Fintech

Who is redesigning financial services?

Who is redesigning financial services? 1000 624 Efi Pylarinou

Who is redesigning financial services?

Simon Sineck says that you always have to start with the “Why”. True, but for the digitization of financial services, we have already answered the “Why redesign financial services”. The “Who” and “How” is a work in progress. The “Paradeplatz meets Silicon Valley” event in Zurich last week, organized by RFS, was an opportunity for me to think around this multi-faceted topic. My insights today are by no means an attempt to cover it all but to shed light and a few noticeable trends.

This is Switzerland, the small country in which Swiss banking contributes around 80billCHF to the Swiss GDP. This includes banks and insurers, that account for nearly 10% of GDP. Despite the fact it has been declining, it is still much higher than several G20 countries.

As I reflect on whether Swiss Banks and Insurers, are the ones that are taking the lead in redesigning their businesses; the answer is that they are not. This is in alignment with the fact that Swiss Banks and Insurers understand their businesses very well but only Backwards (as Dan Kimeling, of Deciens Capital said). They are not those that foresee and shape the future of their businesses. They are not pushing their own thinking and challenging their current offerings like Google X does. They are trapped still in the mode of growing their market power by acquiring more assets to manage. They are not in the mode of acquiring human resources, IP, and investing heavily in being in the flow of innovation wherever it is happening, in whatever way. There is no Goldman Sachs in Switzerland. Meaning, there is no boutique, brand investment bank, that is in the flow of it all. With Marcus, with Honest Dollar, partnering with Betterment, investing in Kensho, with and Circle & Poloniex. There is no BBVA here. There is UBS and SwissRe, but not as aggressive and with no sense of urgency.

Switching over to the firms that have been in the financial software business, like Salesforce, they are the ones that are powering the Software as a service (Saas) model and becoming platforms which integrate the scattered Fintech innovations. They are the ones that have the distribution channels and can “save” their clients (the banks and insurers) the resources and time, needed to integrate. Switzerland does have a Salesforce and a Finastra of its own. Temenos and Avaloq are the ones that redesigning financial services. At “Paradeplatz meets Silicon Valley”, Francisco Fernandez, co-founder and ex-CEO of Avaloq reminded me of several Fintech innovators that are already integrated on their core banking.

IBO – TheScreener  –  Spitch – Sanostro

Avaloq’s app store and developer portal, is already 3yrs old and includes over 90 apps or Banklets as they call them, for a diverse use (PFM, payment mgt, alternative investments, asset & market info, etc) and through their recent strategic investment in Metaco, they also offer custody solutions for crypto assets that can be integrated in a bank’s core system (SILO). Will the clients rush and buy from such Saas providers? The signs here in Switzerland are not that encouraging. The offering is there, it is a work in progress but the buyers have to make the strategic decisions. The bottom line issue is that IT people in banks and insurance companies are not the majority on the Boards or at high-level management. Martin Naville, CEO of the Swiss-American Chamber of Commerce, highlighted this issue when he was discussing on stage the successful case of Swissquote. This is a 30yr old Swiss listed company that merits to be called a Fintech focused on online financial and trading services. With robo-advice, e-mortgages, e-forex, and crypto offerings, Swissquote is the leading online banking /trading platform in Switzerland and has even established partnerships with banks that are white labeling their technology (e.g. Postfinance e-trading powered by Swissquote).  Their annual conference in collaboration with EPFL is a unique combination of academics and startups. What is the main reason that a 30yr Swiss bank, is an unstoppable leading innovator in online financial and trading services? It is a business founded and managed by engineers.

Technology and data parlance is built-in organically in their board meetings and amongst all their decision makers.

If you come from that angle into today’s reality, then you can cannibalize your business offering; you can even “hire the young to teach the old”. Anyone 35yrs and up, can qualify as old actually and can benefit hugely from being mentored by the young. Young people get it, how Revolut is acquiring 10,000 customers a day and is only 2.5yrs old. I get it too, because it took me a few minutes to open a business account on Revolut this past weekend which is open 24/7.

RFS by Who?  –  (Redesigning Financial Services)

Here in Switzerland, it is the seasoned financial services businesses that are overweight engineers that are pushing the status quo to change. The redesigning of financial services can happen from the Avaloqs or the Swissquotes. These are those transforming into Saas platforms for B2B penetration or those growing fast their digital offerings for B2C and at the same time white labeling their technology to other players (B2B2C) and revenue sharing.

However, if the banks don’t “buy” into all this, then these offerings will be exported and German or African or Middle Eastern banks and insurers will digitize faster than the Swiss. At the same time, there is still one major factor that the Swiss ecosystem has not leveraged enough, and which may turn all the above into a tale much like Aesop’s “The Tortoise and the Hare” race. What is this underutilized X-factor?

Swiss data protection laws, coupled with the unstoppable Transparency trend

Regulation has more or less shaped the dominant technology, in all innovation cycles (inspired by Guenther Dobrauz, PWC partner).

