The Convergence of High Tech and High Touch in Wealth Management

I wrote a piece for the popular fintech blog netbanker yesterday on how high tech and high touch are converging in wealth management, and what I will be watching for in that convergence zone next week at Finovate Fall 2012 in New York.

In the article, I mentioned that most of the notable traction to date has been in the payments space. One might not think that this “dumb pipe” portion of banks’ business models– moving dollars and data from Point A to Point B– would provide such fertile ground for disruptive innovation, but consider the impact and potential of players such as Finovate alums Dwolla and Simple, as well as SquarePayPal, and others.

I also noted in the article that innovative specialty lenders and crowdsourcing platforms are breaching what had long been banks’ deepest moat–  the ability to monetize their balance sheets. Most simply defined, banks’ primary function is to be a financial intermediary. Besides moving money from one place to the other, they hold excess capital when it is not needed for investment, and lend it out when it is; providing liquidity to all sorts of macro and micro markets along the way.

Oligopolists acting like oligopolists

Even though there are over 7,000 banks (plus a similar number of credit unions) in the U.S. alone, the industry has long operated as an oligopoly. For the most part, it continues to act that way despite disruptive threats from all around. After all, their primary product is the ultimate undifferentiated commodity, money. Bank A’s money isn’t better designed, sturdier or more portable than Bank B’s.

Parenthetically, oligopolists acting like oligopolists has a lot to do with the reason most consumers hold banks in just slightly higher esteem than they do the U.S. Congress. Banks integrated vertically and horizontally, they bought weaker competitors, they raised prices, they made up new fees, they cut costs and maximized profits for shareholders with scant regard to other stakeholders, like, you know, their customers.

Predictably, smart players from outside the industry have visions for better ways of doing business.

As frightening as any of these threats should be to any entrenched bankers who are paying attention, the ongoing march of innovation should be scaring them right out of their moire suspenders. Innovators are moving beyond solving the algorithmic problems of the industry and beginning to tackle more dynamic and heuristic areas, such as wealth management.

I continue to reference a recent American Banker article cited a KPMG survey that said 9 out of 10 banks were considering a major overhaul of their strategy, and that 40% said that wealth management was essential to growing revenue in the future.

Wealth management is an attractive business, and if done right, the business can also be a key differentiator, but it requires the ability to develop, manage and leverage intellectual capital beyond the commodity that is the bulk of many banks’ current business models.

Not all will be able to make the leap.

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