This is the followup to our interview with Thrive CEO and Founder, Avi Karnani and Lead Scientist, Matt Wallaert. In our first installment, which you can read here, we talked to them about their work in financial literacy, competition with popular money management site, Mint and how they differ from other financial service companies. In this installment, we’ll find out more on behavioral budgeting and how it works, and how Thrive is working to make banking a better service industry.
What exactly is your business model? Do you get referral fees when users sign up for products that you recommend?
Avi: When somebody signs up for certain products, we do get paid. Since many financial products do offer referral fees, if we recommend a product, it likely contributes to our revenue model. Being part of Lending Tree is also helpful, since we don’t have to go off and sell your information to third parties to make our investors happy.
So you guys are still sort of shaping the business model?
Avi: Yeah. We’ve looked at areas where people would be interested in paying for different services. I like to use the example of a travel advisory service. You could go to a travel agent and book a really great safari to Kenya, and that’s great because you want to talk to someone who’s been there before and is familiar with the area. That’s a great use of that person, and they’d probably charge you for that help. But you probably wouldn’t want to pay for that information for a trip to L.A. So are there areas in personal finance, like Matt talked about with mortgages, that are big decisions for people? Yeah. I think there are many of those areas in your personal financial life from the time when you graduate college until the time you retire. So maybe we build services around those.
Matt: One thing we’re working on right now is white labeling.
What is that?
At Thrive, we’ve managed to create a really good user experience. We can help banks do the same for their users and we’ve been experimenting with ways to do that. And with banks, since each user for a bank is quite a valuable thing, getting them to stay there because it’s a happy user experience is very helpful to them.
It’s surprising that a majority of your users are women. You don’t typically find that in the finance industry as a whole.
Avi: Yeah. It’s dramatically in the other direction. You won’t find that with Wasabi, and you definitely won’t find that on Mint.
Matt: But a part of that is Thrive. The language that we use is conversational. We’re not gonna turn you on with a bunch of powerful financial terms. We’re gonna tell you like it is — gonna actually get you there. It’s interesting. Everything we write on the site, it goes through Lynn (our designer) and I — so a behavioral psychologist looks at it and a designer looks at it and we talk about how can we help people understand this and how can they feel comfortable taking a recommendation from us.
I haven’t heard of anyone else hiring a behavioral scientist. Are you guys the only ones going this route and using this model?
Avi: Um, I’m not sure we’ve done any extensive check to see if we are. One of the things my co-founder and I have tried to do, is bring people on who understand really deeply the problem sets we’re trying to solve. In personal finance, everything’s always green or red or blue and starkly designed and it makes you feel a certain way. And I think that’s a problem with engagement online — the kind of experience you get online. With Matt, we looked at what’s inhibiting people from actually making personal financial decisions, and it was that there’s just too many choices. There’s 8,000 mutual funds. You have to kind of figure out what you’re gonna choose. We’ve had people come to us with their 401(k)’s and they’re like, “we have 80 [funds] to choose from in this book”. We realized it’s about judgment and decision making, and we went out to find people who really understand that and we found Matt, who actually studies decision making.
Tell me a little bit about behavioral budgeting — what it is, what does it entail?
Matt: So behavioral budgeting is very task oriented. It’s based on something that is difficult to transition into action. For instance, the traditional way to budget is to say you can spend $300 on food. What we’ve done is taken a look at the tremendous amount of data from your transactions. [From looking at your data], I know how often you go to a restaurant and how much you typically spend. So I can arrive at the average dinner for you, and then break the budget down by those things. Instead of saying “You can spend $300 on restaurants this month”, we’ll say “You can eat out eight times this month”. Then we’ll have a calendar where you can drag down certain meals and plan out your spending. The second phase is to understand those trade-offs. Say that you take one restaurant and move it into coffee and it turns into six coffees. You can see the units, instead of the numbers. At the bottom, there’s a savings bank, so at any time you can drag one of those units into the savings bank. [We allow you to] manipulate your budget. Also, with your savings bank, we can tell you how close you are to your savings goals — vacations, a down payment on a house.
What happens if you don’t meet those goals? Say you move a meal into the savings bank, but then go out to dinner and have that meal, what happens?
Matt: It automatically updates, so as soon as your spend that meal, it’s taken out of the savings bank. So your savings bank could potentially be negative. Savings is always the bottom line. The problem with budgeting is that it’s all passive, it helps you track, but without having the ability to trade and understand how your actions affect that. Most of the discretionary spending we see is unplanned, and there are easy ways to avoid it if you plan. It’s easy to not go out to dinner at the end of the week if you buy groceries on Wednesday and there is something to cook. You can look at your budget in advance and plan accordingly.
Avi: And we’re making people think about that because we’re showing it to them in a super easy way.
What about the financial health scale on the site? What factors go into that to determine your overall score?
Avi: In our financial health score, we look at different areas of your financial life and give you a score. The kind of things we track are behavioral cycling — how you spend, your savings rate, the quality of the accounts you have. Another one of the areas we look at it is your credit score, and based on these things, we get your financial health.
Matt: In the beginning we populated it with our initial data and used our own expertise. In the future, we’ll refine the score so that it’s statistically predictive. A credit score is statistically predictive of how likely you are to pay back a loan. We want to blow that up on a more massive scale, so we can say, in a concrete way, having a 6 means you’re going to end up with this much money and with a 4, you’ll have this much money.
Avi: It’ll be predictive of your ability to generate wealth.
Is there an iPhone app in the works?
Matt: I would estimate that very soon after the release of behavioral budgeting, I think you’ll see an iPhone app.
Avi: A lot of people build iPhone apps as a check in the box. We’ve got a site. We’ve got an iPhone app. It’s the site on the app. But most people don’t need that in their pocket. There are those things that we can solve in personal finance that need to be mobile and in the moment to get closer to the decision. But we’re less interested in building an iPhone app for the sake of building an iPhone app.
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