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.

 

Comments

[Steven A. Carpenter]

Hi. Thanks for posting about Cake. I'm Steve Carpenter, the Founder and CEO of Cake Financial.

I wanted to provide comment on two areas of concern for you about our service. The first is security and the protection of our users' personal and financial data, which we take extremely seriously. My team is made up of seasoned financial services engineers and security experts. Cake is built by the same people and employs the same practices that banks and brokerage firms use. The reason that startups can succeed here is that we don't have to protect antiquated legacy systems; we are using best practices from the ground up.

If, in the unlikely event of a breach that is the result of our negligence and causes a direct financial loss of one of our members' accounts, we will reimburse them for that loss.

Last, Cake is not simply about the wisdom of crowds. Cake is about providing transparency, allowing communication, and enabling collaboration around one of the most important areas of our adult lives: managing our money. We already know and trust people who invest their hard-earned money better than we do. Investing is already a proven social activity with the popularity of social clubs and the fact that we buy the same stocks as one another. And, there is evidence that shows that 10% of us consistently outperform markets. The collective wisdom of the few, I call it.

If you're interested, the is more here:

http://blog.cakefinancial.com/cake_financial/2007/09/the-power-of-th.html

Thanks for your thoughts.