Digital payments are creating a wealth of data that can be used to inform other types of financial services for managing debt or promoting financial inclusion — and these services are, in turn, attracting the interest of venture capitalists.
The San Francisco-based Day One Ventures is about a year old and specializes in seed and early-stage investments in companies that attack problems such as paying for fertility treatment, canceling forgotten subscriptions, setting up payments for student debt, managing rental payments or handling digital card-on-file updates for merchants.
“We see that fintech offerings are merging with consumer products. General banks no longer cut it because finances are a major part of our lives, but banks don’t cover all of the use cases,” said Masha Drokova, founder and general partner of Day One Ventures.
Drokova, a formal angel investor, looks for companies that can use transaction data to inform financing, budgeting or payment strategies for other needs. She says that while these companies are alternatives to banks, their existence can also have a positive impact on banks’ image and influence their user experience.
Day One's most recent investment is in Pillar, a startup that connects to a user’s accounts to analyze income, prior payments and a consumer’s balance sheet to change monthly payments over time. The company says its model can change recurring payments by altering the size of those payments through an analytics engine that takes other unrelated payments into account.
That’s the crux of almost all budgeting, but Pillar says it can be particularly useful in recurring payments for debt. Pillar's original goal was to manage student loan payments, and it's expanding into new recurring payment types.
“You may have a wedding this month and have spent more. Our engine says, just make the minimum payment. Or on another month you can pay more,” said Michael Bloch, founder and CEO of Pillar, which launched May 30. The startup does not charge a fee for its core service, though it plans premium payment management features that will carry fees. “We found that there’s generally not a lot of customization for default auto payments, or a way to easily transfer funds to manage these auto payments," Bloch said.
Pillar’s pricing structure also provides a differentiator, Drokova said. “It doesn’t make money from keeping people in debt, so it can truly prioritize getting people out of debt.”
Day One didn’t disclose the size of its investment in Pillar, though
Day One’s portfolio also includes Truebill, which monitors a consumer’s account to find inactive subscriptions, or negotiate lower rates for active subscriptions.
Another Day One-funded startup, Domuso, applies payment data-driven innovations to property rental. Domuso captures a rental property’s receivables electronically and supports multiple payment methods for renters, with a “pay rent” button similar to an e-commerce buy button available, along with digital onboarding. It also offers point of sale financing, or credit that's designed to help consumers in a short-term financial bind by paying for rent up front while allowing for installment payments over several months. installment payments for renters to split rental payments over several months.
Arcus uses payment data points such as amount due, statement balance, statement histories, and current payment methods to inform a business’ payment strategy. It also automates updates for lost or replaced cards, in an effort to reduce churn for merchants that keep cards on file.
And Future Family aggregates fertility-related bills such as clinic visits and prescriptions into a single recurring payment.
These startups are products of the age of open banking. While there’s no open banking law similar to PSD2 in the U.S. yet, the concept of open banking — which requires banks to connect to fintechs and other third parties to give consumers more control over their accounts — enables a multitude of use cases.
The utility of tying a bank account to specific life needs or as a portal to finance payments to solve a particular problem can cast banks in a more positive light even if consumers see a nonbank as more appealing for a particular task, Drokova contends.
“Many of the bottlenecks and distrust in financial institutions are beginning to decrease. This is in large part because fintech startups are flipping the script in what consumers expect from a financial institution, forcing the traditional companies to invest in user experience and boosting trust with consumers,” Drokova said.
Technology as a differentiator for banks appears to be waning, creating an impetus to embrace partnerships with external companies that may do a better job of tying digital payments to other accounts, or that ease payments or financing for a narrow use case.
The number of consumers that are leaving their financial institution is on the decline, said Tim Sloane, vice president of payments innovation at Mercator.
“While some consumers select an institution based on technology, it is clear that the vast majority of consumers continue to decide based on branch locations and ATM coverage,” Sloane said. “Even if a consumer is aware of the technological shortcomings of their current institution, these tech issues are rarely sufficient to drive the consumer to a new institution.”