The place to Open Transparency centers that enable international stakeholders to review the vetted offerings, is Switzerland.

With the toughest data protection laws, quality control is essential. At the end of the day, this is how the Crypto ecosystem scaled in the Alps. One of the tipping points was when foreign businesses moved here.

Financial services will become invisible and intertwined with IOT. Whether you enter and exit a parking lot and payment is done; whether you send money or borrow money with an SMS; or your online financial advisor keeps you intact with your long term goals; or your insurance claim processing is done with two swipes; it will be all about Data quality and trusting the code that connects behind the scenes the devices and the service providers. IOT and invisible finance, is no utopia. It is happening as we speak. Switzerland can be the home of Open Transparency centers for all data used for the networks that will link invisible finance via IOT and make it all a reality. Regulators and entities like governments, agencies or corporates will be able to review and monitor these invisible business processes (data & code).

It was Kristine Braden, the country officer of Citibank, that opened her keynote with the FT headlines about “Spying fears prompt Russian software company move to Zurich” at the RFS event in Zurich and highlighted Kaspersky’s decision to move to Zurich and open a Transparency center for their antivirus software. This is a facility where trusted partners and government stakeholders can review the Kaspersky products’ source code as well as the tools they use.

Robert Ruttman, founder and CEO of RFS, and head of Customer Insights for FS at the Institute of Customer Insights at the University of St. Gallen; is always smiling, full of energy and a host on stage. As I walked out if the Aura hall at the end of the first  day of the RFS event, I thought:

RFS by Who and How?

Secure invisible finance in an IOT environment hosted out of Switzerland! The locals don’t see it yet. Maybe the “foreigners” do and will start moving here and that can turn Switzerland into the hub for secure, transparent centers because everybody gets it: Tough data protection can work magic within a transparent environment.

Nudge-Budge banking software lagging in the attention economy

Nudge-Budge banking software lagging in the attention economy 800 1040 Efi Pylarinou

Nudge-Budge banking software lagging in the attention economy

It’s been 10 yrs since the best seller “Nudge” hit the market. Richard Thaler, the Chicago economist and co-author of the book was awarded the Nobel Prize of economics for his pioneering work in behavioral economics (popularized in the “Nudge” book).

I find it remarkable that there has been only one Fintech PFM app called “Nudge” after such growth in this fintech subsector (and even that one has changed its name). I find it even more remarkable that the oxymoron term “Libertarian Paternalism” coined by the Thaler & Sunstein isn’t used in the Fintech ecosystem (too political maybe). I would have expected that at least accelerators, incubators, hackathons would “Nudge” participants to design solutions that affect behaviors in consumer banking, wealth and asset mgt. and small business banking.

Could it be that the “Fintech crowd” (all of us included) is silently voting against the Nobel Prize “behavioral theory” that points to all sorts of Predictably irrational behaviors and suggests that “Libertarian Paternalism” is the way to go? In plain words,

are we not convinced that it is possible and legitimate to affect customer behavior through the implementation of “Nudges” while still allowing for customized services and in alignment with all fiduciary principles that protect personal goals?

Is it true that the only tangible “Nudge-Budge” effect that Fintechs in WealthTech have managed up to now is more investing in “indexing” and more growth of the ETF sector? The robo-advisory decision-making influence has yet to prove to us that it offers a sustainable risk-adjusted outperformance.

Maybe there is a more tangible “Nudge-Budge” effect from Fintechs in PFM targeting cognitive biases towards increased savings, which in turn leads to more investment and better retirement. Bottom line analytics on this front are yet available but it is the only subsector that promises to provide several “Libertarian Paternalism” case studies for the near future. Challenger banks are clearly going down that route; from the Monzo app, Tandem, to the Starling Goals app. Digital micro savings apps like AcornsStash, and Qapital also. Incumbent banks have also entered this space with HSBC being one of the earliest to use real-time customer analytics to increase self-awareness of spending patterns for its First Direct customers. HSBC developed internally a savings app, coined Nudge, in 2016 and then developed into SmartSave a microsavings app developed in collaboration with Fintech Pariti. Old mutual had launched a similar service with the 22Seven app. This collaboration continues but 22Seven has gone independent because they have ambitions to grow globally.

Nudge-Global is another a Edutech company that has been focusing on financial education. Standalone fintechs like Oval MoneyPensionBee, and WeatlhWizardsare examples that “Nudge-Budge”. Personetics technologies is one that is laser-focused on cognitive banking solutions, so a variety of “Nudge-Budge” software that aim to be the next generation Nudging apps.

Nudge-budge fintech approaches in consumer banking still don’t have an impact. Culture before technology. Let us wait and see how our inertia and behavioral biases, withstand these technologies.

“Keep winning me”, says every robo-investor

“Keep winning me”, says every robo-investor 1000 517 Efi Pylarinou

“Keep winning me”,
says every robo-investor

“Not another post on robo-advisors” maybe your first thought. But 2020 and 2025 with projections of either 10% of total AUM or $2 trillion managed by digital platforms; are far away still. So, we will be seeing lot more pivoting in the business models and the stacks, in robo-advisory.

