Beware of Retail Banking’s Present becoming Asset Management’s Future


Asset Management, Fintech, Retail Banking

Vered Zimmerman

Investment Writer


At first glance, asset management may seem nothing like retail banking: no chain of branches to operate, no round-the-clock call centres. But technology is disrupting both sectors in similar ways: as services become commoditised, clients turn to lower-cost, self-managed alternatives.

Last week, at The Financial Services Forum’s Annual Members’ Conference, experts met to discuss the finance industry’s future. To some, struggles to adapt are already here. Asset managers may sigh in relief hearing that it’s retail banking suffering most; given the scale of the changes, they shouldn’t.

With their index-tracking funds, providers like BlackRock and Vanguard are competing fiercely to take business away from actively managed funds. And current innovations in retail banking can provide asset managers with clues on how to respond.

Tip #1: People will invest in what they care about
Panel moderator Rohit Talwar, CEO of consultancy Fast Futures, argued that within many industries, including finance, there is still a strong separation between our physical and digital worlds: we may spend lots of time on Facebook, but our closest digital engagement with the bank is a dispiriting email with the latest statement. At the same time, we see the companies that have shifted to a digital mindset delivering rapid growth, and in some cases transforming their industries, breeding a “winner-takes-most” business environment.

Panellist Renee Friedman, a financial services editor for the Economist Group, shared preliminary data from the Economist Intelligence Unit’s annual study on the future of banking. It showed
growing concern about competition from peer-to-peer lenders. Platforms like Funding Circle and Growth Street appeal to clients by offering viable investment opportunities that can be highly
tailored, in terms of both risk profile and personal preferences towards specific industries or companies.

Investment decisions are rarely purely rational. Services such as Goldbean are using this insight to offer investments based on consumers’ spending habits and personal interests. Asset managers can readily use this theme, and their client relationships offer a built-in advantage over retail banks.

Already, clients are asking to amend fund mandates to exclude investments in companies or industries for social and environmental reasons. Through a better understanding of what clients care about, asset managers have an opportunity to uniquely tailor their offerings.

Tip #2: Solve your customers’ problems
The third panellist was Tom Blomfield, CEO of Monzo Bank, a relative newcomer to the retail banking market. In 2013, to increase competition in retail banking, the Bank of England introduced a two-step process for new entrants. Monzo, along with competitors such as Atom and Starling, was granted a restricted licence, which allows the issuing of pre-paid cards. Those restrictions will be lifted in spring 2017, allowing the first wave of digital banks to offer full-service current accounts.

Blomfield believes that banks are bound to evolve into platform banking (which he dubs “the bank as an app store”), providing a host of digital data-driven services. These include real-time budget management, bill-management and micro loans and savings.

Crucially, he observed that retail banking has never been preoccupied with customer problems, focusing instead on bank problems, like regulatory compliance and internal IT issues. This, Blomfield said, is in sharp contrast to many fintech startups, which target specific customer problems. He added that many banks have been able to solve these problems for at least a decade – but haven’t done so.

Asset managers need not repeat this mistake; simply asking clients to describe features that would enhance their experience can generate a wealth of insight, much of it possibly applicable in the nearterm.

Tip #3: Client consent opens a new world of services
Financial decision-making is moving out of the bricks-and-mortar bank branch. Talwar commented that, increasingly, the modern-day bank branch resembles a data centre, a human representative merely directing clients to the appropriate queue. Friedman agreed, citing evidence that branches have been closing across the industry as a cost-saving measure, and this trend is likely to continue.

Monzo does not plan to have any branches. In Blomfield’s view, the interesting question for a digital bank is how to engage with clients’ everyday lives. What if, with your consent, your bank registered you onto every customer reward scheme on the market, and made sure you get the rewards as you spend? What if, with your consent, your bank could automatically switch to a cheaper energy provider? After all, it knows how much you’re spending, and has all the information required for switching suppliers.

Retail banks have an extraordinary amount of data on their customers’ spending habits, and consequently, the lives they lead. Having clients’ consent to mine the data opens a world of
possibilities, such as automatically offering short-term loans to bridge the gap until payday. Or, recognising you are at an airport but have not bought travel insurance, offering you the option to
buy some.

For asset managers, this suggests considering their discussions with clients over mandates; usually, these are agreed early on and changed little thereafter. Thinking creatively about additional services may involve changing the consent model, but may offer the benefit of greater flexibility.

Tip #4: Treat regulators as partners
The panel observed that, apart from tech firms like Google and Facebook, banks hold more personal data than any other businesses. But unlike those tech giants, banks have been reticent about using any of this data to improve services. Much of this, the panel agreed, was due to fear. Repeated fines imposed on investment banks following the 2008 financial crash have proved crippling, and tighter regulation now inhibits innovation.

Talwar commented that when comparing the number of regulators with the scale of the financial industry’s workforce, it’s futile to expect regulators to outsmart the industry. For their part, he
added, regulators are preoccupied with deflecting blame for industry misconduct. Talwar believes that the way forward is to directly engage with regulators: “They should be saying: this is what we want to offer, so how should we do it in a way that protects the client?”

Regulators are not inherently against innovation, particularly when it opens up markets to competition. The European Revised Payment Service Directive (PSD2), adopted this year, has opened
the European payment services market, in a move that will continue to chip away at retail-banking stagnation.

Though asset managers face different regulatory hurdles to retail banks, the principle remains intact: building a working relationship with regulators can benefit both clients and industry.
The panel’s final observation is one likely to hold true for years to come: A trade-off always takes place when adopting innovation. In exchange for Google maps, we lose a bit of privacy. In engaging with friends on social media, we accept targeted marketing. To reap the benefits of technology, we will continue making such concessions. Therefore, what companies perceive as a fixed barrier today, may dissolve entirely tomorrow. Like everything else in the complex world of investment, it boils down to risk and reward.