(Or the three stages of digital transformation)
According to a survey by The Economist, in 2015, banks have for the first time promoted the implementation of a digital strategy, to the highest priority on their agenda. However, according to a survey by Avaloq, 74 per cent also admit they have not yet defined a digital strategy or are only at the very early stages of doing so. At the same time, large banks such as BBVA are investing heavily in technology through the acquisition of software companies or digital banks, known as ‘fintechs’.
Fintechs leading innovation
Fintechs are widely regarded as the leaders of innovation in the banking industry over traditional financial services providers. They are primarily achieving this by offering clients a state-of-the-art digital experience and offer their services at a much cheaper price than their more traditional competitors. Many are also leveraging the untapped potential of technology to offer innovative products and services.
In wealth management, robo-advisors offer low-cost algorithmic-based investment management – for example, Wealthfront offers a tax-optimised direct indexing service at a management fee of 0.25 per cent of asset value. While Wealthfront has reached a milestone of two billion dollars of assets managed on the platform, Silicon Valley fintechs claim to manage a total of twenty billion dollars of assets, and this number is growing quickly.
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However, many wealth managers still underestimate the risk of a disruptive change within the industry. Many believe fintechs only provide solutions that appeal to retail or mass affluent clients and claim they do not provide sophisticated investment solutions that are tailored to a client’s unique situation. There is also an argument that they do not offer the personalised client experience that wealthy clients still expect and can easily receive from a relationship manager.
The problem with disruptive digital shifts (an issue which has already been realised in other industries) is that the change is sudden and dramatic and happens when both the technology and the consumer are ready. Such transitions are also very difficult to predict as there are only minimal warning signs before they actually occur.
Despite this, the rapid growth of fintechs in the last two years and the surge in mobile technology adoption cannot be argued against, and these may be the early signs of an impending digital shift within the financial sector. It also can’t be denied that fintechs today clearly provide an alternative to part of, if not all services offered by banks and wealth managers.
Industry surveys now suggest client expectations in a digital experience with their finance provider are rising quickly, even for High Net Worth Individuals (HNWIs). For example, according to the 2014 Global HNW survey by Capgemeni, RBC Wealth Management and Scorpio Partnership, over 65 per cent of HNWIs are prepared to leave their wealth management firm if they fail to provide an integrated channel experience.
Clients today expect the service they get from their wealth manager to be integrated across all channels, from personal contacts, to phone, computer and mobile devices. What’s more, when they start a request from one channel, they want to be able to seamlessly continue and finish it on another, of their choice and at their convenience.
The three stages of digital transformation for traditional players
Mounting pressure from client expectations and new rival players in the industry mean many banks and wealth managers are prioritising the provision of a new digital experience for their clients. Yet, as other service industries have already experienced, this alone will not be sufficient to survive a digital revolution.
At Avaloq, we have identified three stages of digital transformation. While most banks and wealth managers have identified the first two, only a minority have identified and integrated the third stage within their digital strategy.
Stage One: enabling digital channels
The first stage within the journey to digital transformation is to enable multiple digital channels to sell products and serve clients. This stage is already being implemented by most financial service organisations today. Mobile or e-banking channels are typically independent from traditional client-facing channels and operate in a silo-mode, directly integrated into a core banking operating system.
One of the limitations that banks and wealth managers operating at this stage will face is that digital channels do not provide the same services as traditional channels. Another is the limited level of self-service on digital channels where too often, only simple transactions are possible online, such as payments or trading orders. It is also not always possible to execute more complex requests online such as on-boarding a new client, subscribing to a discretionary management service, or getting investment advice.
As a result, many clients, in particular younger generations, can become frustrated as they cannot understand why what has become a standard in other service industries, is not possible in the financial field.
However, perhaps the most concerning limitation is that client-facing employees have absolutely no transparency over their clients’ activities on digital channels. If a client has unsuccessfully tried to use mobile or web banking to execute a payment or initiate a trading order, the client will have to give a full explanation in order to get the help needed when meeting with an advisor or relationship manager.
