An Uber-Like Revolution … in Investing
WHY YOU SHOULD CARE
A more efficient financial system is good for the economy.
By Steven Butler
Matt Quinlan calls it a pain in the ass. Investing in the stock market, that is (or shall we say, of course). So the San Francisco-based personal injury attorney says he didn’t bother with it until about a year ago, when he got an email from GoPro, the wearable videocam maker, explaining that he could buy into the company’s initial public offering of shares — for free — through a little-known company called Loyal3.
Curious, he dipped his toe in the water, and the rest is history — he’s now buying shares in other companies too, without any trading fees. “It’s free,” he says.
The financial industry might be one of the last holdouts, but an Uber-like revolution is finally arriving, big-time, in the world of money. New software and services are lowering costs and creating efficiencies that make it easier for companies looking for loans or investment capital to connect with savers and investors who might be willing to plunk down some cash. These financial innovators, including outfits like SmartBiz and Bizfi, both of which accelerate loans to small businesses, threaten to undercut the business models of established players — you know, those Wall Street banks and brokers that Americans love to hate.
Historically, banks and investment houses in England drove the Industrial Revolution by creating an efficient conduit between people with money to invest and companies that needed capital. Places that lacked these financial institutions, like China or India, tended to grow more slowly. While the age of big banks and investment houses isn’t over, the rise of social media and sophisticated software algorithms has created openings for finance companies that claim to be fomenting a disruptive people-power revolution. The last holdout seems to be Wall Street, despite all the attempts to provide more access to ordinary Americans, says Jeff Modisett, chief legal officer at Loyal3.
Aspiration lets investors buy into a hedge-fund-like product and choose how much they want to pay in fees — including nothing.
Loyal3 uses an online platform that lets investors buy stock and hard-to-get allocations of initial public offerings, without any fees. It earns money from the companies providing the shares, after convincing them that shareholders tend to buy more products made by companies they own. “If you own stock in Coca-Cola, you are less likely to go to the store and buy Pepsi,” notes Modisett. Meanwhile, the investing company Aspiration allows investors with as little as $500 to buy into a hedge-fund-like product normally available only to the wealthy, and it even lets people pick how much they want to pay in management fees — including absolutely nothing. CEO Andrei Cherny says he’s “democratizing” finance, adding that most customers so far are paying a “fair” amount.
Then there’s CircleUp, which attacks a different end of the investment chain by trying to offer something like private equity for the masses. Co-founder and COO Rory Eakin says the company screens emerging consumer goods and retail companies across the country and offers them online to investors. These brands are ”largely hidden” from most investors, he says; they include Smári, the yogurt maker, and Common Good household cleaners. So far, the company has raised over $100 million, though it is open only to “accredited investors” who meet a certain income or net-wealth threshold.
Other corners of the financial industry may also be ripe for attack. One prime target: small business lending, especially since the traditional providers of such loans — local banks — suffered greatly in the aftermath of the 2008 financial crisis. Bizfi software, for one, combs the Web and pulls in data from a company’s accounts to work up a risk profile and make a loan decision in minutes, instead of the usual days or weeks. Competitors like SmartBiz, Kabbage, CAN Capital, OnDeck and Fundera make up some of the online lenders that account for about $10 billion out of a $600 billion market. “It’s getting Darwinian,” says Stephen Sheinbaum, Bizfi’s founder. Indeed, online tools at SmartBiz now make it possible to process cheap Small Business Administration (SBA) loans for up to $350,000 in about the same time it takes to watch an episode of Modern Family, with access to the funds granted within a week. Bank processing, by contrast, can take months.
Which is not to say that all, or even most, of these entrepreneurs will thrive, much less spell the end of banks as we know them. For instance, Wall Street titan Goldman Sachs is getting into the act by hiring staff in preparation for a launch into online consumer and business lending. Karen Mills, former head of the SBA under President Obama, thinks the new players will be good for small business, but she warns they’ll need to be regulated or self-police at some point to avoid trouble. “It’s like the Wild West out there,” she says.