📈 The Infinite Learning Curve
Financial Literacy via French #Fintech
Whether you like it or not, you are involved in the world of finance. And today, it's transforming at an exceedingly fast pace. Everyday, you make decisions that directly impact your financial future. You invest time and energy, but statistically speaking you aren't investing your money. Or at least not optimizing your investments. Don't worry, you're not alone. According to Panorabanques, around 1 of 4 French people find themselves in the red every month; in the US, 69% of US adults have less than $1000 in savings (SpendMeNot). Financial literacy is low, even among the highly educated. Nowadays, access to the financial system has been widely distributed thanks in part to the digital economy, but that alone doesn't necessarily fix the gaps in opportunity for wealth creation. Today, I'd like to examine why the learning curve towards financial literacy is so steep and some of the French tech startups building products to accelerate the climb.
Term Sheet (Introduction)
Magic Internet Money (Bartering to Bitcoin)
Personal Finance 101
French #Fintech
Diversification > Democratization
Bébé, Bobo, Bourgeoisie
Term Sheet (Introduction)
Most would agree that getting an education is a key ingredient for success, upward mobility and financial stability. Many of the great institutions around the world are sanctuaries of higher learning, built in service of educating generation after generation. Whether you find yourself pursuing a liberal arts degree, vocational training or a highly-focused PhD track in the math and sciences, there's one area that tends to be left out of the curriculum: personal finance.
Growing up, I learned there should be "no taxation without representation" but never how to actually do my taxes. Personally, I majored in economics and not once was I assigned an exercise to run a cost benefit analysis on my own investment portfolio. In fact, I have several friends in investment banking and private equity who work with some of the most complex financial instruments in the world, but were never taught how they themselves should allocate and accumulate personal wealth.
Alright, what's my point? Taking stock of all this made me realize how little there is in the way of pragmatism through formal education. I would bet that most people who do in fact learn the ropes of personal finance did so through a savvy family member (i.e. mom teaches you how to balance a checkbook) or sheer determination and passion for the subject (i.e. Reddit forum). But in today's digital economy, access to information is vast and tools to actually put your money to work are easier than ever to use. In this piece, I want to examine modern approaches to personal finance and review some of the French tech companies providing solutions at different points in the journey towards financial security.
Magic Internet Money (from Bartering to Bitcoin)
We've made significant strides, societally speaking, with respect to the way we buy and sell things. Way back in the day, we relied on bartering i.e. you give me a fish, I give you some grain. It worked, but it wasn't terribly efficient. How many grains constitute the value of one fish? But we got by… And if I had to guess, this must be the root of haggling, a desirable skill-set in many cultures to this day!
Eventually, we figured out how to create 3rd party stores of value (proto-currency) like gemstones and precious metals that provided some standardization and drove efficiency in the markets. Later, we adopted the gold standard to back fiat currency (read: paper money) because carrying around a few bills in your wallet was much more convenient than lugging a safe full of gold bars to your local shop.
Around this financial core, we built tools, products and markets for the purpose of security, leverage and scale. Eventually, nearly anyone had access to a credit card, financial markets were globalized, trading in near real-time, and money itself felt more like 1s and 0s than crisp bills in your back pocket. In the past decade, we've charged head-first into fintech — combining the power of complex financial instruments, consumer mobile apps, gamification, and powerful APIs (app interoperability) — which has lead to perhaps the largest "onboarding" in history of new entrants into the world of finance. Coinciding with this shift is the emergence of the blockchain, cryptocurrency and decentralized finance (better known as Defi), which in conjunction with a freshly minted cohort of amateur investors and market participants has turned the financial system on its head.
Let's take a step back and ask ourselves a very simple question. One you might hear from a curious child: what is money, anyway?
Personal Finance 101
CAVEAT: if you're a seasoned investor, you can probably skip this section and get to the good stuff (i.e. French tech co's!).
Bear with me, because sometimes the most juvenile questions are the hardest to answer. It all starts with three words: The Scarcity Principle. It's a foundational economic theory that asserts a limited supply of a particular good, coupled with high demand results in mismatched supply and demand of said good. In plain english, we have limited resources on this planet, and theoretically limitless desires. To reconcile those two statements (visually) you can create a chart of supply & demand (note: if you take an intro to econ class, you will draw literally thousands of these). These two curves represent how much of a resource exists to sell and how many people are willing to buy it. At their intersection you find the market price. It's that intersection that spurred economic advances from bartering to bitcoin and plays an enormous role in how we operate as a society today.
