Happy Wednesday, Fintech Listeners!

I just got back from the AI-Native Banking and Fintech conference in Salt Lake City. It was wonderful and I will have much more to say about it in Friday’s newsletter.

My thanks to the Spring Labs team and Peter Renton for inviting me to participate. As always, it was a pleasure visiting the Silicon Slopes.

— Alex 

P.S. — If you're looking for something active and really, really fun to add to your Money 20/20 agenda, join me and a great group of people at Fintech Takes The Court. It's a 3x3 basketball tournament, and everyone is welcome (as both players and spectators)!

We're looking for all basketball enthusiasts, female or male, young or old, seasoned or out of shape - come hang!

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WHY THIS ISN'T JUST A BLOG POST

When it comes to the lending industry, everyone can agree on two things: We all want more applicants. And we all want better ones.

That's the goal.

But it's a hard balance to strike. Getting it right requires science and art.

Today, in just a few hours in fact, I'm sitting down with Tomás Campos from Spinwheel to find out which elements of an application filter out fraud, and which ones filter out customers.

Your application isn't like anyone else's, which is why this is a conversation, not a blog post. Bring your questions.

I'm in

3 BIG IDEAS FROM THE PODCAST

This week's episode of the Fintech Takes podcast is a little different from what you're used to.

My guest is Tim Flacke, co-founder and CEO of Commonwealth, a nonprofit that has spent 25 years working with financial services firms and employers to build financial security for folks living on low and moderate incomes.

Tim came on to talk about The Investor Diaries, Commonwealth's research (conducted with The BlackRock Foundation and the JPMorganChase Institute) into how folks in households earning $30,000 to $80,000 a year invest.

The best part? We threaded select voice diary excerpts from some of those investors throughout the conversation. The episode opens with one of them: "I'm aiming for the stars, and as long as I land on the moon, I'm satisfied."

Honestly, I think it's one of our best episodes.

Tune in for the full conversation here

And read below for my three big ideas...

#1: Savings as a Loss Leader

Commonwealth’s research around withdrawals is pretty sobering. About one-third of all retail investors living on low and moderate incomes (LMI) have paused or stopped investing due to a financial emergency, and among those who sold investments to cover such an emergency, ~1 in 10 never recovered what they lost. Without a cushion, as Tim put it, you're going to dip into whatever you've got, and that might be your investments.

So why doesn't every investing platform push customers to build an emergency savings fund first?

Because on its own, the cushion loses money. In Tim's words,"the business model for helping somebody build up a small cushion of liquid cash is terrible." Providers earn on balances that are large and stay put. Several hundred dollars that leaves within a month, and maybe returns (in part) a few months later, is very hard to justify on a product-level P&L.

Financial services providers need to think differently. More like employers, to be honest. Employers measure of success isn't whether the emergency savings benefit turns a profit. It's whether workers show up and do their job, without a costly search for a replacement.

Tim's challenge to brokerages: Adopt the same logic. Don't judge the savings feature on its own P&L. Judge it by whether it produces a successful long-term investor. Seen that way, the cash cushion isn't a separate product competing for resources. It's what keeps the customer's actual investment account, the one the brokerage makes its money on, from getting raided every time life gets expensive.

On the customer side, Tim sees lower-hanging fruit. Providers, in his own experience, hand you "a bunch of stuff we offer" with no point of view on why any of it applies to you. Banks are the worst offenders, still selling from a legacy product catalog instead of a customer-centric strategy.

None of this calls for complicated new technology; it all really hinges on user experience. And it starts with a provider signaling to customers that the short term and the long term, the cash cushion and the investment account, belong in the same conversation.

#2: Pull, Don’t Push

New investors want to learn. Tim was emphatic on this point; people entering a new part of the financial system sense they should know more, and they want to know more.

Whenever I dig into credit or financial health, the first answer people give is more financial literacy. I'd encourage anyone who defaults to that answer to try actually teaching it first.¹

Tim's explanation, building on the research's "actionable knowledge," draws a line between information people pull, because they face a decision, and information pushed at them regardless. Financial education, however earnest, usually pushes. Kids in a classroom are a captive audience whereas adults might have very little patience for it.

Tim offered up a great example. There are customers who deposit cash with a brokerage and never invest it, which is a pattern he’s seen firsthand and has heard about across the industry. If someone went to the trouble of opening up an account, funding it … and then did nothing else, they're probably walking around with some gap in knowledge. Tim imagined an AI bot noticing the idle cash and simply asking, instantaneously and judgment-free, whether that was intended.

Tim also cited AI chatbot research from Commonwealth, which showed a high correlation between customers' confidence in their bank and their confidence in its chatbot. One finding struck Tim as a little surprising: Chatbots rarely lose trust over accuracy. Customers said a chatbot earns trust when it's relevant to their actual problem, and Tim's read was that irrelevance reads as the bot not knowing them, which curdles into distrust.

A second finding surprised him more: People want the interaction to leave them more confident navigating investing on their own, not less. Tim noted that new investors sometimes have an exaggerated sense of how much one needs to know, or assume everyone else is an expert. As he put it, most of us don't want to be experts. "We just want to make the decision we need to make."

#3: A $20 Billion On-Ramp

I asked Tim for a policy change that could help households earning $30,000 to $80,000 a year. He didn't have a ready answer, but he pointed to something that already happened.

Last summer's One Big Beautiful Bill, created what's now known as Trump Accounts. Almost any parent can open a Trump Account for a child who is a U.S. citizen. Babies born over a four-year window (between January 1, 2025 and December 31, 2028 to be exact) can receive $1,000 in federal seed funding, and Tim puts the total on the table, once philanthropic dollars are added in, north of $20 billion.

Baby bonds have existed as a concept for a long time. I've written about Trump Accounts a few times, and I’ve opened them for my kids (which will show them the value of compounding). Still, it's incredible that baby bonds have finally been operationalized at this scale.

Tim's worry is a world where families claim the seed funds and never engage with the accounts again (since that would be a world where families wouldn't feel the maximum impact). The opportunity Tim sees is parents becoming first-time investors as a byproduct of opening these accounts. From there, they might get curious about opening accounts for themselves, or for siblings who don't have one. Aunts and uncles might contribute to a loved one's account. As Tim put it, there's now a concrete bank account that can anchor those conversations.

For providers, this is a customer acquisition channel funded by the federal government and philanthropy. The firms managing these accounts, and the firms sitting adjacent to them, have a lot of say in whether Trump Accounts become dormant balances or the first rung of a family investing habit.

WHAT I'M LISTENING TO

#1: Why Upstart Is Building a Bank From Scratch Instead of Buying One (Fintech One-on-One) 🎧

Upstart’s transition from enabling banks to becoming a bank is fascinating to me. Fascinating conversation.

#2: The Single Smartest Case Against AI Doom (Plain English) 🎧

I plugged this one on Monday, but I’m plugging it again. It’s essential these days to seek out rational, calm, objective, and humble takes on what’s happening in AI.

Thanks for the read! Let me know what you thought by replying back to this email. 

— Alex  

Footnotes

1.One of my first jobs in financial services was teaching financial education in high schools. Try getting 16-year-olds to care about long-term investing, and your eyes open fast to what education can do versus where its limits are.