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Too small to fail: The partnership-driven nature of fintech startups (via Pando Daily)
By Houston Frost On May 22, 2013In the last quarter-century or so that has made up the digital revolution, one universal axiom has held true: evolve or die. Record labels were too busy suing pirates in the 1990s to adapt their business model to the digital world, newspapers were consigned to the recycle…
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I spent a great couple of days in San Francisco this week hearing from 72 FinTech companies at Finovate, stay tuned for my unique recap and thoughts from the largest Finovate ever.
As usual, there were several companies focused on improving access and service to the so-called underbanked– those who are priced out of traditional banking services, and those who simply opt out. This is a large market– several markets actually, and providing services people want and need at an affordable price is always good business.
I’m talking about affluent and high net worth customers. Not because they don’t have sufficient access or because they are priced out of any markets. In fact, it’s just the opposite. Affluent customers have plenty of choices. Maybe too many. It is a market niche most financial institutions should be pursuing, but it’s hard to stand out to affluent customers.
Marketers hoping to reach the affluent need to tailor their offerings to be relevant. Messages about daily cash flow budgeting, for instance, can be powerful for the mass market and the underbanked. Every dollar matters and the timing of every dollar matters. It is worth spending time on activities that will save money by avoiding late fees and overdraft fees, for instance.
For many (though not all) affluent customers, it’s the other way around– they will often willingly spend additional money in order to save time. They will also spend money on unique experiences, as I have written about before.
(See Reimagining Bank Product Design in the Experience Economy)
Wealth management firms are increasingly turning to financial technology (FinTech) to enhance the client/advisor relationship, not just deliver self-service tools. It’s about time. That very subject is a prominent theme on this blog, and it comprises a lot of the work I do for financial services and FinTech firms.
Ernst & Young’s recent report Enhancing the Advisor and Customer Experience Through Technology cited three core themes that emerged from their survey of wealth management executive:
The survey found that 75% of wealth management firms surveyed have plans to increase client-facing time, and an equal share of firms plan to invest in mobile tools to improve advisor collaboration and effectiveness.
An article on the study on the Financial Planning website quoted E&Y principal Marcelo Fava as describing the rapid growth of self serve tools as a greater threat to mass market advisors than to advisors of wealthier clients;
“The low cost and effectiveness of that model is appealing, but as your move up in net worth and complexity it’s less so. Households that need tax effective financial strategies will still be willing to pay for the skills of personal advice.”
– Marcel Fava, Head of E&Y’s Americas Wealth Management
(Read the entire Financial Planning article here: Ernst & Young: Face-Time a Priority for Financial Advisors)
In general, I tend to agree, although I will continue to watch the growth of newer entrants focused on disruptively cheaper alternatives. I don’t see FinTech replacing financial advisors for affluent clients any time soon, but I do see it is both a an opportunity and a threat. Remember the Innovator’s Dilemma anyone?
I also continue to see clients gravitating towards more omni-channel solutions, where clients can choose self-serve, advisor-assisted and advisor-driven options when and how they see fit, on any technology platform or face-to-face. We are not even in the first few pitches of the first inning on this, but it promises to be an exciting game.
(See Clients Do Not Want Help. Until They Do)
When B. Joseph Pine II and James Gilmore wrote a book called “The Experience Economy,” they built on the work of Alvin Toffler (“Future Shock”) and others on the value of creating experiences. They cited Disney, Starbucks, Nordstrom and other leading brands as examples. Pine and Gilmore argue– and I agree– that our economy has been evolving, and continues to evolve.
We started as an agrarian society, and we extracted raw materials from the earth. Then we eventually began to make products from the materials we extracted, and we further evolved into delivering services. We still do all of those things, but they are all becoming increasingly commoditized. Think about banking products and services. How do you differentiate your brand from your many competitors? Interest rates? Fees? Product features?
Being able to stage memorable experiences, large or small, elevates your brand to a level far beyond the commodity discussions of features and price. Staging experiences allow you to connect with people emotionally, and surprising numbers of people decide with emotion and justify with fact—including the affluent. (How many of us can say we truly need to spend $6 for a cup of coffee, let alone a $2,700 espresso machine for our kitchen?)
Ultimately, being able to guide customers through a transformation is the highest evolution, and financial services companies are uniquely positioned to be able to do that. (Figure 1)
A KPMG study in June 2012 revealed that 9 out of 10 banks were considering a major overhaul of their strategy, and 40% said that wealth management would be an important part of that strategy. And for good reason— affluent clients hold higher balances, are better credit risks and use more fee-based services. But competition is fierce, and it is difficult to grab the attention of this busy demographic.
(See: 9 out of 10 Banks are Mulling an Overhaul of their Operating Models)
How do you become the bank your affluent clients can’t live without? There is no shortage of financial providers willing to help clients borrow, save, manage and move money. How can you add value beyond these utilities?
This may seem like a bit of a stretch for product managers typically steeped in competitive rate shops and price elasticity curves, but winning affluent clients in this new era requires some broader thinking about ‘products’ and about value propositions.
As I wrote in a recent American Banker article: Anyone who has taken even the most basic business course in the past fifty years is undoubtedly familiar with Theodore Levitt’s 1960 treatise “Marketing Myopia”:
“The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented.”
So what business are banks in if they are not in the banking business? They are in the business of helping people achieve their financial and life goals, and the best brands differentiate themselves by reimagining the definition of ‘product’ beyond a typical set of tangible attributes.
