you get 3% back on, and other cards with competitive cash-back rates, the reality is that Stash’s customers will use the new debit card at merchants that already own the stock of, and will max out and optimize their rewards on the other cards they have in their wallets.
The Rebundling of Banking
Stash’s announcement comes a few months after Robinhood’s aborted attempt to enter the banking space with a 3% cash-back offer on a debit card. What’s going on here?
The answer should be troubling to fintech investors and founders. It’s a sign that a narrow, monoline product strategy is untenable in financial services (something the incumbent banks learned long ago).
Can Stash and Robinhood (and other fintech investing startups) not succeed and grow with the product that they entered the market with?
These moves repudiate the alleged “unbundling” of banking that was supposed to be happening. One McKinsey consultant wrote:
“While some companies have multiple products that target different activities involved in consumer finance, there’s no one company that does all of this. For example, there’s no tech company that allows users to both invest in stocks and bond and also take loans. Similarly, there’s no company that both gives users short term credit (credit cards) and also let them invest in the markets. This is how consumer banking is being “unbundled” — a bank is being broken up into its key activities, and products are emerging which do those key activities better/cheaper than banks.”
Except, that’s not happening.
The startups that have come to market with unbundled “key activities” are now desperately trying to rebundle banking by adding traditional banking products.
Firms like Capital One and Bank of America have annual marketing budgets north of $2 billion (granted, it doesn’t all go into debit and credit card marketing). But startups like Stash will need that $65 million–and more–to compete in the broader banking market as their strategies evolve.