"We were told to trust these institutions, and we did," says Mitch Tuchman. "We trusted Madoff. We trusted AIG. And now we've lost most of our life savings." Tuchman, though, is not an angry victim of some Ponzi scheme or shady subprime lender. To the contrary, the former hedge-fund manager is trying to be part of the solution, starting a company whose goal is to upend the trillion-dollar mutual-fund market by offering cheap, no-nonsense investment advice. Tuchman's MarketRiders is part of a movement of Web-based financial startups creating services that embrace transparency (even in their largely fee-based pricing) and improve the customer experience. These are the same traits that changed everything from music to auto sales, and given the financial industry's woes, it, too, looks ripe for this type of reinvention. Here's our list of the eight most promising "green shoots."
Debit cards have left cash and credit in the dust for in-store payments, hitting a record-high 37% last year (cash is used 29% of the time; credit, 22%; checks and gift cards make up the remainder). And yet, "debit's last significant development was PIN technology," says Mike Grossman, CEO of Tempo Payments, which has decoupled debit cards from the banks that traditionally provide them. Tempo's cards, branded by MasterCard, can be linked to any checking account. They're also tied to a specific retailer or nonprofit (much like an affinity credit card) so customers can use them to earn rewards or help a cause, such as the Breast Cancer Fund or Greenpeace U.S.A. "This is very disruptive," says Bruce Cundiff, a consumer-payments analyst at Javelin, a financial-services research firm. "The banks will lose out on all that revenue from consumers' use of bank-issued debit cards."
In 1994, banks with less than $10 billion in assets held 70% of U.S. deposits. Today, that number has dropped to 31%, mainly, says Gabriel Krajicek of BancVue, because "community institutions lack name recognition, and consumers think they can't deliver big innovations, such as Bank of America's Keep the Change program." Krajicek rolls up a set of incentives -- rewards-driven checking accounts, up to 6% APY interest rate, ATM-fee reimbursements -- for these banks to offer customers who actively use debit cards, e-statements, and online accounts. (Such practices drastically reduce overhead costs, enabling the banks to shell out.) Then he gives the banks an opportunity to join his Intel-inside-style marketing plan, advertising their BancVue services under the brand name Kasasa. "Many customers may still rather bank with Wells Fargo or Bank of America, simply because they're less likely to fail," warns Jacob Jegher at Celent, a financial-services research firm. That said, if BancVue's 620 clients formed just one bank, it would have approximately 4,200 branches, America's fourth-largest network.
During his years managing a $1 billion hedge fund, Mitch Tuchman uncovered two truths: Steady returns come from smart asset allocation, not stock picking, and inevitably, managers will "siphon your money" with fees. Tuchman's lessons underpin MarketRiders, which recommends to customers a variety of low-cost exchange-traded funds (ETFs) for $9.95 a month. The service then tells you when and how to rebalance your portfolio. During MarketRiders' 15-month beta period, Tuchman estimates that the site's 2,000 testers would have saved $3.25 million -- or 1.3% of their $250 million in declared investments (the difference between a standard 1.5% mutual-fund fee and MarketRiders' average 0.2% ETF charge) -- by switching exclusively to this service. With hedge-fund manager brio, Tuchman boasts, "We could do to investment what Craigslist did to classified ads."
At 2008's Clinton Global Initiative annual meeting, brothers Roy and Bertrand Sosa pledged to provide financial services to 5 million of the world's unbanked masses. How? By tailoring services to local markets and making the programs more accessible. In Mexico, they offer prepaid debit cards to workers; in Romania, they enable thousands of cell-phone users to send money via text. Through two of their startups, Mpower Labs and Mpower Ventures, the brothers are funneling roughly $100 million toward their goal. "Any company that's good at getting people to interact with banks," says Avi Karnani, a former Citigroup analyst and cofounder of Thrive, a popular financial-services Web site, "that's a good thing."
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