Money, simply put, is a way to facilitate transactions. There are, as in many disciplines, layers to this concept. You start with one understanding and then suddenly, months later realize your whole conceptual framework for something only scratched the surface. So let's dive a bit deeper. Below is a crash course on the characteristics of money (as currency):
Durability: it can be used more than once
Portability: easy to transport
Fungibility: it can be interchanged with another asset of the same type
Scarcity: it's not unlimited
Divisibility: you can divide it up into pieces
Recognizability: easily identifiable as money
But money is much more than just a currency. It's a store of value. With a stable currency, you can be reasonably certain that a dollar today equals roughly a dollar tomorrow. But in the long run, you are playing a game against inflation — the aggregate rise in prices over time. This means that your dollar is actually worth less tomorrow than it is today and in order to outpace the inflation rate, you need to put your money to work (invest). And it's here that we come full circle to resource allocation and scarcity:
How do I invest?
Where should I put my money to ensure it outpaces inflation and continues to grow in value?
What do I invest in?
Do I need to go to a precious metal mining company in east Asia or visit a battery manufacturing facility in Nevada to give them my money?
The good news: you don't need to understand the nuances of oil futures or be an expert on federal reserve policy to be a successful retail investor. The bad news: it still takes work and a degree of risk tolerance. Personal finance and investing is kind of like learning a new language. It requires practice, immersion, and if you're lucky enough to get exposed at a young age, you can build a great foundation for success.
Let's take a look along the learning curve and see if we can piece together an app-based curriculum for financial literacy, starting from the very beginning.
French #Fintech
Before we get started, I should mention that the #fintech ecosystem is vast. The market landscape below is from 2020 and covers France alone. Fintech ranges from banking to insurance to payments to regulation. In some ways, if you touch one category, you touch them all since they are deeply interconnected. But today's focus is on solutions designed for savings, investing, peer-to-peer payments and consumer credit.
Baby Steps: Kard
Think back to when you were a child. Did you even have a concept of money? How did you pay for things? The answers are likely no and your parents which was the case for most of us. When I reached 8th grade, I recall getting Visa Buxx: a glorified gift card that my parents could put a limited amount of money into and I could use like a "big boy" when out with friends at the movies. Conceptually, very cool: trading the inconvenience of cash in an increasingly credit-based system and all the while teaching my younger self how to budget and spend responsibly. Looking back, it was ahead of its time. Mainly because smartphones were still brand new and it was a pain to add money or see your balance. Fast forward over a decade later and the technology has caught up with the vision. And to be honest, I'm pretty jealous of the kids who get to use the modern incarnations. One of the leaders in France is a company called Kard.
Kard is the fully actualized version of Visa Buxx. Having raised €7M, they are poised to become the dominant provider of financial services for the adolescent spender. What on the surface appears to be a debit card for tweens is actually much, much more. This might just be the best entrée into the financial system. For parents, it's great: facilitate good spending habits and budgeting while giving your kid some financial independence; for teens, it's even better: a neo-bank in your pocket: pay back your friends, contactless payments and unlimited ATM usage. It's a win win. Plus, they have digital cagnottes — a French tradition of pooling money for someone/something i.e. going-away party or group trip.
This wouldn't have been possible without the accumulation of tech advances of the past decade. Security concerns, speedy iPhone apps, the financial "plumbing" of the internet (we'll get to this) all had to coalesce to make something safe and usable for kids and trusted by parents.
These advancements are pretty astonishing when you think about it. For the next generation, money and finance will be inextricably linked with technology. The abstraction of physical money combined with seamlessness of payments opens up opportunities for all kinds of changes to our financial system. In order to change something, you need, at the very least, to understand it. So it's very cool that young French teens will have a tangible experience with spending, budgeting and saving early on.
Growth Spurt: Lydia
The quintessential sign of tech success is when your company name has turned into a verb. Let's Uber there! or I'll just Venmo you! In America, we have a habit of turning popular nouns into verbs and we can get away with it because English happens to be quite flexible in this area. But even the French, despite their rigorous conjugation and attention to grammatical detail, have adopted this technique as well. And I think the most common manifestation is with Lydia. Lydia might be considered the Venmo or Cash App of France. Like it's American analogs, Lydia started as a peer-to-peer payments service: sync your contacts & banking details and pay your buddies with a couple of clicks. Recently, however, they've seen an opportunity in becoming the "financial super app" of Europe. We've talked about super apps before (specifically, Alan, the digital health supper app). In this case they are hoping to become the one-stop-shop for all your personal finance needs.
