Embedded investing and why it works

In a recent blog post, I explained why every app is about to become a financial services company. Consumer businesses are about to start adding traditional financial services functions like savings, lending, insurance, investing and planning to their apps. There are different reasons why each of these traditional financial service capabilities make sense inside of consumer apps, but for now, let’s dig into embedded investing.

First off, the market is untapped. In 2019, only 35% of American adults personally owned stocks, mutual funds or bonds outside of a 401(k) or IRA, according to the Pew Research Center.

This isn’t surprising. After all, the securities industry was created by brokers, who purposefully kept investing confusing to keep prices high and create eternal security. Although we’ve seen a long, slow shift toward the opening of access and lowering of costs — beginning with online trading and continuing with robo-advisers and app-native brokers — the industry is still surrounded by high barriers to entry. Those high barriers are locking everyday consumers out of investing.

The current process to begin investing is wrought with friction, and those of us who have grown up in the financial services industry barely even realize it. To become a “first-time investor,” a person must pick a brokerage firm, open an account at the brokerage firm, transfer money from their existing account and then pick stocks. Imagine grappling with these daunting questions: Which online broker is best? Who can I trust? What kind of account do I need? What should I buy? How much should I buy? What might I lose?

The likes of Robinhood Markets Inc. and apps like PayPal Inc., as recently reported, and CashApp, which have embedded stock trading, have solved some of this, bringing more first-time traders to the table. But according to a Bankrate survey, 32% of U.S. adults still don’t understand stocks.

And these first-time “traders” who don’t understand stocks or who are not investing for the long term are less likely to fare well and to keep investing. A recent article from Forbes reports that 59% of Gen Z investors are guilty of TWI (trading while intoxicated).  

So we’ve learned it’s one thing to get investors to the table; it’s quite another to get them to stay.

How will this problem be solved? What’s the next innovation that will bring new investors to the table and offer true wealth-building potential?

Professionally managed portfolios will begin to be accessible inside of consumer apps. This is embedded investing. Consumers will be getting their first taste of investing via a long-term-focused, embedded investing offer — perhaps coupled with education and bite-sized planning — as opposed to being introduced to easily accessible “trading,” which in the wrong hands can be bad for wealth-building.

We’re already seeing the beginning of this with companies like McDonald's that are offering loyalty and rewards programs to customers, via third-party fintechs, in the form of fractional shares — which make investing more accessible to the consumer.

If it's done right, embedded investing will change the landscape of financial advice. Consumers with accounts of any size will be able to participate in programs where they already spend their time, and their money. Finally, investing tools typically reserved for high-net-worth individuals will truly be accessible to all.

[More: 5 reasons why every app is becoming a financial services app]

Dani Fava is head of strategic development at Envestnet. Follow Dani on Twitter @ENVDani.