There is significant market focus in the investment community on robo advisory wealth management services. In fact, market growth in this area according to KPMG's Robo Advisory Catching up and Getting Ahead article is moving at breakneck speed and is expected to hit $500 billion in 2020. It’s not surprising that banks are working toward cashing in on this ripe customer revenue opportunity, between business slow downs and tighter operating margins squeezing profits.
But there’s a problem.
Banks don’t have the technology innovation inside to offer this service. Many banks have chosen an easier route by partnering with third-party robo advisors instead of building it in-house. These robo advisors utilize “robots” or automation for investment advice, a self-service option for consumers to get investment advice rivaling a personal advisor, which is typically reserved for well-heeled banking clients.
Unlike many other financial services of the past, the robo advisory business has been purely market driven. High-tech wealth management is the next logical step for millennials and other digitally-minded consumers who don’t have the millions to invest like a higher-income private client, but want the ease of automated financial advisors.
I believe an online advisor service is very appealing to these consumers and is accepted as a more trustworthy investment advisor by many who expect online sources of information to be truthful. These are the same customers that grew up on online and ATM transactions, are comfortable with technology and have little patience or desire to interact with their bank’s customer service department. They also want the transparency and control over their finances and tend not to trust the monolithic “Big Bank,” which has gotten a bad name since the 2008 collapse.
This perfect “demographic storm” has left open a wide gap for FinTech startups to capture the robo advisory service business, while banks struggle to build their own solution. It’s not difficult to understand why: Since the projections of the AUM (assets under management) figures are so incredible, there is a race to provide these services.
But unfortunately, banks keep getting further and further away from their customers. It wasn’t that long ago, a retail banking customer would go to their bank for checking, savings, investment, auto, home, loans, credit cards etc. These days, all of these transactions are separate, without the ability for the bank to cross-sell and upsell. These are all independent businesses within a single bank – without the ease to share data due to regulations and privacy issues. So the pursuit of “partnering” for these advisory services is ultimately not the right strategy for a major bank that needs to retain control of data and customer interaction.
What these financial institutions need is customer intimacy.
Can robo advisory be part of that? An unequivocal yes, but if the underlying technology is not fully built into a customer’s other “transactional relationships” with the bank, then it is a major loss for them.
We started looking at this issue with our banking customers. One of my first questions about these organizations was, “Is it even possible for a major bank to act like a ‘FinTech Factory’ and to put agile software paradigms into place?” It is much more than technology that is required; it’s also process change, internal budgeting and corporate structure.
I believe it is possible, but it needs executive involvement as a direction. What is needed is a blending of disparate data sources, some algorithms, some understanding of life events, and taking a platform approach.
Working with banks my entire career, I know they buy “one of everything,” and each purchase is a separate budget to solve a point problem or de-risk a technical need. This makes for an abundance of disparate technologies, skills and processes in the global banks.
Banks are highly regulated – misuse of the data or lack of security means page one headlines. They are not designed for this scrappy digital business model like FinTech start-ups. Banks were born into a scale out mentality instead of scale up; and must build on older infrastructure, while not always having adequate support for cloud and mobility requirements. Banks are typically native to a culture that doesn’t always embrace change.
So what is involved for the banks to really own this automation direction and act more like a “FinTech Factory”?
We have a pretty strong view on this at Hitachi: It is a platform play, rather than a point robo advisory solution. This means a set of reusable templates, enabling the banks to take on the role of FinTech innovator.
Banks can outsmart the ‘one size fits all’ approach of other third party robo advisors by leveraging the customer data the bank already has. This means blending unstructured and semi-structured data like social media, websites, reports, feeds and streaming data to identify unique correlations and serve up a more accurate and valuable customer profile.
I started a list of the topics that the banks have to consider in making these additions. The goal, again, is customer intimacy:
- Knowing the customer is a huge part of success (not a one size fits all approach). Leverage what is there in both big data and relational/transaction systems.
- Build in the data science algorithms that can bring together life events and predictive analytics including AI and automation for the steps and workflows.
- Blend in the tax implications and alternative investment offerings so that taxes can be optimized based on a client profile.
- Add/change and iterate the data sources to adapt with the market,
- Work with a client as a person (the same as an advisor does) where both and the client and his or her whole financial life and family are considered.
- Blend the client and advisor views by embedding this into their applications and existing solutions so that banks can work with customers directly. Banks should help solve the challenge of “I don’t need ANOTHER thing to manage,” felt by most people.
There are more areas to consider, but the core of the decision needs to move from market “keeping up” to an intimate customer understanding – that loss of connection and intimacy has moved banking outside of the trust circle.
This is where Hitachi’s influence in this space can help considerably. We’ve been re-imagining financial services technology for decades, with more FinTech patents and intellectual property than any other technology company.
I look forward to see how this market plays out. Similar to most of these new technologies, they rise and fall based on the customer’s perception. As these robo advisory services get greater adoption in the market, it presents banks with a brilliant opportunity to grow their connection to their customers and a way to show renewed value.
I’d love to hear from you on this topic. Please share your thoughts are questions at @DKnightHDS.