Financial Technology, also known as FinTech, seems to be everywhere at the moment.
What are FinTech companies?
FinTech has been defined by Wikipedia as an economic industry composed of companies that use technology to make financial services more efficient. These companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.
Oscar, Wealthfront, Square, Betterment and Acorns are all examples of FinTech businesses in the United States and believe me there are hundreds and hundreds of them.
Not to be outdone by Wall Street and Silicon Valley, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison have established an expert advisory group to help make Australia the leading market for FinTech, in the Asia Pacific region.
Why FinTech companies look attractive
FinTech businesses are wonderful enablers, and have come up with innovative new approaches to crowdfunding, peer-to-peer lending, mobile payments, digital currencies, and robo-advice. And can potentially provide better consumer outcomes.
How a FinTech works
Acorns (Acorns Grow Australia Ltd) is a financial technology business that allows investors access to a relatively low cost portfolio whilst doing so in a way that is simple and easy to use.
Whilst you can nominate a fixed monthly investment, it’s strategy to date has been to encourage users to select the round up option. This is how it typically would work. This morning I had a coffee and some vegemite toast on the way to work, and I paid for this with my Visa Debit Card, via PayPass and the cost was $6.50.
Acorns rounds up this payment to $7.00 and invests the additional $0.50 into a diversified portfolio on my behalf. This process is repeated with each and every transaction on your statement.
Conceptually it’s brilliant, particularly for those that are just starting out.
Why FinTech companies aren’t the best way to help you achieve your long term goals
However, the merits of the service get a little less clear when you are dealing with someone that has accepted responsibility for their own future, is already putting some money aside or has the ability to push themselves a little harder than the typical Gen Y investor.
It is your personal behaviour that drives long term outcomes, not a new FinTech service or product.
To illustrate the point further our team put my wife and I through some testing of the banking variety. We have several accounts that could be used for this strategy, a joint account for day to day spending, two personal accounts and a credit\debit card that we each have access to.
In the month of January we recorded a total of 186 transactions which would have seen approximately $78.00 invested in the Acorn investment. It’s super convenient, and yes it’s cheap but at what cost?
If our entire strategy was defined by what was easy to establish and low cost, then I believe the lifetime cost associated with this approach would be in the hundreds of thousands of dollars, if not millions.
A FinTech product will allow you to feel good that you have made a decision. However, it won’t provide you with a plan to dream big and achieve big and it won’t pull you aside and tell you what you need to hear.
That’s what advice is for. You should provision for fun times, tough times, dream big and do what is necessary to provide for your long term future.
I would suggest a better approach to managing your money is to follow these three principles.
Every account has a purpose
You should separate your savings and investment from your day to day bank account.
Cash is sexy
It might take a few years but it’s vital that at all times you have access to 3-6 months worth of living expenses in cash. This is very empowering. And every time you log into your banking account it is a visual demonstration of what you can achieve if you set your mind to it.
Don’t take the easy option
Get comfortable putting money aside every pay cycle for holidays, bills and emergencies, and invest in a portfolio that is easy to understand and has proven outcomes.
If FinTech is all you are using, you are only scratching the surface of your true potential. What’s your dream?