PlatformMar 23 2017

Why there is a need for fintech innovation

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Why there is a need for fintech innovation

FinTech is no longer a buzzword among those who dwell in Silicon Valley or the UK's Silicon City; it is business critical for firms which want to grow and succeed in the years to come.

Developing technology that can reach new clients and service existing ones, in a compliant, cost-effective and clear way is imperative if providers and advisers want to develop robust businesses.

There are clear trends which cannot be ignored: the closure of high street bank branches and advisory arms in favour of online banking; the emergence of a generation born and brought up using online services and the rising advice gap. 

Building on existing technology

More people than ever are becoming accustomed to putting their financial details online. According to British Bankers' Association, nearly 14m banking apps were downloaded in 2015, a 25 per cent rise on 2014. 

With the closure of high street branches over the past five years - and the prospect of more to come - it is clear more people will have to consider moving from a branch visit to sitting on their sofas and doing their household bills.

Good financial planning is unlikely to become automated in the near future but technology can support financial planners better by providing wider access to their client's portfolio. Charles Owen

And developments have made it safer and more efficient than ever. For example, Barclays Bank enables its mobile-based customers to take photographs of the front and back of cheques and use these photographs to deposit that money into the account the same day.

But while this is great for providers, advisers still have yet to see proper technological developments using data more intelligently, for example, that can help with the financial planning process, especially at the lower end of the client wealth scale.

Martin Bamford, chartered financial planner for Informed Choice, says: "We also need innovation when it comes to data gathering and aggregation.

"The current state of IT solutions for UK retail financial services is generally very poor and product-led, having failed to keep up with an evolution towards financial planning. Fundamentally, we still lack well adopted common standards for data between providers."

Demographic change

Twenty years ago, when I started in journalism, it was said that nobody over 60 would be prepared to do business online, as this generation was unfamiliar with technology and therefore suspicious of it.

Nowadays, those who are 60 were the 40-year-olds of 1998, those who were becoming used to new technology and even involved in developing it.

The 40-year-olds of today grew up with technology, teaching their parents how to record on a VCR and chasing the high scores on the Legend of Zelda's Famicon Disk System of 1986.

These current wealth accumulators will be the wealthier pension clients of 2038 - but how will they be accessing their financial planning in 20 years' time?

And from whom - those who ignore technological advances, or those who engage with it? 

Therefore, any arguments of clients' average age being a reason why firms will not engage with technological innovation is a dying - if not dead - argument.

Indeed, according to the BBA's 2015 research, The Way We Bank Now, nearly 2.3m people aged between 70 and over 100 years old are now using internet banking.

The study also showed: 

  • More than 450,000 customers over 60 are harnessing banking apps on smart phones, iPads and other tablets.
  • More than 600,000 of those using internet banking are 80+.
  • More than 306,000 customers aged 60+ have signed up to receive text alerts from their bank.

Advice gap

Charles Owen, founder of online alternative investments platform CoInvestor, agrees with general adviser sentiment that the advice gap - which was acknowledged in the March 2016 Financial Advice Market Review - was largely a result of two major pieces of legislation.

These were the implementation of the Retail Distribution Review, which led to a reduction in the number of advisers in the UK, and the Pensions Freedom and Choice regime, which created a high demand in people needing pensions advice.

Mr Owen says: "The advice gap is a by-product of regulatory and technical change. The RDR came into effect to ensure retail investors were not being mis-sold investments by advisers who were incentivised by commission."

However, he believes this has led to "many retail investors not seeing the value in financial planning advice, and choosing to opt out of the advisory process instead".

This has led, in his opinion, to the rise of do-it-yourself investing using online investment platforms such as Hargreaves Lansdown's Vantage. 

Those advisers not embracing this change and creating a means to win these potential clients back through better use of technology will miss out. 

Research by consultancy EY has revealed that, by the end of 2016, there were up to 70 players offering, or planning to offer, an automated advice solution.

The report, Managing Risk in Automated Advice: How to be a Robo-Cop, stated: "There is certainly a feeling that companies which would not have considered entering the robo-advice arena five years ago, are now recognising the competitive advantage such solutions can offer."

Mr Bamford agrees the advice gap needs to be closed, and fintech could go a long way to closing it, but this really does need proper innovation; developments that help financial planners. It's not just about robo-advice.

He explains: "In order to close the advice gap, I believe we need a variety of new technologies."

Mr Owen agrees. "Technology in the form of robo-advice has been advertised as a solution to the advice gap. Robo-advice, however, merely directs money towards a risk-weighted strategy in isolation of any understanding of the consumer's overall situation.

"Good financial planning is unlikely to become automated in the near future but technology can support financial planners better by providing wider access to their client's portfolio."

Regulatory support

To get on top of these trends, provide workable solutions to the challenges these trends present, and to create sustainable, scalable businesses that will continue serving clients well into the future - that is the rationale behind the FCA's Project Innovate.

The will to develop was there, but not necessarily the ability. Firms cannot always just get up and create compliant, robust and groundbreaking technology on their own.

David Geale, director of policy at the FCA, comments: "Project Innovate was necessary.

"We found innovators have a particular need for support, which requires us to operate in a more agile manner. These firms may not easily fit within the existing regulatory framework and it is important we provide answers to their questions as swiftly as we can. Project Innovate is about reducing the barriers caused by the length of time it can take to navigate the regulatory process."

Moreover, the FCA said Project Innovate would amplify competition in financial services. Mr Geale adds: "Innovation can be an effective driver of competition, which helps us pursue our objective to promote effective competition in the interests of consumers, whether individuals or businesses.

"We are seeing firms offer new business models and new products using technologies we have not seen before, as evidenced by the variety of firms taking part in our Sandbox."

So there is a clear need for a programme such as Project Innovate. But there is also a need for a 'project implementation and review'  - as even when the technology has been developed, it always takes time to test and see how consumers respond.

As the EY report adds: "As with any highly regulated digital journey, it will take time for users and providers to gain comfort, typically using technology behind the scenes to begin with but working towards opening it up to customers over time."

simoney.kyriakou@ft.com