Recently, the Paris metro has been plastered with their newest offering: Lydia Blue. It presents a bit like Kard for adults, adding on services like physical credit cards, savings and shared accounts and the ever-popular cagnottes (money pots) commission free for the time being. You're probably starting to sense a trend: digital-first neo-banks (alternatively known as challenger banks) seem to resonate with our generation. We place value on convenience, user experience and flexibility over austere buildings with marble columns and the volume of ATMs within a close radius. The world of finance is changing and that change is starting with the consumer. But financial institutions and tech companies alike are realizing that this trend will have implications upmarket.
You don't have to look far to see what lies ahead for an app like Lydia. Cash app is now owned by Square, combining the power of B2B and B2C payments all under one roof. And Venmo is now entangled in a web of payments/tech companies giving Ebay (the parent company) an enviable vantage point to study user behavior and emerging trends. Ebay's subsidiary, Paypal, is the original online payment tool and another, Braintree, has built what is essentially the payment services workflow across banks (read: financial plumbing of the internet). Venmo is the final building block, providing direct access to end users. With fresh funding in December 2020 (totaling €142M all in), Lydia has an opportunity to choose their destiny in the European markets.
Reaching Maturity: Nalo
Access to liquidity is critical in the early stages of your journey into personal finance. To understand the game, you need to play the game, so to speak. Taking out cash, trying various payment methods, putting a bit of money on the side -- these are all fundamentals that give you early experience and first-hand understanding of money, budgeting and the transactional nature of the economy. As you get older, however, it's not just fun and games. You have to think about the future, consider projects and purchases you want to finance, and save for retirement. It may sound relatively straight-forward, but the decision matrix you face when deciding how to invest can be overwhelming. The tech industry has facilitated unprecedented access to markets, but the principles of investing can still seem bewildering. If you want to be an active investor, you can buy and sell individual stocks; but if you're like most people you want to set and forget. But then again, it sounds a bit risky to just place a bet on one stock with all of your savings. Which is exactly why it's common practice to seek diversification in your portfolio.
That's where a product like Nalo comes into play. It's kind of like a mutual fund (I'm thinking of something like Fidelity in the US) but completely digital-first and personalized to each investor. Their primary product, the assurance vie, is the most common savings/investment vehicle in France (includes tax benefits but imposes mandatory minimum vesting period). What makes them different is that they provide an intake survey to identify your savings goals, anticipated upcoming projects and personal interest in the funds in which you invest your money. Traditional banks typically sell you one offering (their own fund) and charge service fees. With Nalo, it streamlines the process for an amateur or first-time investor and allows you to feel confident and participatory in the investing strategy without requiring you to manage the day to day. Plus, their track record appears to be quite good. In particular, their "green" fund has been outperforming average returns by a wide margin.
An app like Nalo is ideal for early investors looking to expand their portfolio and dabble in some long-term investments. It builds on the fundamentals acquired in earlier phases of the learning curve and applies that knowledge to build passive income. But just like your portfolio, you may want to diversify the services you use to invest, which brings us to our next stage: ensuring savvy investors can keep track of it all!
Aged Like Fine Wine: Finary
What's exciting about an infinite learning curve is that the learning never stops. In finance, like in tech, there is always a new frontier to explore. And when you combine finance and tech, those frontiers are sometimes unimaginable. Mature investors often have a diverse portfolio: stocks, bonds, ETFs (index funds), real estate, cryptocurrency, equity in early stage companies, fine art and jewelry. The challenge when you reach this stage is that it's hard to track. Multiple logins and separate interfaces make it difficult to get a comprehensive view of your holdings and building and maintaining a consolidated spreadsheet is painful (and let's be honest, rarely up to date). I ran into this problem myself about a year ago when trying to get a 360 degree view of my investments, which is perhaps why I was so intrigued when I stumbled upon Finary: the ultimate portfolio tracker.
Think of it like a personalized dashboard for your finances. They've created an API-to-everything product that allows you to plug in investment data from whatever bank, mutual fund or crypto trading platform you use. And thanks to those plug-ins, you get real-time updates on performance. It's as if the spreadsheet I built was on steroids, hyper-secure and beautifully designed. I was smitten.
So I sent a Twitter DM to their CEO and Co-Founder, Mounir Laggoune, to get some deeper insights. Naturally, we talked about the app, but what I found most fascinating was his perspective on personal finance and the questions, concerns, and hopes of the everyday aspiring investors he regularly speaks with.
Mounir's path is an interesting one, a multicultural kid (French-German), he was exposed to the ways of the world at a young age through frequent travel. After business school, he cut his teeth in the French tech scene at two startups: one of which has become a competitive player in the employee benefits space (Worklife, as covered in my essay the 401K Meal Plan). He was granted a coveted spot at Y-combinator, Silicon Valley's premier incubator/accelerator program which gave him the launching pad for Finary.
