Game On

Once upon a time, finance, like health, was a private matter.  Discussions regarding personal financial decisions were conducted largely behind closed doors - between spouses or between individuals and their financial planner, broker, or accountant. With the advent of the World Wide Web and the creation of investing chatrooms and personal finance websites such as The Motley Fool, financial matters began to become a bit more public.  Perhaps it was the perceived anonymity of the Web, or the interaction with strangers who would not pass judgement, but having personal financial discussions in cyberspace became increasingly acceptable.

As finance in general became a social matter, a parallel phenomenon unfolded in the retail securities brokerage space.  Information technology revolutionized and even democratized financial services in the roaring 90s, and the rise of daytrading gave birth to the idea that "playing the markets" was a potential way for patient, disciplined traders to eke out a living.  The wild bull market of the latter 90s, and a frothy IPO market only served to bolster this belief, and "casino capitalism" continued to progress.  Surprisingly the eventual dot com explosion did little to dissuade the day trading appetite among investors, and as opportunities in equity markets dried up, enterprising companies sought to democratize a new asset class: foreign exchange.  A multitude of brokers popped up during the early and mid-2000s offering access to this trillion dollar marketplace at affordable rates.  Whereas the highly volatile FOREX markeplace was once the province of central banks, banks, and multinational corporations, it is now a playground for small investors with as little as $250 to trade.  FOREX is now one of the most popularly traded asset classes among retail securities traders.

Today, finance is truly social.  KaChing, Covestor, Zecco, and TradeKing are examples of both brokers and asset managers whose business models are actually built on a social media platform. Others have bolted on social media to enhance their value.  Despite the explosion in social media over the past three years, however, brokers and asset managers have lagged behind in terms of innovation, adoption, and the number of home runs in the space.  Of course, they can be forgiven for this - the industry has had bigger fish to fry.  Things like solvency and survival have understandably trumped IT spending..

What, then, is the next phase in the evolution of retail brokerage?  As finance continues to become more social, more interactive, and brokers offer increasingly lower commissions and cutting-edge trading technology, the securities brokerage landscape is changing.  Lowering commissions means emphasizing volume, and that means encouraging not an old-school buy and hold approach, but high frequency trading.  This fundamental change in philosophy is justified on a daily basis by unprecedented volatility in the financial markets, and reinforced daily by the new financial media - bloggers, twitters, and vloggers who publish up-to-the-second trade ideas designed to exploit short-term movements in stocks and FOREX.  This, coupled with social features that enable traders to mirror the trades of other "players," provide real-time ideas and analyses to followers, and even compete for prizes and a spot on the "leaderboard" can only mean one thing: financial services is rapidly become the next frontier in social gaming.

RIP Wesabe

It's always sad when any business is forced to shut its doors.  More than just a cash-generating entity, a business is also the manifestation of a dream, the real-world expression of an original idea and the unending toil necessary to bring it to life and to sustain it.

Wesabe is an example of a company with the right idea, at the right time, but with incomplete execution.  Wesabe's early success was impressive, and was largely due to the novelty of what it offered: the ability to manage the entirety of one's personal finances in one place.  The aggregation of personal financial data - credit cards, bank accounts, bills - was truly revolutionary, and in an era of increasing economic uncertainty and complexity, was embraced by many consumers.  Online personal financial management (PFM) seemed to have almost unlimited growth potential.

But Wesabe faced a host of challenges along the way, not only in the form of competitors (Mint, Geezeo, Jwaala, and Yodlee, to name a few), but a lack of revenue model.  In those "early" days of Web 2.0 (four years ago), the prevailing business model was (and in many cases, still is) free.  That is, offer the product for nothing to generate buzz and a sizeable user base, then monetize later.  Of course, sustaining operations in the absence of meaningful revenue can be a true test of faith (and capital), and investor patience is only so long.  Mint, Wesabe's chief competitor, realized early on how to leverage its data to generate substantial revenue via targeted ads.  Nine months ago Mint was acquired by Intuit for $170 million.

Wesabe went a different route, seeking to white label its product to credit unions.  Springboard, as it was known, only generated moderate success, and Wesabe signed on a handful of licensees.  Fierce competition from Yodlee and Geezeo posed a sizeable challenge to market penetration, and the Mint acquisition meant that Mint would be deployed to the 1,800 banks and credit unions serviced by Intuit.  As resources were allocated to the development of an institutional market for its product, Wesabe's ability to service its consumer user base slowly degraded.

Wesabe's failure may be due to a host of factors, but surely at the center lies a fundamental crisis of business identity.  The lesson for start-ups in any industry is clear: know who your customer is, and have a viable revenue model from the outset.