The meteoric rise of startups across the entire technology spectrum has planted a seed in the minds of many young engineers and entrepreneurs: Your idea, no matter how small, can disrupt an entire industry.
With the right team and the right tech, a small “point solution” can expose an industry-wide weakness and buy itself enough runway to grow into something much bigger. But the finance industry continuously reminds us of its resilience to such disruption. That’s not to say disruption cannot come from the bottomless pool of fintech, wealthtech, advisortech or any other “tech” — it can.
But this is not a world for small ideas, and the sooner many fintech companies come to grips with that reality, the better.
The phrase “small ideas" is not meant to diminish the teams or technologies behind many fintechs. Good people with big dreams and the best intentions have launched many great fintech companies. They see a market need, know they have the talent to address it and make the gutsy move to do something about it, even in an industry as highly regulated and competitive as finance.
The condition of being stuck with a small idea is what I call Point Solution Syndrome. It’s the creation of a product, or even a suite of products, where the total addressable market is a few million dollars in revenue. They address a need, but that need is just one of many in a tech stack. The fintech industry is full of critical PSS cases.
Companies with PSS can survive for a time — the ones that last are small businesses with reasonable recurring revenue somewhere under $5 million. But without reinvestment and reinvention, the businesses slowly experience customer churn and disappear.
One particular corner of the fintech world known as advisortech — B2B technology built specifically to address the needs of financial advisors — is especially susceptible to PSS.
In November 2020, an advisortech firm called Oranj closed its doors forever, seemingly out of the blue. The company had made a name for itself by offering low-cost, “freemium” wealth management tools built for smaller registered investment advisors clamoring for cost-effective solutions.
Oranj expanded in 2017 with its acquisition of TradeWarrior. All signals showed a company targeting an important need in the advisory world. Still, to make its pricing model work, Oranj needed to scale massively. But scale proved to be elusive. At the time of its closure, many estimated that Oranj had roughly 500 customers. If we assume an average revenue of $500 per customer each month, the firm was likely generating $250,000 in monthly recurring revenue. At the same time, it’s safe to say Oranj probably had monthly expenses in the neighborhood of $500,000.
So Oranj’s expenses were possibly double its revenue, and yet it had built its entire business around fixing one problem: cost. If the company had any chance of surviving, it needed to abandon its most important value proposition.
In advisortech, there are hundreds of really small companies that have limited prospects of becoming big companies. They shut down or get acquired and rolled up into a bigger tech stack.
Recently, RobustWealth, once touted as a serious challenger to the advisory service status quo, announced plans to close its doors in September.
For many, this was an expected, although not inevitable, outcome following the company’s acquisition by Principal Financial group in 2018. Its closure wasn’t inevitable because the product truly could have broken the PSS pattern.
Unfortunately, RobustWealth was sold to a large company that likely had zero intention of investing in and adapting the product to stay ahead of market changes. After the acquisition, the product didn’t innovate in a meaningful way. It’s possible that, had it remained independent, the original mission focus would have driven product improvements.
But Principal is a much larger company with an insurance and retirement plan background that most likely just wanted some combination of RobustWealth’s team and intellectual property. The way RobustWealth priced its products, charging a high percentage in lieu of commissions, was legitimately disruptive when it started in 2015. But RobustWealth suffered a similar fate to Oranj when zero trading commissions became the norm.
The stories of Oranj and RobustWealth demonstrate that if the product and pricing don’t evolve with market demands, it becomes difficult for any fintech company to succeed.
Solutions that put the client experience first are crucial. The industry needs turnkey options that allow businesses of all sizes to operate at scale, fully digital, and deliver a delightful client experience. Solutions should be inexpensive, easy to use and require little to no training — solving 80% of needs while focusing on 20% of features to accomplish that.
Ultimately, the fintech industry needs fewer companies in the ecosystem focused on niche solutions. Having hundreds of small point solutions is not driving the kind of innovation across the entire industry that we know is possible.
To truly prove that fintech innovations can redefine the industry in the long term, we have to be thoughtful and not afraid to think (and execute) big.
