9 FinTech Lessons to deliver Digital Advice Model Success – Part B
Driving Customer Volume to Build a Scale Business
Having executed our strategy excellently and created our digital advice business, we can now move on to creating scale within our digital advice business.
1. Customer Insight
- Customers will seek advice where the subject matter is complex and/or the stake (consequences of an incorrect decision) are high (PwC)
- People are moving to solutions that are web, tablet or technology based (AMI)
- Smartphones are now the most popular way to browse (IRESS)
Customers do not need, or in some cases want, face-to-face advice and will deal with complex advice matters online, by telephone or video conference, through co-browsing etc. I have observed them doing it and seen their excellent feedback as their problem is solved.
A recent survey estimated the number of future users of automated advice in the UK (1):
I cannot argue with the numbers, but I do believe hybrid models (combining digital solutions for operational efficiency and risk management along with advisers focusing solely on advice delivering the professional help and reassurance at key moments) will play a bigger part than is indicated in the above table.
2. “If you build it he will come”
A good, often misquoted, film quote. But in robo investment and digital mortgage worlds the reality is “just because you have built it, so what?” An excellent digital customer journey is a necessary condition but by no means a sufficient condition to attract buying customers.
And, by the way, consumers are increasingly setting their sights higher. In a recent survey (2) investors identified roughly 20% of available digital tools as “difference makers”—those that are most likely to drive their selection of a platform or cause an investor to switch from one firm to another. Just two years ago, nearly 50% of available digital tools were identified as such. It concluded that digital is approaching commoditization, and that digital platforms will need to continuously innovate to stand out from the rest.
Get your digital front-end spot on and you have reached base camp.
Most UK robo advice firms are struggling to get close to break even. A recent report (3) stated that Nutmeg has seen its losses increase to £9.3m for 2016 as it warns it may need more investment.
Furthermore, the ongoing requirements and therefore costs change with MiFID II. (4) COBS 9, the current primary source of rules and guidance on suitability has remained in place after 3rd January 2018. However, a whole new chapter, COBS 9A has been added and will also apply to most firms and contains a few new requirements. For example:
“Firms providing investment advice must agree with a client whether a periodic assessment of suitability will be performed. If periodic assessment is to be performed it must be at least annually and the continued suitability confirmed in writing.”
The big question therefore is how to drive volume traffic to create an ‘at scale’ business?
3. Pay Per Click, currently the drug of choice
Pay Per Click (PPC) is very useful say for a beta test or proof of concept (PoC). Over the long term PPC is best used to load balance operational volumes rather than as the cornerstone of lead generation efforts. I have worked with a firm who successfully generates PPC leads but my concern is that as more digital offerings emerge and more attempt to build scale the street value (cost) of PPC leads will rise and/or the quality of the leads will suffer.
PPC for Mortgages may cost £30 per lead and convert at 7.5% giving a cost per sale of £400. This compares with mortgage procuration fees of 40 BPS for a mortgage of £125,000 giving a £500 sales value. Not a lot left to make a healthy profit having covered all other costs. I have ignored ‘add ons’ such as life assurance and general insurance as current digital mortgage offerings do not seem to have figured out how to deliver these as part of their journey. In fairness Habito say they plan to address this in 2018.
Traditional mortgage leads typically cost 20% of an average sales value (including add ons) of £1000 on completion. A much better place to be.
Fintech Folly, The Sense and Sensibilities of UK Robo Advice (SCM Direct, 6 July 2016) provided detailed analysis of costs and profits for robo investment businesses that reached a similar conclusion.
4. Partnerships with larger organisations with major customer bases
The answer I believe is partnerships, clever fintech businesses aligned to larger organisations with a large customer base, access to leads, access to distribution and so on.
Alignment with distribution can deliver scale quickly which in turn can lead to early break even (5). Charles Schwab’s Intelligent Portfolios and its Institutional Intelligent Portfolios has attracted about $12.3 billion since March 2015. In comparison, two of the largest firms that created automated platforms from scratch, Betterment and Wealthfront, have attracted $7.4 billion and about $5.1 billion in assets, respectively, despite being founded in 2008.
Scalable Capital’s partnership with ING-DiBa, Germany’s third-largest bank by number of customers, provided significant growth: in the first two months of the cooperation, almost 7,000 ING-DiBa customers have already invested more than 150 million euros.
In the UK LV, the mutual insurer who have bought Wealthify, retirement and investment group, is expecting its investment in robo-advice to being breakeven next year. “Each time we get near to profitability we sign up another number of large schemes, so I think where we are seeing that small loss coming through is actually from positive reasons” (6).
Digital marketing is still critical but not to generate leads but to love and nurture all opportunities, leads, and eventually customers.
5. Open Banking: The Catalyst for Change
Traditional mortgage broking places an over reliance on the adviser, isn’t integrated end-to-end so there is a need for re-keying and uses an overly cumbersome process resulting in an end-to-end journey that typically takes around 14 weeks. It is ripe for the type of digitisation outlined above.
Open banking is set to move this on a stage further. Assuming a digital broking business has been created then registration as an Account Information Service Provider will (with the customer’s permission) give access to income & expenditure data through APIs. Combine this with credit data and you will have a ‘mortgage passport’ in minutes giving not only house buyers but also estate agents and vendors a clear picture of what the buyer can afford. It is no coincidence that Experian recently bought a stake in London & Country.
I expect we will see innovation in the wealth advice space too as this data is utilised for cash flow modelling.
Conclusion: Bancassurance finally delivers?
Bancassurers (or other large institutions with access to distribution) who partner with best of breed digital technology have the potential to deliver at scale revenues, excellent profit margins and good risk management. Will they do it? With the right transformation leadership, I think they will.
Many thanks for facts and figures to:
1. The next frontier: The future of automated financial advice in the UK, Deloitte, 2017/ YouGov 23-24 Jan 2017
2. The new face of wealth management in the era of hybrid advice, Accenture Apr 2017
3. Nutmeg losses soar to £9.3m, FTAdviser.com, FT Adviser, 2 Oct 2017
4. Periodic assessment of suitability under MiFID II, ATEB suitability, 30 Nov 2017
5. Why big banks are (finally) deploying robo-advisers, American Banker, 21 Dec 2017
6. LV expects return on robo-advice arm next year, FT Adviser, 14 Sep 2017
John Wilkinson is the Managing Director of John Wilkinson Consultancy Ltd. After 30 years working for major financial services brands, he now helps companies deliver major business transformations. Visit his Linkedin page here.