By Peter Ballard, Founder and Exec Director of Foolproof – www.foolproof.co.uk
Budgeting, saving for a rainy day and investing for the future are up there with doing the housework and grocery shopping for most people. It’s often considered dull, time-consuming and we all know we have bad habits which prevent us from reaching our goals when it comes to money. Not only is it considered a chore but, according to a report by PWC, only 24% of millennials demonstrate basic financial knowledge. In fact, a 2016 report by the OECD ranked the UK number 15 in the world for teaching financial literacy, despite a move in 2014 to make it mandatory in schools.
Automated financial services delivered through Robo-advisers, Apps and Chatbots is a potential game changer for how consumers approach everyday savings and investments. It’s no secret that the banking industry has been slow to adapt to changing consumer behaviour and technological advances, but automation is an exciting development which could help consumers re-engage with their personal finances and give banks the opportunity to rekindle relationships with customers.
Robo-advice and wealth management
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There is much hype surrounding Robo-advice. It has been in the news off and on since 2008 with companies like Wealthfront, Betterment and Nutmeg, and has been gathering momentum over the last two years with high street banks like Barclays, RBS, Lloyds and Santander revealing plans to launch Robo-advisers.
Robo-advice is not a robot but an algorithm which uses information that the customer has provided to determine the most suitable investment options for them. It is hoped that Robo-advice could be the key to providing low-cost financial advice to the millions of people who are unable or unwilling to pay high fees. . However, it has been slow to get off the ground and whilst consumers are open to advice delivered this way, providers need to not only convince regulators but also consumers.
In 2016 Accenture reported that 68 per cent of UK consumers were prepared to use Robo-advice for banking services. During our own experience design research, we also found customers to be open to the idea of advice provided through a non-human interface. After all, we expect managing our money to be as easy and as hassle-free an experience as buying a book from Amazon. So surely a service like Robo-advice, with its instant access and speed of delivery, should be an attractive option for customers?
But whilst people may be open to the idea of automated advice, they appear less willing to pay for it believing it to be expensive. This is in part due to a lack of understanding of the value of traditional face-to-face advice and how much it costs, which makes it more difficult to make a direct comparison with Robo-advice.
Cost perceptions aren’t all to blame though. In our experience customers have also become wary of putting their trust into institutions such as banks and financial advisers. They fear that the advice they are given may be biased or incorrect and believe that financial advice is not for them but for ‘rich people’. Many believe their bank does not do enough to help them stay out of financial difficulty and worry that banks put their own interests before customers, profiting from encouraging overdrafts and short term loans.
Providers of these services will therefore need to educate consumers and regain their trust before being able to provide financial guidance this way. According to Andrew Craig, author of ‘How to Own the World’ and founder of Plain English Finance, where providers are currently failing is in their communication with customers. “They’re not speaking their language and don’t understand their needs. They assume that their readership understands investment and why they should be doing it. It’s not about income it’s about knowledge.”
The key to the adoption of robo-advice will be through helping people to first take control of their everyday spending. As people become more accustomed to using app-based services that help them take control of their everyday spending, when they have disposable income and begin thinking about savings and investments, it won’t be such a huge leap for them to put their trust in AI-driven wealth management services.
AI and changing everyday spending habits
Mobile is quickly becoming the heart of the banking relationship, giving customers the 24/7 service they crave. Whilst Robo-advice is helping people to engage with investing for the long-term, where automation is coming into its own is in helping people to form healthy day-to-day savings habits. Importantly, it’s equipping people with the tools to manage their money how and when they want. Research tells us that people want different approaches to advice with some wanting to be nagged and others wanting to be nudged or coached. With a variety of start-ups entering the market, there’s something for everyone.
Digit for example is a US savings account launched in 2015. Digit monitors your income and spending and then puts money away when you are least likely to notice it. What’s interesting about Digit is that it automatically figures out when and how much to save based on your lifestyle. Similarly, Plum – an AI-powered Facebook chatbot – monitors your balance and spending habits and deposits small amounts into a virtual savings pot. Cleo on the other-hand positions itself as an intelligent assistant which automates the ‘boring stuff’ such as categorising transactions, and provides actionable ways to save in real-time.
What these services do very well is communicate with customers little and often and provide personalised advice based on that person’s spending habits. What we see often during our research is that customers recognise they have bad habits, but breaking these requires outside influence. It’s not something that they generally find easy to do themselves. These AI powered services encourage customers to put away a little and often and ‘micro-wins’ provide positive reinforcement and can potentially lead to longer-term positive behavioural change.
Monzo for example uses data to help customers make better decisions about their money and to modify their spending habits over time. There’s nothing ground-breaking about their pre-paid product, but the experience they’ve created is frictionless and delivers relevant, valuable and practical information to customers. By making the information digestible, Monzo are helping consumers make smarter decisions about their spending. Other start-ups that we’ve worked with are exploring the detail of customer’s spending habits such as how much they spend on coffee or eating out. They can then provide appropriate decision-making prompts around whether they are going to go over budget or save money based on their spending.
What’s interesting is that these services appeal to a wide range of customers from those who have none or very little understanding of their spending through to those who like to take control of it. For customers who out of control this functionality helps them to spend less, but for people who have control they feel rewarded and even more in control.
In the past, invading customer consciousness to encourage them to make savings has been prohibitive for banks due to cost and logistics. AI gives banks the opportunity to deliver advice to customers in a timely and tailored manner. The challenge for banks however will be in convincing customers to use their services over start-ups and this will require rebuilding trust and loyalty. With the coming age of fragmentation – where bits of apps will appear within other services such as Facebook or WhatsApp – banks have the opportunity to employ AI agents to re-engage with customers by helping them form more constructive long-term habits around their money.