Personal Finance Fintech
And a brief look at alternative assets and private credit
Personal Financial Services Software
Personal finance is the process of planning and managing your finances to achieve your specific goals. In a broad sense, it involves budgeting, paying off debt, saving for retirement, investing, and using credit cards efficiently. Through recent conversations with my peers and investors, I learned that personal finance software is an underinvested space.
There exist some incumbent players that have been around for a long time, including Quicken, YNAB, Intuit Mint / Credit Karma, Moneydance, Banktivity, etc… These services link your various accounts, like brokerages, and provide analytics to track spending by category, properly budget, pay credit card bills, and report taxes. Yet many consumers are unsatisfied with these products. Take Quicken, for example. Users mention that Quicken is inconsistent, not intuitive, and faces performance issues when dealing with data. As with many personal financial management softwares, data is stored locally for security, and Quicken uses an in-memory database. This leads to data volatility, and as the file size grows after years of use, the memory becomes larger, making it slower to access data. Users also state that Quicken has many functionalities but the important ones are poorly designed (ie: stock splits / non-regular transactions are not handled well). Furthermore, Quicken has a specific file format and not all brokerages produce output to that format, which could lead to errors when ingesting data from various accounts. It seems like a common pain point across incumbents is product functionality and performance concerns.
Consumers are becoming increasingly concerned with user-centric design and customization. Personal finance technology for the future means software that is tailored to a consumer’s specific financial goals, with a customer-centric interface that incumbents currently lack. Incumbents also need to integrate with AI to stay competitive: emerging startups are integrating AI/ML to offer personalized financial recommendations, more accurate financial forecasting, automation, and improved risk management. Different customer groups also have different needs for personal finance software: Tech-savy millenials / Gen Z favor accessibility and ease-of-use and are being drawn towards neobanks / digital-banking solutions. Gen X favor simplicity and longer-term solutions like retirement preparation.
With many purpose-built solutions for a specific financial area (ie: spending, saving, investing, borrowing), users start to lose track of all the apps and financial tools they are using. This presents a need for a SaaS solution that provides a holistic view of an individual’s personal finances, linking all of their accounts into one. The challenge is that platforms attempting to do this lack the “winning functionalities” that specific fintechs provide. Here’s an example of some of the top purpose-built Fintechs of 2024:
Propel: Provides financial management services for low-income families that receive government benefits like SNAP and TANF.
Sunbit: Targets low to middle-income Americans with a buy-now pay-later solution for large expenses like dental, auto repair, and retail.
Tala: Provides micro-loans to individuals in emerging markets using smartphone data.
Chime: A simple, no-fee digital banking platform that offers traditional financial services.
Esusu: Software that builds credit scores for property managers and renters by reporting on time rental payment data to the major credit bureaus.
It seems that new fintech startups thrive by targeting narrow vertical audiences and providing purpose-built solutions for those groups. Whether it be spending led, savings led, investing led, or borrowing led, customers all have different goals and require different solutions. This can add to why a “one-size fits all” solution in personal financial software has been challenging to come across, and why users complain about many of the functionalities of incumbents like Quicken. It will be interesting to see how incumbents adopt to the fast pace of growing niche fintech solutions.
Alternative Asset Investing
The Problem: Alternative assets is another space facing a problem around ‘holistic data.’ Unlike public markets, data is siloed and workflows are manual, creating negative impacts on returns for investors. It is a clear problem, for an LP for example, to have to log into multiple separate GP portals, download different documentation, and then try to aggregate that data to track performance. Furthermore, post-investment monitoring on aspects like equity raises and tax payments becomes challenging when RIAs have to piece together information from discrete sources, or the occasional semi-annual report from the sponsor. This is a problem that doesn’t exist in public markets, where RIAs can look at every 10-K, 10-Q, and other regulated documentation that is required to be filed.
An interview of executives at Northern Trust elaborates on this problem:
“Today, most alternative asset data is unstructured and not digitized. Asset owners are dealing with PDFs, emails, phone calls, and various other data delivery methods, and there is no standard way to sort that information… Asset owners are responsible for managing and aggregating all this unstructured data, which is a huge undertaking.” - Global Head of Front Office Solutions, Northern Trust
“Each manager has different formats for providing information to asset owners and there are also differences in data elements across investment types. This lack of standardization, combined with the increased volume of information, requires significant effort to manually consolidate which can be associated with increased risk of error.” - Head of Client Services, Northern Trust
I believe this a substantial problem for both small RIAs (that lack a dedicated in-house team for data analysis) and large funds (like insurance companies or pension funds) where data management becomes increasingly crucial as they increase their allocation towards alternative assets.
To summarize, accessing accurate, timely and comparable data is one of the main challenges facing asset owners when allocating to alternative assets.
Arch Labs: “Digital Admin for Private Investing.”
One startup of interest seeking to combat this problem is Arch Labs. They connect upstream GP portals and fund admins so investors can automate workflows like document collection and capital calls. The Arch platform aggregates investment data and documents (ie: K-1s) across every investment, to provide report-ready data to investors, accountants, and advisors, all in one central dashboard.
Company Features: Arch currently manages ~$100bn aum and works with 230 investment firms. Arch Labs raised a $20M Series A from Menlo Ventures in 2023, and has demonstrated capital efficiency, rapid ARR growth, and significant employee growth (Menlo Investment Memo).
Key Takeaway: Most importantly, Arch has been gathering proprietary investment data, and has seen network effects with investors sharing Arch data with their own counterparties at banks or accounting firms, who are themselves becoming Arch customers. As RIAs, LPs, and investors demand more accessible data, Arch will continue to grow its rich data pool, allowing it to expand horizontally into many new workflows and unlock new use cases.
Growth of Private Credit
Private credit has been a hot topic recently, so I thought I’d write a brief blurb about it. The graphic below provides a nice visual of various asset classes, showing that private credit totaled ~$2 trillion in 2023 and has substantial room to grow.
Amidst the prolonged high interest rate environment, private credit has seen rapid growth within direct lending. Since private credit is typically floating rate, it presents attractive opportunities in rising rate environments compared to fixed income instruments. Furthermore, when bank lending is tight, private credit competes by offering more tailored loans and a higher yield to investors, usually through the form of junior debt as opposed to senior debt from banks.
Risks: While private credit is here to stay (and grow), there are risks to be aware of. As with any credit investing, thorough underwriting and company analysis is crucial. If interest rates decline or the economy veers towards a recession, private credit loans may become stressed or distressed, and the illiquid nature of this asset-class can create problems for investors.
Outlook: As non-banks steal more market share from traditional institutions, banks will start to rethink their balance sheet, partner with asset managers, shift to different transaction structures like SRTs, and potentially emphasize more protected asset classes like lower-risk short-duration loans.
What could private credit mean for Fintech? Vertical SaaS providers looking to offer embedded finance solutions will look to partner with private credit funds to diversify their offerings and unlock additional revenue streams. Furthermore, there is increasing value in SaaS for loan services. As AI/ML data analysis capabilities improve, private credit funds will benefit from higher-accuracy loan underwriting, financial forecasting, portfolio management, speed, and digital accessibility, which will subsequently fuel more demand for private credit. That’s all for today, Stay Curious.