Fintech is the future - along with traditional advice
23 January 2019
This article was originally published on FTAdviser.com, on 10 December 2018.
Tech company valuations and stock markets went stratospheric, while whizzy tech companies promised an ultra-efficient future, with increased productivity and no more economic boom and bust.
The subsequent bear market put a stop to most of these fantastic future projections alongside a heavy dose of schadenfreude for sceptical observers (especially those analysts who had lost their jobs keeping to their common sense valuations during the bubble).
Over the following 18 year period, there is a sense that while tech stocks were a bubble and burst, there is a nub of truth to how tech can increase productivity, efficiency and competition.
More recently, and as smartphones have become part of everyday life, it is obvious how reliant we have become on tech for GPS navigation, organising our private lives, and indeed its increasing use within the financial sector.
And yet there is an undeniable sense of tech-bubble déjà vu about the latest cohort of ‘fintech’ companies.
Again the investing public and advisers are presented with a gamut of new firms, with quirky names, who aspire to re-invent, or disrupt, current business models in finance, investing, insurance and advice. The question is, should advisers pay any attention?
Fintech – what exactly is it?
Firstly, we should explain the kind of companies and services we are talking about that fall under the label ‘fintech’, or ‘financial technology’ firms.
These are companies who are aiming, via the use of new technology, mobile phones, the internet, or ‘big data’, or some combination of these, to enable the business of banking and financial firms.
This is a broad definition, and includes everything from ‘insurtech’ (insurance technology), ‘regtech’ (regulation or compliance technology) or peer-to-peer firms (including investing, lending and insurance). Admittedly the sector is a complete buzzword bingo, so we give some examples below:
Car insurance telematics
Likely the most familiar and accept use of insuretech, by installing ‘blackbox’ devices in cars, insurers are able to tailor premiums more accurately to driver styles, as opposed to the more traditional but blunt customer demographics of age, postcode and car model.
Home insurance black box
Similar to the above telematics, but instead ‘smart home’ devices that monitor home heating and water systems for drops in pressure, and warn of problems and leaks before they cause major damage
Life insurance utilising big data
Insurers offering reduced life insurance premiums for customers who maintain healthy lifestyles, based on data from their grocery shopping and gym memberships
Most commonly known for linking savers and borrowers for lending, but has also been used for peer-to-peer insurance among niche insurance groups
New banks being licensed in the UK, who aim to challenge the traditional high street banks, usually with a large online presence via customer ‘marketplaces’. Their main advantage is to offer convenient customer access and new financial products, and not to be held back by incumbent legacy IT systems
Attitude to risk systems and risk ratings
In order to meet RDR regulations, online platforms that integrate measuring client risk attitudes, documentation and recommendation of suitable investments
Is fintech a threat to advisers?
In short: yes. Many fintech apps are about placing more decision making power in the hands of the retail investor.
These include robo-advice services and the new ‘challenger’ banks. Usually a key aim of these apps is to ease the pain involved with opening an account or depositing funds. For example, the same apps aim to “to move money into an account in less than five clicks”, or savings apps that use ‘round ups’ on contactless purchases.
(Roundups take contactless purchases and roundup to the nearest pound, with the difference being automatically deposited into savings.)
Given how fintech apps promise to reduce costs for retail investors, there is hope that fintech apps may be able to fulfill the so-called advice gap of currently under-served consumers.
The issue for advisers is that if investors become accustomed to more user-friendly and seamless integration to manage their daily finances, very likely they will look for a similar level of service from their financial adviser.
While face-to-face meetings remain a key and very important part of the adviser-client relationship, clients will demand the convenience of monitoring their financial circumstances individually, and from a single platform.
There are parallels with online banking – how many customers prefer to visit their bank branch, as opposed to sorting everything themselves on their phones and PCs? Not many.
Additionally, many of the direct to retail apps include an element of client education. It is a standard feature for savings apps to feature articles and blogs that answer frequent questions, and to explain how risk can be controlled using a variety of investments. Motivated clients will educate themselves.