For bankers, it is about moving beyond the rate and fee discussion and de-commoditizing the service offering. It is also about thinking more broadly about how to deliver value to clients, on their terms. Affluent clients have the financial assets to achieve their goals, but they are very often time-poor, and the wealthier they are, the more willing they are to trade dollars for time (and experiences).
I recently collaborated with Ten Group USA, the U.S. arm of London-based Ten Group, one of the world’s leading lifestyle management and concierge services companies to explore some ways financial institutions can deliver compelling clients experiences that might be outside of financial firms’ core capabilities.
In future posts I will discuss other ways savvy firms are innovating well beyond the typical rate/fee/feature conversation.
(This is an excerpt from an article I wrote for the William Mills Agency’s 2013 Bankers as Buyers report. Click here to download the entire article, plus 40 more pages of “research, observations and articles about what technology solutions and services U.S. bankers will buy in 2013 and the changing financial industry landscape.”)
Technology companies like to describe their role in a ‘value stack’ for clients. In banking, the value stack is comprised of three primary sets of activities undertaken for the benefit of their customers. The first set is balance sheet activities—gathering deposits and making loans. The second set is payment activities—moving dollars and data from point A to point B. The last set is advisory activities—providing expertise and advice. Most bank departments can provide some combination of all three activities, but wealth management is primarily about deploying intellectual capital to help clients grow, protect and transfer their wealth effectively and efficiently.
Technology has generally been more of a threat than an opportunity to the wealth management business over the past twenty years, as financial information became more easily accessible and online brokers democratized trading platforms. Firms that made money simply by being gatekeepers of asymmetrical information evolved or died.
Most financial firms have tended to allocate their tech spending to two extremes; either for enterprise needs to meet compliance mandates or improve internal operations (ERP, CRM, core systems, trading platforms, etc.) or to enable self-service for their customers (ATMs, online banking and brokerage, mobile banking, etc.)
Survey results fluctuate during different economic environments, but over the long run, roughly a quarter of clients prefer self-service in managing their money. A slightly smaller group wants to pay someone else to do just about everything, but most clients fall somewhere in the middle. They don’t want to pay excessive fees for services they don’t want or use, but they want advice when they want it, usually related to a change in circumstances, such as an inheritance or a major life change.
In other words, self-service alone is not enough, and firms will need to invest in technologies that can scale profitable advice delivery.
Financial institutions of all sizes want to improve their business with affluent and high net worth customers, and technology can definitely help banks address these challenges, but the payoff can be elusive, as I’ve written about before in the Clientific blog. Merely implementing a piece of technology without the context of delivering true value to clients will typically become an expensively disappointing project. The gap between high expectations and the longer growth curve of real value often leads to the ‘hype cycle’ that Gartner describes so well, (and which I have also previously described in a broader wealth management context). The gravity of reality will inevitably pull banks down from the Peak of Inflated Expectations and into the Trough of Disillusionment.
Download the report to read the entire article…
P.S. – The consulting firm Oliver Wyman has recently reached similar conclusions in a new report that is worth reading: A Money and Information Business: The State of the Financial Services Industry 2013
This year’s State of Financial Services examines the industry’s greatest opportunity, and its greatest threat: information…
You may be reading this paper on a tablet. You would not have read our 2008 report that way. You may use your smartphone for travel directions, reading the news, getting stock quotes, making bookings and listening to music. You didn’t five years ago. You may connect with your friends on Facebook or watch movies on your laptop, streamed from the internet. Again, you probably didn’t do those things five years ago.Yet, if you are a banker or an insurer, your work life has probably been little affected by the rapid growth of information. How do you now set prices, underwrite loans or policies, assess performance, segment customers and measure their satisfaction? Chances are your practices are much as they were in 2008 (or perhaps even 1998 or 1988). (Emphasis mine)
Source: Oliver Wyman http://www.oliverwyman.com/state-of-financial-services-2013.htm#.UQAWlKUZGB8
(P.P.S. – And if one of your new year’s resolutions was to fill up your digital reading list, head over to the Clientific site to download a free 28 page special report: Five Shifts that Define the Future of Wealth Management.)
I continue to get questions on which social media channels are most effective for what purposes. No wonder, considering the growing complexity.
Thankfully, there is a very simple explanation, which I will be using from now on:
You’re welcome.
Readers of this blog know that my primary focus is the convergence of high-tech and high-touch that I believe IS the future of wealth management. I think Balance Financial gets this better than most fintech firms, and that is why I am proud to serve on their Advisory Board. Read on…
I was recently interviewed by BAI Banking Strategies on the evolving use of social media in banking and wealth management.
Here is an excerpt from the article, which was published yesterday:
Nicols, a former executive with Minneapolis-based U.S. Bancorp, agrees that social media can warn financial institutions of potential problems. “You ought to be happy when a client is complaining because you’re learning something,” he says.
Young customers are more likely to be influenced by what their peers do than older customers, which, in turn, highlights the potential for social media, Nicols says. He cited the example of a customer who had a problem with his bank that was successfully resolved, which led to an enthusiastic recommendation of the bank to other consumers in social media. “There are whole businesses built on peer recommendations, such as Yelp,” which posts online customer reviews of businesses, from restaurants to bank branches, Nicols says.
Banks also have to use the right channels to respond to customer inquiries, Nicols adds, citing an occasion when a CEO of a technology company tweeted the bank that he wanted to talk to someone about a mortgage. The marketing department, which received the tweet and didn’t know how to respond, sent an email to Nicols, who immediately tweeted the executive. “Customers are giving you signals about how they want to interact and you need to pick up on those signals – or lose business,” he says.
Read the whole article here: BAI Retail Strategies