Making Financial Advice Affordable to the Masses in the Age of Digitalisation

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By Tim France-Massey

Many people in the UK struggle to navigate their way through uncertainty in the current financial climate and achieve their financial planning goals. However new regulations have resulted in a market influx of fintech companies and third-party providers, bringing to consumers innovative new technologies integrated into banking services that at last mean financial planning tools and advice – which were once only available to affluent clients – are now becoming available to everyone.

 

The financial services industry provides essential facilities, which are fundamental to support our modern economy and society. Given the current financial climate in the UK, many people are unable to achieve their goals, struggling to grow their savings, and make better financial decisions. Seeking advice for even standard queries – from sending children to university, to managing finances to ensure a comfortable retirement – can cost £1000s when speaking directly to a financial advisor or wealth manager.  

Customers, even those with high income, are often maintaining a spreadsheet to track all their banking and investments accounts across different institutions. Although low cost, this method is extremely time consuming and opens a new market which innovative fintech companies are beginning to tap into.

The problem is consumers today need financial advice more than ever before – with worldwide interest rates at rock bottom since the last recession, the UK savings ratio has plunged to an all-time low of 4.9%.1 The new Pension Freedoms has resulted in pensioners able to go into “Drawdown” instead of buying an Annuity, with nearly half a million retirees taking this option, and yet a third of them having no experience of being invested in the stock market.2 In fact, according to the FCA, only 6% of UK adults have had regulated financial advice in the past 12 months.3 Customers, even those with high income, are often maintaining a spreadsheet to track all their banking and investments accounts across different institutions – trying to build up a holistic picture of their net worth, spending trends and budget by themselves. Although low cost, this method is extremely time consuming and opens a new market which innovative fintech companies are beginning to tap into.

 

New regulations shake up the market

Earlier this year the financial services industry saw the implementation of the PSD2 regulations in Europe and the Open Banking regulations in the UK, which require banks to allow customer to give permission for FCA-regulated providers to access their current account data via Open Banking APIs. Therefore, the market has seen an influx of new third-party providers, larger technology giants and entrepreneurial fintech start-ups, who can access customer data easily, through the new regulations. New technologies such as robotics, artificial intelligence (AI), and blockchain are now being integrated into financial services, enabling companies to start bringing financial and wealth management advice – traditionally expensive, and only available to affluent clients – to virtually anyone.

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The potential advantages of the Open Banking regulations include making it easier for consumers to get a clear view of finances, but also making it easier to shop around for a better deal. These benefits sound positive for the consumer, but the power of big data analytics to spot trends based on spending patterns is immense. Already there are fintechs who have developed transaction analytics algorithms that can determine consumers’ investment risk appetite, credit risk level, political affiliation, likely addictions, health issues, and even probability of divorce.

New technologies such as robotics, artificial intelligence (AI), and blockchain are now being integrated into financial services, enabling companies to start bringing financial and wealth management advice – traditionally expensive, and only available to affluent clients – to virtually anyone.

In fact, there are a number of money management apps from small fintechs already making waves in the market. Moneyhub is a complete money management app that uses screen scraping to provide a picture of total worth across multiple banks, card companies, investment platforms, and pension providers. It enables a comprehensive holistic view of consumers’ finances, showing spending patterns across all accounts, allowing consumers to create accurate budgets and track progress against it, and as the data builds up over time, can create a trajectory of net worth and cash flow projection. Moneyhub can even import the individual equities and funds in a consumer’s investment accounts and is able to tell whether they hold any of the worst performing investment funds. Additionally, Cleo is a Chatbot integrated into Facebook Messenger which similarly uses screen-scraping to aggregate accounts, help consumers budget, and sweep unused cash into a savings pot at the end of the month. Yolt, is another whose app leverages the Open Banking APIs to provide a 360-degree financial view.

 

Appealing to the new age banking customer

Many commentators predict that Open Banking represents a major threat to the incumbent banks, as it will allow the digital challenger banks like Monzo, Revolut and Starling to offer more targeted competing financial products. Yet there is the counter argument that many customers may be more likely to trust their old bank to be their data aggregator than the recent startups and challenger banks. In the wake of the recent furore around the misuse of Facebook data by Cambridge Analytica, many consumers may be justifiably wary about sharing their transaction data with an unknown entity. Despite the influx of new innovative services, banks are arguably in the strongest position of all when it comes to remaining at the top – as they have several advantages – such as a large number of customers, strong brand awareness, huge distribution networks, physical ownership of infrastructure and significant capital. However, traditional long-standing financial institutions have been burdened by legacy technology, strict regulations, and lengthy administrative processes – making them lag behind when it comes to providing digital customer experiences. To keep up with the challengers, financial institutions need to shift their focus to enabling better digital experiences, tapping into technology, to appeal to the banking customers of tomorrow.

One of the UK’s major banks has been the first to launch its own version of account aggregation services with a new app. The app allows customers to aggregate accounts from other banks alongside their owned accounts, with sending categorisation, a budgeting tool and a regular payment calendar. Given most mainstream banks have historically shied away from account aggregation technologies, owing to risk and data protection issues of screen-scraping financial data from competitor websites, this major bank is the first to take a leap, in hopes to offer to its customers more personalised financial service experiences.

