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Social Investing Ain’t a Piece of Cake

The Techcrunch 40 conference added a bit of enthusiasm to the social finance space
this week by selecting Mint as the startup competition winner. Mint consolidates users’ personal finance
information across financial services (credit cards, banks, etc.), aggregates
financial services offerings, and presents/ contextualizes them. Cake Financial
– a social investing site – was also distinguished as a leading contender, in
the crowd sourcing space. These results help validate the social financial
services space at large, but did not alleviate some of the obstacles ahead.

Security is a key concern. The numerous comments in Techcrunch’s announcement post
illustrate that point. Another case in point is the security breach at TD
Ameritrade, which was apparently ignored for over a year. How could startups
succeed when established players fail, in an area where hands on experience and
deep pockets matter most?

Back in the last boom, Yodlee faced similar criticism and the outcry from experts on
security (and financial institutions) was equally loud. Yodlee eventually
pulled it off and now serves millions of users (although mostly through
contracts with financial institutions). Flawless execution on the security
front certainly was critical. However, user adoption ultimately proved that users
favored convenience over privacy and security concerns.

Above all, an attractive value proposition will determine these services’ longer term viability.
Cake Financial, for instance, touts the wisdom of crowds as a smarter approach
to investing. This proposition runs counter to the accepted notion of alpha – a.k.a.
retail investors’ role in the market is to absorb risk. Focusing on the core social
elements of investing, rather than promoting herd mentality, would provide a
much stronger foundation for their services.