Money 2.0 – Aspirin or Vitamins?

I had been thinking a lot about personal finance this past few weeks and then I saw a TechCrunch post on how Mint raised more money and has been growing nicely. So I posted a tweet over the weekend with the following comment:

i’m not sure people are ready to hand over financial creds to web 2.0 startups. that being said, plenty of cool work being done in money 2.0

When I first started working in venture capital after college, one of the first anecdotes I heard was the “vitamins vs. aspirin” theory of investing. In short, the basic idea is a notion of relative need – people with headaches will seek out aspirin while we all know we ought to take our vitamins and often don’t. The theory holds that the best businesses (traditionally) are more like aspirin (solving an acute need) than vitamins (good for you but not critical).

Unlike esoteric and philosophical arguments about data portability, privacy, and API integration, people have a strong and material interest in making sure that their money is safe and secure – it’s one of the few areas of web 2.0 where what’s at stake is real, concrete, and quantifiable.

I’m very interested in all of the cool start-ups I’ve seen in the personal finance space which I unimaginatively lump together as Money 2.0. Good examples include Mint, Cake Financial, Wesabe, BillShrink, and Covestor. I try to avoid writing about products I haven’t actually used that much but I’m going to do it in this case.

Given that Microsoft Money and Quicken are both getting a bit long in the tooth, it seems like now is a good time to be launching innovative personal finance products. Some thoughts about the whole Money 2.0 space below.

To succeed, I have to believe that these tools are going after people who are non-users of the desktop alternatives. Microsoft Money and Quicken both have large installed user bases and relatively flat growth in net new users. Chances are if you’re interested in a desktop personal finance solution, you’ve already got one. Given the marketing budgets and installed base those products have, I can only imagine that these money 2.0 startups are going after folks who aren’t using these desktop products. Whether or not they’ll succeed in converting these non-users to become active users of a web-based solution depends (I think) largely on the root cause of their non-use. Is it product complexity? Cost? Or is it simply that people know they should be more responsible about their money and just choose not to take action?

Are people ready to trust their financial information to new startups? I think this is going to be a really interesting situation to see play out. There are obviously early adopters in any market and people nowadays seem much more comfortable putting their personal information online in social networks and community sites. I have always thought that money is different than other types of personal information because the consequences associated with disclosure and misuse are so much higher. This will be a good test for how far the market has come in terms of people putting their financial information online.

One thing worth noting is that one of the historical advantages of desktop products is that the information on your computer feels “safe” as it’s under your control – as long as your computer is properly secured nobody can get to it (in theory, at least). Will people be as trusting in the cloud with services offered from new companies? I think there are more people willing to hand over their financial information to companies (start-up or not) who can help them better manage their money than either I or any other pundit today expect. I’m curious to see how large that audience is today, which is really what matters for all of the new entrants.

Is this going to be like Paypal or online bill payment? In terms of historical analogies, I wonder if this will play out more like Paypal or online bill payment. In the former case, Paypal was able to succeed in pioneering a brand new service that existing banks and financial institutions could have provided and in fact did try to provide. In the end, Paypal won for reasons that are too myriad to list here. However, online bill payment has been a different story. Based on data that I’ve seen, the vast majority of users who pay bills online pay them directly through their chosen bank or financial services provider. At this point, I’d be willing to say that it if there is a market for web-based personal finance solutions, start-ups are likely to win here. If any of these companies can build a large enough user base, I think they will be very difficult to knock off, even by a well-funded incumbent.

Right now to me, this market feels more like vitamins than aspirin, but that could change as people start saving money, getting their financial houses in order, and talking about the benefits of these products.

If you’re a user of any of the products mentioned in this post or have thoughts, feel free to leave them below.

  • Great post, Charles. I’m a big believer Money 2.0 will succeed. The reassurance that startups must offer when asking for this private data from users is the same level of protection that banks and credit card companies use to handling online banking. If you’re a user of online banking, my take is you’ll eventually migrate over to one of those startup services. For those that don’t trust the web can’t be won. They will continue to balance their checkbooks with their handwritten checks and take their checks directly to the teller. Sites like Mint will only get better and they offer things the desktop apps can only dream of. And obvious business model is genious.

    That said, I think the same will be done to “social investing.” As much as innovation knock down the barriers to music and traditional media, I’m hopeful that sites like Zecco, Covestor (they are more social investing than personal finance), and CakeFinancial will open the door to much more transparency in this space. Their services will open the door to a much needed educational aspect that young professionals lack from their college education.

  • charles

    Steven,

    Thanks for the excellent comment. I am hopeful that these companies all succeed and help consumers do a better job of managing their money and getting a handle on their finances. I am very curious as to how long it will take for users who already have a trusted relationship with their bank to embrace a service like Mint. I do think there is a big opportunity here and the real question is when.

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  • Ben

    Charles,
    Vitamins indeed. In the investment world, a better service usually means better returns. There is no way that any of the mentioned above companies will be able to provide that. That is why Mint is better , as they “SAVE” you money (they don’t, but that’s a different story).
    Assuming no start-up can provide better investment returns, I think people use to think that innovation in the field of investment can occur only if you provide:
    1. Cheaper means (Zecco) to invest, yet as Zecco is experiencing the cost is not the main factor of people migrating to new brokerage firm, so innovation here won’t get you that far.
    2. Easier means to invest – it means more user-centric approach of presenting investment data. I there’s opportunity here, as most people are lost when trying to figure out when and what to invest in.
    3. Target non-users. This is a hard one, as most U.S. households are involved in investing in one way or another. However, if you will present them with new investment vehicles, that might change things.
    Hope it makes sense.

  • charles

    Ben,

    Very insightful comment. I think what it takes to innovate in the world of consumer-facing financial service products is still not well understood by many start-ups. It will be interesting to see if any of these companies can crack the code.

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  • One thing that always comes to my mind when I hear the “vitamin vs. pain killer” line is that in the literal markets this analogy addresses, the total market for vitamins is at least as big as the total market for pain killers — and it’s growing much faster.

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