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Apps are getting millennials interested in money – but can they be trusted?

Young people are using fintech for financial help, but shunning big banks and embracing new businesses doesnt mean youre removing risk from the equation

Its official: the vast majority of millennials would rather go to the dentist than listen to anything that a bank wants to tell them about a new product or technology.

In fact, given that this demographic group came of age, found jobs and began trying to make ends meet in the midst of and the aftermath of the financial crisis, Im surprised that any millennials responded to a survey by confessing a preference for spending time with a banker than a dentist. Maybe they have exceptionally bad teeth?

But millennials still make money and still need financial services: someone has to offer them a way to address their lending, savings, credit and investment needs. Stuffing dollar bills in the mattress is so 19th century.

If millennials have completely lost faith in the conventional banking world after witnessing the events leading up to the crisis of 2008 and watching the banking bailout that followed they have found a refuge of sorts in the world of financial technology. Nearly twice as many Americans (of all ages) trust technology companies such as Google, PayPal and Amazon offering financial products, as trust big banks such as Bank of America, Citibank and JP Morgan Chase. And millennials would far rather deal with the offerings in increasingly crowded financial technology (aka fintech) space than with the banks.

And thats just fine: its easy to go bank free by opening an account at your local credit union and looking around at the ever-proliferating universe of financial apps for tools that you can use to supplement the credit unions bare-bones offerings. By some calculations, investment in fintech startups is growing at an annual rate of 46%. Some backers have called valuations completely insane and mutterings about bubbles are heard constantly.

But the fact that you shun the big banks and embrace these new businesses doesnt mean youre removing risk from the equation, however. Nor is the risk that youre taking simply the chance that some of these startups will go poof when/if any bubble deflates or pops.

Some of the most popular startups have been in the crowdfunding arena. Its hard to think of an investment concept that is more anti-bank than online portals allowing early investors the chance to make early investments in startup ideas, real estate ventures or loan portfolios. The problem is that its an area that is perilously full of misunderstanding and, yes, fraud.

Consider Oculus Rift, the virtual reality company that Facebook paid $2bn to acquire in 2014. The startup was crowdfunded on Kickstarter, and when its founders sold out, those early investors got zip or at most, a T-shirt or an early prototype of the headset. Certainly, they didnt get a cash return on the investment. Their cash investments actually were donations something that most of the angry millennials who felt short-changed clearly hadnt understood.

There also are a growing number of reports of outright fraud on the part of companies who promise either some kind of reward or a stake in the company, and then fail to deliver, according to Consumer Reports.

Heres what you need to remember before embracing fintech: each and every one of these businesses is precisely that: a business, seeking to make a profit from its users, in the same way that the big banks seek to make money from their customers. Whether they are disrupting the stock market by launching a crowdfunding platform or banks formal lending business by opening a peer-to-peer online company, the bottom line hasnt vanished from the equation.

The business models of the fintech startups may sound more altruistic, since they involve disrupting the inefficiencies of the existing financial system. They may prove to be more altruistic, in practice, since they do a better job of serving groups of customers, such as millennials, that the big banks have done a lousy job of serving, that dont care about or that are overlooked altogether. But their goal is to make money lots of money while doing it. Thats why these companies raised $7.4bn last year alone. And that means that you should be just as cautious of how you approach them as you are with any other company that seeks to make money from you as a customer.

Consider millennials liking for instant online credit, a market dominated by companies such as Affirm (backed by Khosla Ventures, Andreessen Horowitz and Lightspeed Ventures) and Klarna AB, a Swedish unicorn with a valuation that tops $2.25bn (and Sequoias Mike Moritz on its board), dominate the landscape, alongside PayPal. It seems tailor-made for this demographic, a majority of whom dont have credit cards at all. These handy apps make it possible for them to make large purchases online, while Affirm, for instance, uses everything from social media signals to your zip code to assess your ability and willingness to repay what you owe on what its founder described as a digital charge card.

These companies will talk a lot about the services they provide, and certainly what millennials using Affirm and Klarna need most is affordable credit and the ability to build a credit history. What they can end up with, however, is high-cost debt that doesnt contribute to boosting their credit score to levels that will help them qualify for mortgages or other loans down the road. Neither company, as yet, reports the payment history of responsible borrowers to credit bureaus (though Affirm says it will move in that direction.) And the cost? Well, base interest rates start at 20% and climb to as high as 30% or more, more than double the rate on the average credit card. In many cases, you might be better off with a conventional credit card.

A rival, Splitit, offers consumers the option of dividing payments between existing credit cards. The borrower doesnt pay interest on the payments, but the bank makes up for this by collecting a higher fee from the merchant in exchange for the sale. Founder Alon Felt argues that over time the population of millennials without credit cards will diminish. In the meantime, we can help them make the best use of unused credit and prevent them from applying for credit in the form of store cards, which has a negative impact on their credit rating.

But even so, if you think youre getting rid of the big banks altogether, youll have to think again. Splitit, like many other fintech startups, received assistance from banks in getting launched, having been part of Citibanks accelerator program, and Felt himself has worked for banks, as have many other fintech executives.

Indeed, bankers from the biggest institutions including some who were involved in causing the events of 2008 are among those funding and organizing fintech innovation. Vikram Pandit, CEO of Citigroup during the crisis, is backing a peer-to-peer lending group called Orchard; John Mack, erstwhile CEO of Morgan Stanley, is supporting a rival model, Lending Club. BlackRock, the worlds largest asset management firm, is a big fintech investor. Lesser luminaries rank and file bankers who saw more potential to make money in fintech than in the contracting banking industry populate this universe, working alongside the geeks.

Look for more banks not only to provide startup funding and support to these startups, but to acquire them, too. That doesnt mean theyll become integral parts of those institutions, though: the big banks are smart enough to know that their potential millennial customers want no part of their brands.

Spains BBVA, and its 2014 acquisition of Portland, Oregon-based Simple, an online bank, are a perfect example of what may lie ahead. Simple still operates with a completely independent brand. Instead, the site is full of testimonials, such as Once a day I get a comment about how cool my @Simple card is. I tell them its only half as cool as the bank that gave it to me. You can find BBVAs name on the website, but only if you hunt for it, and you know to look for it. Dwolla, a digital payments company, teamed up with BBVA last year.

Millennials may want to flee banks, but embracing every disruptive fintech offering simply because it doesnt come from a bank would be foolish and potentially as risky as taking out a subprime mortgage with no money down.

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