Stage Two: digitising all processes
The second stage of digital transformation is focused on digitising all processes to increase operational efficiency and provide an omni-channel experience. This materialises as a digital banking platform that fully integrates all client channels whether digital or traditional, and all front and back office processes. It ensures consistency and continuity of service across any channel, and means client advisors and branch employees are performing their daily tasks on a digital platform that is fully integrated to all client digital channels.
It is commonly called an omni-channel platform because the client can experience a continuous and integrated experience no matter what digital or traditional channel they are using. Client-facing employees not only have clear visibility of all client digital activity, but they can also interact and serve them remotely through digital channels as if they were face to face.
At this stage, digital channels are not just used as a means for informing clients and providing them with basic levels of self-service or interaction capabilities like at stage one. They are now used as a communication and collaboration tool between the client and the advisor, to increase the level of service offered on digital channels and build a closer relationship between the financial services provider and their clients.
Digitising all processes also means fully automating the full financial services value chain, in particular to maximise straight-through-processing transactions and digitise all client-facing processes such as client on-boarding or investment advisory. In many banks, these processes are still executed manually without the help of any digital tools and with a lack of automation and efficiency. Reaching this second stage of digital transformation will therefore enable significant gains in efficiency while also reducing costs. Yet this still might not be sufficient to survive a digital disruption.
Stage Three: transforming into a digital business
The third stage in the digital transformation journey is to turn the bank or wealth manager into a digital business. This requires a change of the business model by leveraging the full potential of technology to reshape products and services. Ultimately, it means that technology is used fully throughout the financial services value chain and to design, build and sell all products and services offered.
The world is experiencing a digital revolution and all industries are, or will be, undergoing significant change as a result. New behaviours are becoming the norm thanks to the daily use of social networks that have introduced new standards of transparency and social interaction. For example, an increasing number of people are now reluctant to trust a new service provider without checking its reputation, rating and pricing compared with alternative providers on various online communities.
It is highly possible that this change could lead to the financial industry undergoing a transition from a bank-centric model, where the bank is at the centre of a client’s financial life, to a customer-centric model, where the bank plays a reduced part of a client’s financial experience.
In a client-centric model, clients will still expect a number of services from their banks, in particular the custody of their assets. However, many will not rely solely on their bank or wealth manager to obtain information or advice on financial products and services; neither will they rely only on them to execute financial transactions.
Fintechs, which have experimented with new business models for banking and wealth management, are a key factor of this disruption. For example, fintechs offer a wide range of new services such as account aggregation across custodians, social finance platforms or platforms to compare, rate and rank investment advisors and banks.
They also offer innovative technology-based products or services. For example, in wealth management, fintechs offer HNWIs investment strategies that leverage the high potential of applied mathematics into their models. Algorithm-based strategies can now include risk and tax optimisation that has proven to perform better than basic ETF or expensive discretionary portfolio management mandates.
One of the most disruptive innovations would be to democratise the access to ad-hoc and tailor-made financial solutions that are currently only offered to wealthy or corporate clients. For example, it could be possible for clients to request the creation of ad-hoc structured products on demand, to hedge the risk on their assets.
Another example is the creation of new exchange marketplaces for investment assets that were once illiquid, such as commercial real-estate investment, art and gold or private equity, which can now be open to mass affluent and retail investors.
Do not ignore the digital financial marketplace
Most banks and wealth managers have identified the digital transformation as a necessity and a digital strategy has therefore become the key priority in their business planning. Yet only a few have truly integrated the change of paradigm that will be mandatory to succeed.
The focus of the digital transformation is usually placed on integrating new client-facing technology to provide a digital experience to clients. Many do not yet see the need to completely redefine their product and service offering with technology, or to open to new emerging financial marketplaces that offer access to alternative investment products and services.
However, in the wake of a digital disruption, the traditional business model may become obsolete. The industry must therefore be prepared to face a future in which clients relegate banks to a low-revenue and low-margin custodian service provider, if they fail to embrace the new digital era. Ultimately, the banks and wealth managers that succeed will have achieved a full transformation into a digital business.