Advisers would do well to compare some of the Financial Independence/Retire Early (FIRE) blogs to see how young investors are educating themselves and managing their own finances, while keeping costs very low.
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There are several instances in which fintech can be used by advisers, whether it be in back office, client risk profiling and cash flow modelling, investment research, client platforms, or services that can combine these elements together.
Fintech can be used to expedite the paperwork of financial advice so advisers can concentrate on the important parts of their client relationships. Ultimately these should enable the adviser to better meet client needs and the reduce costs of providing advice.
That is, they can incorporate the best parts of robo and human advice, to become a hybrid, cyborg-advice business.
But it is easy to underestimate the challenges that advisers face in terms of training, legacy IT systems and regulation requirements.
Staff need to be trained to understand and use new systems or products properly. Indeed, speaking with insurance and tech solution providers, when launching a new product or service, they make significant investments in training so that clients and advisers can understand their products.
(This barrier to entry is very significant among providers, effectively reducing innovation in the UK financial advice market.) Therefore, before taking on any new product or solution, advisers should confirm what level of training and support is on offer from the provider.
Advisers also need to be aware that they are compliant with regulations, for example FCA requirements on suitability and GDPR.
It is no use implementing a new system that is not compliant, and it remains the adviser's responsibility to ensure that the systems they use are compliant – it is common for the various fintech companies to not be directly FCA-regulated themselves.
Especially within insurance, the fintech provider is more likely to be regulated only as a broker, rather than an insurer themselves. GDPR means that client data remains in the ownership of the client, and it is the adviser's responsibility to safeguard that data through every step of the process, even if these are outsourced.
Fintech becomes bricks and clicks
The recent trend among pure retail fintech startups is to incorporate some element of ‘traditional’ finance services, that is, bringing back a bricks and mortar element to their business.
For retail-focused fintech, some robo-advisers have restructured to split off their robo and traditional advice businesses, while some have added more expensive, personal services, such as making available limited access to financial advisers for investment recommendations.
The move into more traditional areas is being driven by a couple of factors. Firstly, having a new brand name that is unfamiliar to UK consumers means overcoming customer inertia is difficult. One leading robo-adviser estimates that around £500 is spent to acquire any new customer.
Secondly, the key selling points of fintech - that of increasing transparency and ease of use - tends towards commoditisation of the service and low margins.
Almost all fintech firms, including the larger more established ones, are currently loss making. It was originally expected that as these firms gained significant funds under management, costs would fall and the firms would move into profit. However that has not occurred yet.
Even for one well-known firm, at a level of £1bn funds under management, losses appear to becoming greater, and has led to questions around the viability of the online-only business model.
A final factor to bear in mind is research showing that advisers most add value to clients by reassuring them to stay the course, focus on their goals, and overcome ‘behavioural’ biases of making knee jerk decisions in response to short-term volatile markets.
It is questionable how effective delivering this behavioural assistance via an online robo-adviser platform will be.
The FCA is also facilitating this broadening of digital distribution channels by rolling out ‘Open Banking’ - a more open version of the EU Second Payment Services Directive (PSD2), release in January 2018.
Under these rules, the customers will have a choice to have their anonymised data released (under GDPR protections) so that other third party firms may access this data to offer competing products.
To explain more clearly, high street banks have traditionally used their current accounts to sell other higher value financial services to their existing customers, such as loans and mortgages.
However, under Open Banking, other third party firms will be able to offer competing products, using the same customer data. This should make it easier for clients to shop around, and increase transparency and competition.
It could well occur that clients will be able, via a single third party web login, to access their current account, mortgage pension savings, insurance, and others, all in one platform (or ‘marketplace’ to use the current buzzword), none of which are from the same provider.
In summary, despite the techbubble 2.0 style names of some fintech companies, this is not necessarily a repeat of the late 1990’s. Does fintech represent an opportunity for advisers? Yes.
The key is for them to educate themselves on how fintech can augment and help their business and clients. There is also the danger of increased competition and falling behind with levels of customer convenience, but signs are that there is still plenty of demand for good old fashioned, real human financial advisers and interaction.
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