We have already witnessed the commoditization of passive investing; the increase in passive investing; the pivoting towards hybrid digital platforms.

“I want passive, cheap, and online” investing options for relatively low amounts.

Thanks to the fact that over the past 5yrs 80% of active large cap funds underperformed their benchmark indices, passive ETFs remain in demand and the suppliers are responding too.

Morningstar, reports that U.S. fund fees have been declining steadily since 2000, going from an average expense ratio of around 0.90% to a record low of 0.57% in 2016. Still high compared to passive ETFs. ETF.com reports that the price of the “Cheapest ETF Portfolio” for the U.S. market is Less than 0.06% a year.

“Pay attention to my culture” says the American, the German, and every robo-investor

It is standard practice in all digital platforms to have a home bias. German robo-advisors overweight European ETFs, while U.S. tend to use more U.S. ETFs. Solactive’s Robo-advisory (see links below) report states that in Germany, on average 40% of the ETFs are European. In the US, the home bias is higher, with an average of 52% to US ETFs.

More interestingly, Solactive reports the different optimization approaches between US and German robo-advisory platforms. These are the two areas with the largest concentration of robo-advisors. The US is clearly more aggressive in equity allocation for the same risk-profile. Solactive compares 3 different “personalities” and indicates that “, in the U.S., the percentage of funds allocated to equity for a more conservative portfolio ranges from 0% to 47%, whereas in Germany, the percentage of funds allocated to equity ranges from 9% to 30%.”

“Pay attention to my values with all this index investing”

Long term performance on a risk adjusted basis has always been the name of the game in financial investments. But our culture is changing. Whether it is in preparation of entering in the astrological age of “the Age of Aquarius” (shifting from the Age of Pisces) or not; we can already sense the shift in values. Philosophically the “Age of Aquarius” is an era that we care less about money, personal success, and boundaries and more about personal and collective consciousness, social justice, equality etc.

Wealthfront has already responded to client demand to omit buying securities from indices in sectors from four main categories: fossil fuels, deforestation, weapons and tobacco. So clients can click on which categories to omit instead of buying the whole index. That way, a client doesn’t loose the diversification benefit of an index and at the same, is not in conflict with his or her values.

Direct Indexing is part of PassivePlus®, Wealthefront signature suite of investment features which allows investors to optimize tax harvesting from moves of individual stocks. Since summer 2017, Wealthfront clients are able to build their portfolios in a Socially Responsible Investing (SRI) style

Morgan Stanley Access Investing, the new robo-advisor launched at the end of 2017 already allows investing in thematic startegies that include gender diversity, climate action and other sustainability themes. This new offering is priced at 35bps annually. Clients can choose from indexed ETFs, mutual funds, and thematic strategies.

Betterment has showed genuine concern around the limitations of existing SRI financial products and for now, is using the iShares MSCI KLD 400 Social Fund, which tracks the MSCI KLD 400 Social Index and has large-cap stock exposure. Companies involved in tobacco, military weapons, nuclear power, adult entertainment, and genetically modified crops are screened out. And the iShares MSCI USA ESG Select Fund for tax-harvesting purposes. Both these ETFs have high fees of 50bos compared the average of 9bps for Betterment’s core portfolio.

Personal Capital, the third largest US standalone robo advisor in terms of AUM and with a hybrid approach from the start, is also listening to the increasing interest and demand from clients. For no extra charge to clients, Personal Capital will screen U.S. equities on environmental, social and governance factors. The analytics are provided from Sustainalytics, a provider of ESG research and analytics,  to determine best-in-class companies in each domestic peer group.

With this ESG offering, Personal Capital may also be drawing more attention to its hybrid advice model. It is the human advice service of Personal Capital that is a paid service. Increased engagement around ESG investments with clients may increase the conversion from the free service to the paid service.

WealthSimple, the Canadian robo-advsior that opened doors recently in the UK, has also included SRI capabilities in their offering. “We always look to our clients for feedback on which features they want to see next, and SRI has been requested from the first day we launched in the UK,’ said Toby Triebel , CEO Europe to Citywire. It isn’t clear which specific funds have been include but the focus is on investments in cleantech innovation, fair labour standards or low carbon emissions.

Two standalone digital investment platforms that are 100% dedicated to sustainable investing, are OpenInvest and Earthfolio. OpenInvest is a YCombinator and Andreessen Horowitz-backed startup focused on the under-served markets in customized ESG asset management. They offer their services for 50bps flat fee. They have also designed a proxy voting app that just makes it easy to exercise your rights as a shareholder; with a swipe. Earthfolio is approaching sustainable investing with a thorough screening approach on multiple factors.

“Keep winning me.
Pay attention to my values.
Lets show the world that ESG and SRI investing, is good business”

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