To keep up with the challengers, financial institutions need to shift their focus to enabling better digital experiences, tapping into technology, to appeal to the banking customers of tomorrow.

Digital platforms, such as robo-advice, are already beginning to disrupt the market for investment advice. Initially launched by fintechs like Nutmeg and Scalable Capital in the UK, robo-advice services help consumers plan for a specific financial goal or grow their money faster than savings. This is done by allowing consumers to compare the potential gains over time, versus the different levels of investment risk, using algorithms to recommend a fund or to manage a portfolio of exchange-traded funds (ETFs). However, fintechs are now being joined by the established banks with their own robo-advice services, of which charge a minimal fee for counsel. These low costs are possible because digitalisation and automation technologies reduce the need for human involvement in the provision of support. Technology though, is only part of the answer. Understanding the customer’s needs, emotions, and capacity to understand new concepts is just as critical to designing a successful digital service.

 

Digital services to address growing financial planning needs

Whilst the uptake of robo-advice services is growing, they still only provide “simplified advice”, meaning they don’t assess a customer’s complete financial situation or consider other investments such as property or pensions, and in most cases can only address a single goal. Holistic money management apps do provide consumers with the foundation to manage day-to-day spending and make smarter decisions about how to meet financial goals, through borrowing or saving, depending on how much they can afford to put away or pay off each month. However, customers need to be able to set future goals and model scenarios for achieving them basedon different levels of risk, timeframe, and needs. Luckily, there are new digital services designed to address this need.

Another notable app on the market for long term planning, including retirement, is from 7 Investment Management, a boutique wealth manager in the UK. Using the app via a tablet device, consumers can drag and drop family structure, properties, assets, liabilities and goals, and get a digital long-term plan that immediately outlines when a user is likely to run out of money. Additionally, a large British insurance company have launched another planning service which helps to estimate income needs in retirement, and projects the future value of a pension pot. The planner is also equipped with tools to model the various options to drawdown, buy an annuity, or both, at retirement, and highlights if there is likely to be a shortfall. These free services available to all give consumers a reasonable idea of whether they are on track for a baked beans or champagne retirement.

There are now many tools available to allow consumers to get control of their finances, and judge whether they are on track to meet specific financial targets. However, the next step is to bring these services all into one place and to provide actual tangible advice. Currently, these services still fail to be able to tell consumers how they know a particular plan is the best option, if they are paying too much in interest or if they have forgotten something important when it comes to their financial planning, like life insurance.

As highlighted through research,4 most consumers don’t have a plan. They don’t know if they are financially healthy and on track, and don’t know where to go to get help. When they want the help, most banks do not offer it or if they do, the consumer simply cannot afford it. However, there is an existing demand. Clearscore, with over 4 million users in the UK, has revealed the huge appetite from customers to know their Credit Score and how to improve it. Similarly, there is emerging interest4 from customers to know and improve their financial health score.

Fintechs such as Lemonade Money offer a digital financial health check that looks holistically across short term income versus spending, liabilities and protection. Longer term goals to calculate a financial health score, giving suggestions to improve the score, access to related products, and in addition a Hero Money Coach. The UK banks aren’t far behind, with some now offering a one off face-to-face financial health check in branch, by phone or video. Outside the UK too, multiple banking groups have introduced financial health check apps that are part of the standard mobile banking app. These services are constantly updating and showing how financial behaviour over time affects a consumer’s financial health positively or negatively.

Most consumers don’t have a plan. They don’t know if they are financially healthy and on track, and don’t know where to go to get help. When they want the help, most banks do not offer it or if they do, the consumer simply cannot afford it.

Open Banking promises to allow consumers to use their data to get better deals on financial products and is opening the market to dozens of challengers offering innovative products and services which tap into modern day consumer wants and needs. Given that the regulations and its implementation are still only in its infancy, consumers are yet to see if large financial institutions or digital challenger banks like Fidor or Monzo will be the first to offer holistic financial planning tools and services for advice. However, as the landscape continues to develop, consumers can eventually expect these services to be a part of their everyday financial services experiences.

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About the Author

Tim France-Massey is Director of Digitalisation, leading consulting engagements for major UK financial institutions from Wipro Digital’s London Lab. As Head of Digital and Data at Barclays Wealth, Tim led the digital transformation of Private Bank client and colleague propositions, and as Head of Mobile at RBS/Natwest, launched the UK’s first ever iPhone Mobile Banking App, a catalyst that helped lead to the widespread adoption of mobile banking.    

 

References

1. Office for National Statistics (ONS) 30 June 2017 (https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/quarterlysectoraccounts/octobertodecember2017)

2. ThisIsMoney – YouGov Survey for Zurich UK (https://www.zurich.co.uk/en/about-us/media-centre/life-news/2018/third – of – retirees – relying – on – drawdown – are – first – time – investors)

3. FCA Financial Advice and Guidance: Quantitative research to inform the Financial Advice Market Review (FAMR) Baseline June 2017 (https://www.fca.org.uk/publication/research/famr-baseline-report.pdf)

4. Consumer interviews conducted by Designit, a Wipro company, in 2017