As it turns out, concerns around personal finance are fairly consistent across cultures. Although the US is somewhat less risk-averse and more at ease with internet privacy and security (i.e. not skeptical about plugging in their bank details to the app), most beginners are concerned about what to purchase, tax implications, liquidity and the like. There's a huge education gap that Mounir and team hope to close. Often when I speak with French peers about investing, their default answer is that they want to buy an apartment. I asked Mounir to validate my anecdotes and his response was insightful. Buying property is the most common investment strategy simply because it's the easiest to understand. You can live inside a physical apartment, it has walls, rooms and appliances. Counterintuitively, because it's such a big upfront cost and requires significant borrowing, you can run up against your lending ability and lose out on other investment opportunities. Index funds, being more abstract, are harder to wrap your head around but often times are safer, less labor intensive investments.
Through product and personal finance evangelization, Finary plans to help more people take charge of their financial futures. Today, the app is a real-time aggregation tool; tomorrow, it will offer a community, investment advice and actually allow you to execute trades from within the app. I'm a fan of their philosophy, it's not just about access to the financial system but education on where and how to allocate your capital.
Diversification > Democratization
In the technology industry, we tend to find grandiose terminology endearing. So when something sticks, we stick with it. As such, the meaning of the term tends to erode from a powerful metaphor to an overblown buzzword. One of these buzzwords is democratization. Essentially, it's a fancy way to say making something accessible to everyone, which generally speaking is a worthwhile cause. With a learning curve that stretches to infinity, perhaps it's wise to impose some limits. I'd like to close with the argument that diversification is greater than democratization in the case of personal finance.
But first, what do I mean by "diversification"?
You've got two people to thank for this concept: Harry Markowitz (left) who won a Nobel Prize in Economics whose work is responsible for modern portfolio theory & John Bogle (right) the founder of Vanguard who is credited with inventing the Index Fund. To translate, diversification suggests that you shouldn't put all your eggs in one basket and Index Funds (or Exchange Traded Funds usually referred to as ETFs) are investment vehicles that are inherently diversified. These are deep subjects for another day, but in short, thanks in part to their work, you can safely and relatively easily build a diversified, risk-averse long term portfolio. And today, you can do it with the click of a button.
The products I covered all more or less contribute to the education of young investors with an emphasis on savings, budgeting and diversification. There are, however, many emerging products that capitalize on this expanding market of "retail investors" by giving them complex financial instruments and disguising them as toys, ultimately resulting in major losses for the inexperienced and uneducated while lining the pockets of the apps that democratized access in the first place. Here's a fairly eye-opening statistic:
According to the stock platform Etoro, 80% of day traders lose money over the course of a year with the median loss of -36.30%!
Why would anyone in their right mind play the markets when it's proven that letting your investment sit in a diversified portfolio, untouched year over year will result in equal or better outcomes? The answer: higher risk, higher reward. And it's exactly this type of misinformed thinking that gets exploited. For further reading on this subject, I highly recommend David Phelps piece Against the Democratization of Finance. What seems contrarian in title turns out to have some incredibly thoughtful points. I'll let one of his more incisive passages do the talking:
"So when we talk about the democratization of finance, we are seldom talking about creating financial opportunity, leveling financial opportunity, or giving people the educational tools to make good decisions. We’re talking, instead, about letting them make more decisions that are often designed to cost them financial opportunity and means. We not only place the onus of difficult challenging and specialized work on individuals to complete on their own, but reduce the challenges with games to the detriment of their decision-making ability, charge them more in the process, and incentivize them to take charge of disastrous decisions through casino tactics."
— David Phelps
Striking a balance between access and education will result in the best outcomes for the public. Despite drastic changes in the financial system, institutional investors and hedge fund managers still have the upper hand. So while it's wise to invest, it's probably not best practice to gamble or even worse, put yourself in a David v Goliath situation where Goliath has real-time access to your very next move.
Bébé, Bobo, Bourgeoisie
No matter where you are on the infinite learning curve, it's never too late to start. I mean, it's infinite, so mathematically, you're not really that far behind anyone else! If you're new to investing, start simple. If you're a parent, consider instilling some early education around money and saving at a young age. And if you're tired of updating spreadsheets to track your real-time net-worth, I know a good app that does exactly that.
Whether we like it or not, money and finance are inextricably linked to the machinery that runs the world. I'm not asserting that money equates to happiness, but financial security and independence tend to be useful in your search for it. New movements in finance — especially tech-enabled finance, cryptocurrency and Defi — aren't just leveling the playing field, they're building a brand new one. In fact, they are leveling cultural and political barriers as well. Today, you can leverage access to powerful tools and information to accelerate your ascent on the infinite learning curve. What are you waiting for? There's no time like the present!
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