Key Deal Stats:
Raising platform: NetCapital
Implied Valuation: $2.6M
Security: Common shares
Raise completion date: May 22, 2018
At time of publication, April 23, Finnest had raised $86K surpassing its $10K minimum
Imagine yourself as an 8 year old once again, trying to understand the new realities of our financial system. It’s no longer just about the few dollars you’ve made from your lemonade stand though; foreign concepts like credit cards, Venmo, and Bitcoin seem like pits of money that adults use to transfer some arbitrary values from a piece of plastic or their smartphones. From where do we actually derive this value?
Part of this, of course, is just the first chapter in personal finance education that kids will learn and develop with practice. It is true, however, that we are becoming increasingly disconnected from the real value of our money as we develop more convenient ways of spending it. This, then, is not just a learning opportunity for the 2nd grader wanting a new bike, but for every participant in our consumer economy.
Clemens Grave, CEO and founder of Finnest, saw this opportunity a mile away. His app allows parents to financially connect with their kids—they can add allowances, track purchases, and maintain card security completely remotely. It has its practical benefits, clearly, but developing healthy personal finance habits, both for kids and parents alike, seems to be Finnest’s top priority. I sat down for an exciting conversation with Clemens as he walked me through the past, present, and future of Finnest.
CG: I’ve always been a huge car fan, so my heart always beats for anything auto related. At the same time, growing up in Europe I was exposed to managing my own money from a very early age. When I was five, my mom would bring me to the bank, and lift me up so that I could place my money on the counter into my own passbook. I quickly saw that the 4% interest I was getting back in the 90s was making a huge difference to my how much money I had.
I had my first debit card at 12, my first investment account at 15, and I started trading stocks at 17. I was quite young to be using financial products, but that’s a common path in Europe because there are more products targeted to the younger people. My co-founder, on the other hand, like many in the U.S., had a very different experience with finances growing up.
For many college students, the first time that they have their own bank account is when they head off to college – most of the time with a credit card. The truth is, most teens don’t know what it means to handle money. They just leave home with the credit card without knowing what it means to take on debt.
The statistics are devastating. The average 2016 college graduate has $37,172 in student loan debt and 46% of those between 18 and 24 have $0 saved. As we learned more, we saw an opportunity to enable kids to manage their money and not become part of these statistics.
With barely any cash transactions happening anymore, so there has to be another solution to develop good money habits. We started talking with parents and this idea really resonated with them. Once we heard the demand from parents and married that with the need among the next generation, we had the concept. I’ve used all kinds of apps for managing my money and I was convinced we could build a solution to this problem.
CL: That’s awesome. For those that don’t know, how do you define Finnest as a business?
CG: I define Finnest in one sentence as a kids-first mobile bank account, but instead of just managing money, we focus on the education. We want to influence good money habits for life and create the next generation of responsible consumers, savers, investors, and charitable people.
CL: To date we’ve seen two companies already taking massive funding rounds from VC’s and go on to grab tens of thousands of users. Why go the way of the equity crowdfunding raise?
CG: For us, equity crowdfunding enabled us to allow our early users, advisors, friends, and family to become part of Finnest as well. We’ve kept a lean organization that’s helped us get to product launch with no outside capital. We thought crowdfunding would be a great way to engage our early users more deeply with the company, building loyal fans and sharing in our future.
CL: How did you decide on NetCapital as your platform of choice?
CG: We saw so many different platforms out there, but then we came across NetCapital at a TechStars event and we thought, “If we’re a Boston/Rhode Island headquartered company, why not work with a Boston headquartered company as well?”
They’ve been great to work with. Their network is terrific and we shared a lot of mutual support since we are both Boston Fintech startups. The synergies were just much tighter and the fit was better than I could have imagined.
CL: For potential investors, as you think about liquidity down the road, do you have any thoughts to the potential avenues you might take?
CG: I think it’s slightly too early to tell where we’re going over the next couple of years. I think there’s a huge market opportunity to grow and establish quite a substantial user base.
Banks tend to acquire services rather than build them. But non-traditional players like Amazon and Apple are looking to get into the financial services industry in bigger ways too. They’re looking down at generation Z and saying, “These guys consume a lot, how do we capture them?”
Anything is possible. Right now we’re focused on delivering a long awaited solution for families and we intend to distribute our service through multiple distribution channels.
CL: What barriers to entry do you think exist in trying to get a product like this to market?
CG: I think the biggest barrier is the regulatory space. It’s certainly difficult to move around all the regulations to establish a product that allows kids as young as eight years old to get a physical debit card. Right now we’re partnered with Visa and are one of the first programs that has accomplished this task of giving debit cards to kids as young as eight.
CL: Why do you think large banks haven’t done this themselves and offer it to all their cardholders?
CG: Retail banking is first and foremost about growing deposits and lending money. Banks work on very small margins and their technology spend is dedicated to that core business. Banks have made attempts to educate their community. However, more and more they are turning to the innovation community to find FinTech companies that could supplement their products.
CL: What current options exist to service market need and how does this improve on that experience?
CG: Parents currently try to solve this problem in a number of ways but we call them band-aid solutions: co-signed checking accounts, passbooks, and gift cards. These are the tools parents rely on to alleviate the pain of not having cash on hand or managing an allowance. From what we’ve seen, all of these things require discipline, time, and resources parents just don’t have. Many told us of the chore charts and allowance plans that lasted for a few weeks and then fell apart.
As one of our parent customers told us, “It’s really hard to constantly have to say no to my kids. But we’ll be out shopping and they’ll tell me, “I want this, I want that.” Parents want their kids to appreciate the value of a dollar and the trade-offs that need to made when there isn’t enough money for all the things they want.
