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.
