Banks Aren't Offering What Clients Want

More robo-advisers are entering the market as digitization spreads. This is the most fundamental change that has affected financial markets since World War II, writes Rino Borini.  

Rino Borini is co-founder and CEO of Financialmedia, an independent publisher with a focus on finance and economic issues (PUNKT, a business magazin and 10x10.ch, an ETF/index platform). The company also presents the fintech-insurtech platform «Finance 2.0», one of Europe's leading for innovation and technology in the financial market. Borini also is a member of the board of Descartes Finance and a leading Swiss expert on digital finance.

Financial service firms face several challenges: margins are eroding in a low or negative interest rate environment, profits from wealth management are falling and new technologies are challenging old-fashioned banking systems head-on. Add to that mix new regulation, which makes internal procedures cumbersome and more expensive.

But the biggest problem is that banks aren’t offering their clients what they demand. Many companies claim successful digitization projects, but a lot of those are not much more than bogus digitization projects. They promise their customers an online experience, but mainly deliver offline. As the process in the background isn’t digital end-to-end, a lot of manual work is required  – even to this day. A costly exercise.

«Banks have no other option but to restructure»

It isn’t just the young customers who apply pressure, but also the generation of over-50s. This is the one currently undergoing the most profound digitization process, with the highest growth rates in their smartphone and tablet usage.

Together with generation Y, which will be in the majority by 2020, banks have no other option but to restructure their product and services portfolio. There’s a change of paradigm from CRM, the classic Customer Relationship Management, to CMR, a Customer-Managed Relationship.

In this transformation process, the regulator has an important role to play. It is his duty to make fintech-friendly rules and to open the market to third-party providers – without neglecting the protection of customers and investors. The emerging fintech startups aren’t the only third-party providers, but also established external providers.

«Actively-managed investment funds fall down on costs»

These providers are to get access to the accounts of their customers at the account-holding bank via digital interfaces (APIs). This will become a reality in the European Union by next year – the buzzword there is PSD2 (payment service directive).

The competition authority in the U.K. is going in a similar direction. The commission in its «Banking Open Innovation» report stated its aim clearly: «Making banks work harder for you.»

The Financial Conduct Authority (FCA), the U.K. regulator, has analyzed the asset management industry too. Initial insights from the eagerly-awaited market study have already been reported in a 200-page paper; the full report is due later this summer. 

The preliminary conclusion: actively-managed investment funds fail to outperform their benchmarks on costs – which often remain too high. This insight isn’t new.

«These new providers see lucrative profits in private banking»

What is new is that the U.K. is intensively looking into the issue. What the authority will demand isn’t known yet. It only states that interventions to the benefit of customers are a possibility. Earlier or later these new regulations will also affect Switzerland, and further increase pressure on the industry.

Banks and product factories are required to deliver an added value to customers and work together with third-party providers. These new providers increasingly see lucrative earnings in asset management and in the prime segment of this industry, in private banking. And they mainly sense the opportunity to offer a better experience to their clients at a lower cost.

One of those companies is U.S.-based Robinhood, whose app enables the purchase and sale of all securities listed on U.S. stock markets with three clicks, free of charge. Customers can buy securities on credit (to gain leverage) for a surcharge (monthly fee based on the size of wealth), and it is even possible to borrow securities.

«Robinhood’s success has changed the industry»

Three years after being founded, this fintech has already become a unicorn: it is currently worth as much as $1.3 billion – with 100 employees and two million customers as of May. The Palo Alto-based startup has processed transactions worth $50 billion since its launch, with customers having saved about half a billion dollars in costs.

Robinhood’s success has changed the industry: established online brokers such as Fidelity, Charles Schwab or E-Trade have cut their transaction fees by almost 40 percent this spring. But the U.S. market isn’t enough for the company: with its most recent capital increase of $110 million, the company aims to conquer more markets. The founders have selected Australia as the first foreign market. Copycats eager to employ the successful idea are at the ready.

Wealth management for quite some time has been rattled by robo-adviser platforms. They aim to democratize traditional wealth management. Which means simpler, cheaper and more transparent for the customer. The rate of growth of this segment remains moderate in Europe and Switzerland.

«Digital wealth managers act without emotions»

A general skepticism toward technology, customers slow to change and a lack of interest in one’s own financial situation are among the reasons for the moderate adoption rate. And last but not least, it’s about money and the Swiss are prudent when it comes to money.

The same applies to the use of new digital services. The idea behind robo advisory is irresistible: it doesn’t just lead to lower costs but as a byproduct, it also improves the investment process. After all, digital wealth managers act without emotions and instead focus on scientific investing based on algorithms.

It is a well-known fact that many investors fail because they allow themselves to be led by fear and greed. But it is important to remain faithful to a long-term strategy and not to adjust to short-term changes of the situation. Robo advisers remain true to the defined strategy and do what successful investors do: they invest long-term, rule-based and in a disciplined manner.

«Established providers have jumped on the bandwagon»

Such platforms already are well-established in the U.S. Independent providers such as Betterment, Personal Capital, SigFig or Wealthfront already manage assets reaching high single-digit billion dollar levels, with sustained growth rates in the double-digits.

Meanwhile, established financial service providers have jumped on the bandwagon. The world’s biggest asset manager, Blackrock, has bought the fintech Future Advisor, while Fidelity and Charles Schwab developed their own platforms.

«These developments are a boon for investors»

And of course index fund pioneer Vanguard has such a platform in the U.S. – a clear sign that the old-guard industry has understood that customers in future will increasingly invest their assets via such platforms.

The future has already arrived. The question is when these business models will break through across the spectrum, and which new providers with appear on the market. These developments are a boon for investors: they are getting better banking at a lower cost.

Source: fintechnews

© Nick Kalikajaros 2017