By Hrishi Rajadhyaksha, Director, Max Biesenbach, Partner and Megan Beattie, Consultant in the financial services industry practice at Simon-Kucher & Partners (www.simon-kucher.com),a leading Strategy and Marketing consulting firm
The economic implications of our current crisis are severe, and investors are wary: a UBS study indicated 60% of investors expect a global recession to hit in the next 12 months – western economies have already registered steep declines in Q1. The future is uncertain to the extent that the question of ‘if’ not just ‘when’ we will return to our pre-crisis level of economic activity, is a very relevant one.
This uncertainty permeates all facets of financial life: in light of government-implemented lockdowns, furlough schemes and mortgage holidays, investors have been forced to ask themselves some of the most fundamental financial questions: Will I have my job tomorrow? Will I be able to pay my mortgage?Will I get a refund on the trip I booked for this summer? Will I be able to buy the house I have been saving up for?
It is clear that as a result of this crisis, both investor expectations and circumstances have changed, which is increasingly leading to noticeable changes in investment behaviours. But with change comes opportunity. In particular, a very real opportunity now presents itself to investment platforms to consider building long term and sustainable revenue streams.
Changing investor expectations
If this crisis has highlighted anything, it is that uncertainty compounds volatility: oil prices, which typically move around 2% per day, have been moving on average around 30% per day. At the time of writing, Brent crude hit a 6-day rally with prices up 48%. It is hard to say if the worst is over however; a second wave of lockdowns may send the market crashing down yet again.
As the investment landscape becomes obscured by the effects of coronavirus, investor expectations are shifting. The market stopped dead in its tracks in March, ending an 11-year bull run, leading to some of the steepest outflows from UK funds on record. The shape of the recovery has also been hotly debated with sentiment turning quite gloomy in recent weeks. According to Bank of America’s Global fund manager survey, 74% of managers expect a U or W route back to normality whereas only 15% expect a V-shaped recovery.
Changing investor circumstances
Six million workers in the UK have been furloughed, and thousands more have been made redundant as a result of the financial uncertainty generated by coronavirus. Many of these workers now wait in the hopes for a return to normalcy.
Even under these circumstances investment platforms have seen a small windfall: retail investors may be finding themselves in the unique position of having time to invest in a new skill, potentially in need of surplus income, and at a time when many are viewing this as a buying opportunity. Investing is suddenly of newfound interest for many it seems. It is no wonder trading platforms saw nearly triple the account openings in March compared with the same time last year—despite the market performing 20% worse.
Changing investor behaviour
Following the market crash in March, two leading investment platforms in the UK reported a surge in buy trades, with 60-70% of all trading activity occurring in the ‘buy column’. In a survey of retail investors, one platform cited that their investors would be just as likely to increase their stock market exposure (~45%) as they would to do nothing (~47%)—with the likely aims of either profiting from the discount on quality shares, or playing the long game and riding out the crisis.
Given these changes, there is clear opportunity for investment platforms to drive higher customer lifetime value. There are three key ways in which platforms can act to do this: first, by widening their total asset base by attracting new money; secondly, by thinking about new ways to engage their existing customer base; and finally, by focusing on retaining their high-value customers.
- Expanding the share of the pie
Targeting new customers is one way in which platforms might secure new revenue streams during these times of uncertainty.To target new customers, platforms might offer 30 minute ‘top tips’ investment sessions —perhaps over Zoom—to help to pique the trading interest of the 18-34 demographic who value social interaction as well as more formal learning. This could be provided in exchange for a referral, or a commitment to purchase a subscription for a package of one, three or six months of investing on the platform. Such a move could secure a larger share of the pie from a potentially underserved demographic.
Further, at a time when future uncertainty also has implications for future investor cash flow and expenditure, re-evaluating the payment frequency of platform services is also advisable. Testing a pay-as-you-go or monthly subscription rate would be aligned to how younger investors think about their billing, and could attract assets which might have otherwise ended up in current accounts. This might be a favourable option for those who are uncertain about committing to an annual platform fee for example. Monthly subscriptions such as Spotify and Netflix are staples of the millennial budget: why should charging for facilitating investments look any different?
- Engagement is key
Along with searching for new audiences, another route to boost revenues is to deepen engagement with existing customers. Some platforms employ a freemium model, where users can learn to trade for free on a ‘play account’ and upgrade for advanced features once up and running on the platform. Charging for value-added features which customers are clearly using and engaging with is a way to monetise differentiated customer preferences on the platform.
Platforms can also increase engagement by introducing a loyalty scheme that rewards long-term investment behaviour. Investors could unlock‘ points’ for healthier investment activities, e.g.: regular monthly investment. This is also a good way to clearly align incentives of the platform (getting a steady stream of investor cash) to those of investors (developing sound investment practices).
- Retention is the new acquisition
Finally, to ensure future revenues during times of uncertainty, platforms should pay close attention to their high-value customers. High frequency or high volume investors likely contribute disproportionally to overall revenue. Identifying these high-value customers and zooming in on those at higher risk of churn is the first step in a best-in-class customer base management approach. Conducting proactive reach-outs to such micro-segments with updates or check-ins in times of crisis will go a long way to sustaining their loyalty.
Alternatively, offering customers a special demo of new products, such as a new subscription to a series of financial health-checks available during the crisis, could yield additional revenue from this high value base. Finally, it is crucial to have ‘reactive retention offers’ as a final gambit for selected customers who are considered most crucial.
Building from a position of strength
Investment platforms should re-visit their approach to monetisation. Even during an economic crisis, demand has remained robust and their go-to-market model has not been impacted. This affords them the rare luxury of playing from a position of strength unlike most other industries. Although economic uncertainty seems to be the prevailing sentiment, therein lies opportunity as well for investment platforms.
Changing investor expectations and circumstances have fuelled changes to investor behaviours: from increasing trading activity on existing platforms, to increasing numbers of account openings, investors look to secure more certain futures now more than ever. Investment platforms should put in place targeted measures to widen the asset base, deepen existing customer relationships and strive to retain their most valuable customers in the long term.