By giving kids control over their money, with parental controls to prevent them from making costly mistakes, they begin to learn to prioritize what they want, save for it, and appreciate the rewards for doing so. Parents return to being teachers and mentors for their kids. That’s what our app does. It automates the “discipline” while helping kids learn through real-life experience.
CL: The bank partnership seems to be in place. The product seems t o be ready for launch. What does the timeline look like for you to really go to market?
CG: We’re looking to launch publicly by end of Q2 2018. There’s a few small things that need to be put in place and then we’re ready to go.
CL: What are some of the lessons that you got from going through the data with actual users, that you learned that you didn’t necessarily think about up front?
CG: I think one of the big lessons is that we always have to differentiate on the parents and kids sides because both of those parties behave so differently. On the parents’ side, what we realized is that even though they would like to have the time to do a lot of the things that they would tell you, they normally don’t. They’ll say “No problem, I’ll manage the allowance every week,” but it’s usually hard for them to keep up with it.
If you can automate that process for them, you can take off that workload. Parents have been very thankful for that. One of our big learnings was that we can allow parents to pay contribute to their kids’ savings, like interest. That’s a great way for kids to understand the power of compounding interest. Banks pay you hardly anything with their 0.01 percent policies, so there’s not a huge motivation to save money. But if parents can contribute additional dollars to motivate kids to save more, then the effect is huge. Throughout the pilot, about 50 percent of our parents were making these regular contributions somewhere between 5 and 10 percent weekly. Their kids saw that the they could reach their goals more quickly. A great financial lesson.
We’ve also seen that Finnest not only has a huge learning effect on the kids, but it has a major learning effect on the parents as well. It establishes a conversation between the kids and their parents—it’s a dinner table topic, a card topic. Talking about their money and giving them the right medium in their hand where they have a mutual connection point is essential in creating that conversation.
CL: Are there any educational tools that you think would be beneficial that you’ve learned about that you think would be really good to have in the app to help engage and make that experience even better?
CG: We have a huge pipeline of ideas right now. Some of them we’ve started building out already, while some are still down the road. But for us it’s really important to understand how to motivate the kids. How can we engage them in money management? What’s really great is how much we hear from them about what they want. For instance, we’re letting the kids tell us which card design they prefer. A good bit of our enhancement pipeline comes directly from the feedback we’ve gotten from our early users. We expect to continue reaching out to our customers for those ideas.
CL: In the early days, what will the customer acquisition strategy look like?
CG: A lot of what we saw over the past year while having the beta and the website running is that parents talk. They talk so much amongst each other about money, trends, and what their kids do. We’ve seen a huge growth in word-of-mouth, even though there’s no public product out there just yet. So we anticipate organic growth at first by building a community of customers. The crowdinvesting campaign is as much a part of that strategy as are social media plans for the future.
Partnerships with financial services firms that work with families has already become an important part of our acquisition strategy as well.
CL: Do you have a sense of who the core customer will be? Is this more for the mass affluent type of family or is this for everyone?
CG: Our goal is obviously to open it up to everyone; we don’t want to exclude anyone. We know that income level is not a determinant of which families are best at teaching kids about money. Sometimes the less you have, the more disciplined you are and vice versa.
You don’t need a lot of money to use Finnest. The annual subscription fee is the only fee we charge. We’ve seen that initial adoption is mostly coming from a middle class and upper income families.
CL: The monetization strategy is kind of two-pronged. You got the subscription fee and then that typical credit card, debit card fees. Does the bank take a portion of that as well?
CG: It’s called interchange revenue, which is nothing that the customer pays. The merchant pays to enable cashless transactions. Everyone involved in this whole transaction system—the processor, the issuing bank, the card network—all get a slight portion. But the Finnest customer pays only the subscription fee.
CL: What is your vision for the company as we think five years down the road from here? Where is Finnest?
CG: We want to be the most popular first bank account for kids. Societally we’re bombarded with advertisements, and spending becomes so easy that you no longer understand how much you’re actually spending on every corner.
Our goal is to be that bank account that doesn’t want the users to spend all their money. I see this as a huge opportunity to really disrupt the space of retail banking.
CL: What do you think, since you are in this financial education space, can be done outside of engaging parents on having these conversations, and what more can be done in the US to help children grow up with a better financial literacy than they currently have?
CG: I think, currently, most of the financial education or financial capability education happens within the household. That’s where we really need to support parents to enable education. There are a lot of courses concerning financial literacy in schools, but not many states have a mandate for it. If we’re able to increase school mandates for personal financial management, I think that would be fantastic.
But what we really need to do is combine the theoretical with practical, hands-on education. You don’t become good at baseball if you just buy tickets for the Red Sox. You need to actually go out there and practice it yourself. It’s really the same with money. If you want to become good at something, you need to actually do it and not just read about it. I think that’s where more of these kinds of solutions need to be established.
I loved Grave’s answer to my question about the future of his company; he possesses such a pragmatic and realistic approach to future outside business opportunities while having an incredible sky-is-the-limit mentality. This idea of Finnest participating in mutual growth as their user base matures can be a key to their success.
App adoption is a challenge that requires concise value communication among other things, but education is in another realm entirely. It requires the utmost level of trust, loyalty, honesty, and knowledge to be an effective educator. It is certainly a daunting task for Finnest to become synonymous with safe and secure family finance, but with that comes a huge investment upside for those who get in a the ground floor.
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About: Chris Lustrino
A Boston College Eagle for life, on a mission to democratize startup investing for all people at KingsCrowd, with a passion for Fintech, investing, social impact, doing well and doing good, and an avid runner, cyclist and writer.