The internet would be a better place if more things on it cost money.
Would you pay for a fintech app that helped you invest more effectively, helped you save money, or made it easier to detect fraud? In some ways, just the fact that the question can be asked seriously is a bit surprising. Think about it: most companies charge consumers for their products, even intangible goods like novels and music. Of course you’d pay money to a financial advisor who helped you invest your money wisely. Of course you’d pay an attorney to help write your will.
Unfortunately, back in the 90s, nobody could figure out a way to make payment user-friendly enough to be sustainable on the Web. Back then, there were few good ways to process payments, even if you could convince someone to give you a credit card number to pay an arbitrary person over the then tenuously-secure web. Even today, expecting users to enter their credit card details simply to view material online creates an excessive time and security burden for both the end-user and the provider, and the overhead of payment processing itself is a huge percentage of small-dollar payments. Thus, vast parts of the internet–especially those businesses offering virtual goods–turned to advertising as a revenue model.
While it worked well enough to create the vast commercial enterprise of today’s Web, advertising is actually quite inefficient. For most businesses, advertising is a poor way to generate revenue. For one, there is no way to build any kind of effective pricing model. An airline can charge a last-minute business traveler more than a leisure traveler, and Amazon can offer things like Prime that appeal exclusively to high-volume/high-loyalty customers. For a website or app selling ads, though, it’s one-size-fits all. A user’s value is determined exclusively by their receptivity to various ads. The incentive to direct products at consumers who care about quality and will become loyal, premium, repeat customers is subordinated to the desire to drive massive traffic, quality be damned. Even worse, advertising is a relatively small and shrinking portion of GDP, so there are ever more companies fighting over ever smaller scraps of our attention.
Even worse, advertising tends to result in openly user-hostile activity. At best, overreliance on advertising incentivizes companies to waste your bandwidth, slow down your devices, and compromise your privacy. One popular website has literally a 1,000:1 ratio between advertisements/trackers and content. At the most nefarious end of the spectrum, it can even incentivize companies to profoundly compromise their user’s security in order to make just a few extra fractions of a penny serving you ads. Adtech is the seedy, opaque underbelly of the internet.
Is this really the best way to run businesses in 2017? Tricking users into serving up personal information, draining their batteries while bombarding them with ads for things they don’t need, steering them towards endless “clever tricks” that are neither tricky nor clever, and trafficking in falsehoods and half-truths merely to drive traffic? I don’t think it is, but change is awfully hard. We’ve been conditioned to expect that online = free, and when an internet company attempts to charge us for something, our initial response tends to be a worry that we’re being wasteful or being ripped off.
At my old startup, Prism, we agonized over how to avoid charging our customers anything for using our service while being–in the words of a very successful fintech CEO–“neither flakes nor dirtbags.” We suspected early on that too many people would find the idea of paying for a bill pay app intolerable. It took us a while, but we ended up finding a pretty clever way to shift that cost away from the consumer and, ultimately, onto the biller. I’m proud that we were able to build a product that we could provide free to consumers, but I’ve also come around to believing that in most cases, the entire ecosystem would be better off if most companies just charged a bit of money. It’s how the economy is supposed to work after all.
First, charging money shortens the product cycle. With enough marketing capital and a free product, it’s possible to build a business on the back of a product that nobody really cares about. Ultimately, that business will be unsustainable, but it’ll take years and millions of dollars to figure it out.
Second, charging money allows businesses to focus on building a better product for their best users. At Prism, we spent an extraordinary amount of time on our complex revenue model–time that wasn’t spent improving the end-user experience.
Third, charging does a nice job transparently aligning the interests of the customer and the company. Tim Cook has repeatedly pointed to Apple’s business model as a reason to trust them:
Our business model is very straightforward: We sell great products. We don’t build a profile based on your email content or web browsing habits to sell to advertisers. We don’t “monetize” the information you store on your iPhone or in iCloud. And we don’t read your email or your messages to get information to market to you. Our software and services are designed to make our devices better. Plain and simple.
To me, this statement is very compelling. I wish we could say it of more fintech products and even traditional banking products. How about: “our business model is straightforward: we sell a simple, low-cost checking account for $5/month. We don’t trick you into paying fees, and we don’t try to reorder your transactions to maximize our sneaky overdraft charges and kick you when you’re down. You pay us a simple fee; we give you a great experience.” Wouldn’t that be a breath of fresh air?
It’s also a lot more fair. Ever notice how “free” products always tend to be free only to the most affluent and sophisticated users? That malicious adware I mentioned earlier? It’s only on the low-end product line; the premium stuff sold to businesses and wealthy customers was mercifully untouched. Tech-savvy users know enough to run adblockers that keep malicious advertising out of their browsers, so they get to experience the web truly for free. Wealthy bank customers who can maintain a cash cushion have access to checking that is genuinely free, subsidized by less affluent customers who pay hundreds of dollars of overdraft fees each year for their accounts.
Of course, changing away from these opaque business models will require a fundamental shift in how our CEOs build their businesses and how their customers understand the value of digital goods. As customers, we need to stop freaking out every time an app asks us to help support its development. Investors and entrepreneurs ought to start working on demonstrating that direct-pay can be sustainable in the long-term.
There are a few companies that I see embracing a direct revenue model, many of them part of the Financial Solutions Lab. Digit, a company in the same Financial Solutions Lab cohort as Prism, announced just last month that they would begin charging a monthly fee. Several of last year’s Lab companies have similarly transparent models, including EarnUp, Scratch, and Remedy, while many others have straightforward freemium (i.e. pay-to-upgrade) models. I’m curious to see how this plays out, and I’m hopeful that we can move towards a more equitable, transparent, and scalable infrastructure for sustaining development in our industry.