Are fintech startups taking advantage of millennials?

Millennials have grown up with technology, which makes them an entirely new breed of consumer. Armed with their devices, they have the world at their fingertips. But access to more knowledge does not necessarily mean making better choices, or does it?

Memories of the financial collapse are firmly embedded in the minds of millennials, which has been attributed to their disinterest in financial services.

The fact of the matter is that millennials deal with money differently than previous generations. Banks have been slow to fill this niche, which has left a vast amount of fintech companies rushing to fill the void. A critical question remains to be answered, however, which is whether the products and services these companies offer are actually any good.

The investment products

One way startups try to attract millennium customers is by offering to control their investments for them, at low risk, and with minimal investment. That is what Vest, a startup originating in Stockholm, has done by aiming at getting its customers into the stock market, with as little as $500, while emphasizing minimized risk on the investor’s part.

They do this via a stock investing practice called options. From a benefit standpoint, investing in options allows one to be speculative, conservative, or anything in between. Though, the ability to be such a “versatile” investing practice does not come without its costs –  options are incredibly complex securities, and they can be extremely risky.

On one hand, Vest lowers the barriers for entry into the stock market, allowing new users to become “investors”. Yet, on the other hand, it does little to demystify the complications and risk that surround options.

While firms like Vest can help provide investment opportunities to those new to the stock market they are not reinventing the wheel by creating complicated new financial instruments – in the case of Vest, options investing has been around for ages. Vest is certainly not the only company capitalizing on this trend, as there are many others who wish to fill the obvious vacuum.

For example, Wealthsimple, another company on the startup investment scene, states that they “build a diversified portfolio of low-fee funds in minutes”. They do not stock pick or time the market, but they “invest in low cost index funds that track the market and outperform stock picking over the long-term”.

Then there’s is Kapitall, which is another company aimed at bringing the complex world of investing to a millennium consumer base. At first glance, Kapitall seems just like a usual retail brokerage firm with tools one can utilize to analyze, chart, and compare stocks, read articles pertaining to investing, and learn how to invest using virtual trading accounts.

However, they also have an algorithm driven solution for those who do not invest on their own, which claims to be carefully crafted in order to mitigate individual risk tolerance. It is clear from their website that they are speaking directly to a millennial demographic group from the verbiage that the website contains (i.e. “zombie apocalypse”) as well as their graphics (for example, a graphic containing a pair of sunglasses reflecting a stock chart).  Their blatant pandering notwithstanding, Kapitall’s prices are not what you could call “millennial” friendly – at $7.95 per trade, they are far from the cheapest service.

Vest, Wealthsimple, and Kapitall focus on separate niche subsets of the investment scene. There is inherent risk involved with stock investments not to mention monthly management and maintenance fees to look out for.

Viable solutions for a millennial crowd?

From the outside, these seem to be solutions, at some level, for those who are not keen to invest themselves. But, are they truly viable solutions? This business model has been criticized as preying on naive users who are unfamiliar with the investment landscape by selling them risky financial products that they do not fully understand. Moreover, these companies have been perceived as painting a prettier picture of investing, in that it is less risky, when it is not.

Their target demographic is a group of people who wish to see financial payout without physically investing time to learn what they are investing in. These fintech startups and their backing investors are literally banking on the millennial demographic as the key to their success – and may be taking advantage of their naivety  along the way.