Close up image of debit and credit cards arranged on a desk
Many customers have accounts at both a traditional bank and an online neobank, with multiple debit cards and at least one credit card © Oliver Douliery/AFP/Getty Images

This article is the latest part of the FT’s Financial Literacy and Inclusion Campaign

The writer is the founding CEO of Nirvana Money and formerly founding CEO of PayPal and Personal Capital

Money is too complicated, and we’re to blame. Banks created a bewildering array of financial products. Fintechs made it worse.

I should know. I’ve started several financial technology companies that built a number of new products. Together with those created by thousands of other financial start-ups, we’ve complicated people’s money beyond comprehension.

In the days before computers, you would go to the bank, and they’d show you how much you had and how much you owed. Simple as that. Then, in the 1970s and 1980s, banks pioneered building different systems for each product — bank accounts, loans, credit cards, mortgages and the like. These once-innovative systems have calcified into inflexible silos that resist connectivity and product evolution.

Freed from legacy systems and processes, fintechs have built a blizzard of new products. Most are point products for specific purposes, such as online payments or high-yield savings. Most do not play well with others — different data in different apps from different companies.

We thought the solution was to put an aggregating layer on top — a personal finance manager — to consolidate all your information in one place. Great in theory. But, as baseball coach Yogi Berra is supposed to have declared, “In theory, there’s no difference between theory and practice. In practice, there is.”

For context, let’s look at regular Americans, neither rich nor poor. Moderate and middle-income families — those making $25,000 to $75,000 a year — account for 46mn US households. Two-thirds of these families live pay cheque to pay cheque, and two-thirds report feeling “uneasy” about their financial situation. They worry about what they can anticipate (“bills”) and what they can’t (“unexpected expenses”). 

Money is the predominant source of stress in many lives within and beyond America’s middle class. The explosion of financial products has saddled millions of ordinary Americans with traditional accounts, payment accounts and new or alternative offerings — too many complicated products with hidden fees that can cost hundreds of dollars a year.

Many customers in this segment of the market have accounts at both a traditional bank and an online neobank, with multiple debit cards. About 80 per cent have at least one credit card. And too many fall into the trap of expensive overdrafts — 18 per cent of all bank account holders pay 91 per cent of the fees. American households spent close to $11bn on overdraft fees last year.

There are a baffling number of ways to make payments — via an automated clearing house, prepaid cards, debit and credit cards and online payment accounts. New ways to pay at ecommerce sites add to the confusion. Half of Americans now use Buy Now Pay Later (BNPL) services like Affirm, Klarna and PayPal Credit.

Many use alternative financial products such as payday loans which, in addition to carrying effective interest rates of 400-600 per cent, typically consist of a series of two-week loans over multiple months.

Fintechs have brought this “short-term small-dollar” lending online. And some are peddling crypto to those who can least afford it.

The fintech explosion, which was heralded as a solution to the money problems of ordinary Americans, has too often made their difficulties worse. The proliferation of products creates confusion rather than clarity, and people have too many accounts and apps and bits of money strewn across the digital domain.

We need fewer, simpler products — single apps that address multiple needs and deliver a straightforward user experience. In other words, to return to the days of offering a central place to manage — and understand — how much you have and how much you owe.

Letter in response to this article:

This is the kind of boring banking I had in mind / From Lex Rieffel, Former US Treasury Department Economist; Former Brookings Institution Scholar, Washington, DC, US


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