Recently, the Aspen Institute Financial Security Program (FSP) and Commonwealth convened leaders from the financial services, FinTech, investor, nonprofit, and human resources communities to explore the promise of “integrated” and “hybrid” financial solutions. Key insights from the discussion are described below and shared with the hope that we can spur the imagination of the financial service industry, build excitement around the potential of integrated solutions, and spotlight the innovators who are leading the way.
Traditional financial products have typically been designed around single financial functions—borrow, save, pay, transact, invest, or insure. “Integrated” and “hybrid” solutions combine two or more financial functions to enable consumers to address their financial needs as they arise. As financial vulnerability and income volatility become increasingly prevalent, the choices offered by single-focused solutions often do not match the way people experience their financial lives. Integrated and hybrid solutions that transcend traditional categories have the potential to better align with and serve the realities of those who face financial uncertainty.
Consumer-centric approach to design is crucial
The development of integrated and hybrid solutions must start with a real consumer need. While integrated models have the potential to yield highly imaginative and sophisticated solutions, products that clearly and simply respond to an actual consumer need are critical to achieving adoption. Rather than frame the design process around separate functionalities that can be put together (e.g.: savings + credit, spending + savings), innovators must center innovation around consumer pain points to produce new products that are sought, not sold. As Mark Green, director of innovation at SafetyNet, points out, “Crafting consumer-centered solutions involves discomfort, discipline and humility. Consumers prove the best-drawn ideas wrong – repeatedly. The willingness to check-in and redesign is an invaluable innovation competency that uncovers your solution’s ‘True North.’”
There is also a large need for product marketing and messaging to speak to the language of the consumer. For example, one attendee noted a wage advance tool that quantified money in terms of “hours of pay” instead of “percent of income” to better resonate with users’ mindsets.
Role of regulation
Regulating financial innovation is a challenge. Historically, regulators tend to focus on product function and category over consumers’ use of the product, in large part because this is how laws regulating financial products are organized. Even when financial firms and regulators are each seeking to support innovative products with strong benefits and protections for consumers, they may need to first bridge the differences in their perspectives. Creating necessary industry-regulator partnerships may depend on more effective translation of the innovative aspects of products, such as integrated and hybrid solutions, into policy insights about the potential for these new products to support consumers’ well-being. That possibility, plus the increasing number of regulatory innovation initiatives in the United States and around the world, contributed to a relatively optimistic outlook about the future of financial product innovation.
Partnerships and the path to profitability
Organizations across sectors should think creatively about how to leverage integrated and hybrid models, as each sector offers different strengths and stands to benefit from their development. Such collaboration can allow for “viable business models for products that have razor-thin margins and therefore need significant uptake,” commented Lenny Mendonca, senior partner emeritus at McKinsey.
For example, when it comes to addressing the challenge of income volatility, employers have indicated a need to provide workers with greater flexibility regarding when and how they are paid. However, they do not have the time or expertise to develop a product that would enable this flexibility. A FinTech company might have a solution, but limited access to workers. Together, they could develop and distribute a hybrid product that addresses the challenge of income volatility. In this scenario, employers are willing to pay for the benefit to stabilize their workforce, providing a path to scale and profitability for the FinTech company, and workers’ needs are met – a win for everybody.
Another example of the power of partnerships is when non-profit organizations raise philanthropic dollars to develop innovative products, and partner with private companies to design, test, and bring these innovations to scale. Relieving an innovation of the pressure of making a profit from day one can allow for the increased innovation required for new product models like integrated and hybrid products.
Platforms instead of products
What other forms could integrated solutions take beyond combining two functions in a single product? They could come through a platform approach, imagining a single money-management destination that would pull in all of a consumer’s accounts, provide quick analysis of their available funds and options, and recommend or automatically select payment mechanisms that help meet the user’s financial goals. An early version of this type of platform exists in the form of applications like Mint, which create a dashboard of your financial situation by drawing information from multiple accounts. In the future, such a platform could become far more customizable and responsive to individual users. If integration and hybridization occur through this type of platform, the result may not be a consolidation of single-use products into multi-use ones, but instead a coherent and elegantly designed system for organizing and maximizing the value of an array of single-use products. This approach may also side-step some of the regulatory challenges of integrated products.
Interest in integrated and hybrid products is coming from consumers, innovators, traditional financial firms, investors, regulators, and others. This is an area ripe for innovations that have the potential to solve consumers’ pressing financial challenges while creating new value for product providers and distributors.
At Commonwealth, we are exploring the potential for solutions that combine restricted and unrestricted savings to enable consumers to save for both immediate needs and long-term goals. This could look like an integrated product that facilitates regular savings towards a rainy-day fund, while also seamlessly building tax-deferred health savings. FSP continues to explore and spotlight hybrid models that can help with income volatility – solving liquidity and risk challenges for workers – and ways in which hybrid products can disrupt the retirement industry.
Successfully developing these products–and regulatory frameworks for them–depends on the inclusion of cross-sector perspectives. Leadership must come from different areas of the financial services industry partnering with a variety of stakeholders. As Jamil Poonja of human resources platform StrideHealth notes, “Financial wellness is so tightly integrated today with health, work, wealth and opportunity for families that we need to partner together with industry, government and community organizations to solve problems.”
Only with all those voices at the table can we innovate our way to greater inclusion and financial security for millions of US consumers.