Fintech: The Next Target Is Asset Management

In this study of the asset management’ industry and of the FinTech disruption, I’ll share with you the impact that digital transformation has had and will have.

1- Digital transformation started 30 years ago
2- But the tools allowing for its boom only appear nowadays
3- This does not make life easy for incumbents
4- The new tools are opening new channels and new segments
5- Thus brings new rules and new actors
6- Asset management will live its digital transformation
7- New players will challenge the incumbents
8- Staff skills will evolve



1- Digital Transformation Started 30 Years Ago

I’ve had the chance to start my career as a trader with the advent of computer technology in financial markets.

I could run my first computer arbitrages for my first boss sending hexadecimal files 40 times faster than manual entry allowed at that time.

This allowed me to experience the evolution premises of the manufacturer (trader / asset manager) as a user and of the consumer (business or individual) as … a user.

The number 1 characteristic of the digital transformation is precisely this notion of UtoU (user to user).

My subsequent experience in asset management companies allowed me to be involved in UX, for instance to set up error reports that users liked to fill (rather than hide the mistake under the carpet with the old forms.)
Then, I had the opportunity to set up the first IT relationship tools between internal and external users. (reporting, risk alerts…)
This was the first phase of the digital transformation, we were already dreaming of machine learning!

These first jobs immediately sensitized me to innovation and the permanent link between quality of production and distribution.

As we shall see, the fintechs appear thanks to the availability of many tools simultaneously improving production and distribution.

Inevitably, after a quarter of a century in asset management, this training and this UX exposure attracted me like a magnet towards FinTech.

Look at digital
I’ll thus share here with you the outcomes of this experience of innovation / disruption and digital transformation.


2- But the Tools Allowing for Its Boom Only Appear Nowadays

The disruption is made possible by this twin availability of tools improving production and distribution. To summarize this in one sentence:
the big data and machine learning dramatically lower the cost of production and allow the opening of new digital distribution channels that shrink customer acquisition cost.
Former BtoB and BtoC patterns are replaced by a new scheme : UtoU (User to User).


3- This Does Not Make Life Easy for Incumbents

As recognized by other industries affected by the digital revolution, this evolution is initiated by new actors (in the financial industry these are the fintechs) and not by the historical actors.

Mainly because of technical debt.

Do you grasp what the technical debt stands for?

It is the IT version of the concept of debt : the very design of an IT system does induce specific future costs, a kind of interest. By analogy we talk about technical debt.

This interesting concept can easyly be transposed: the more an organization becomes complex, the more it embarks debt: training debt, cultural debt, organizational debt, corporate image debt…

Technical debt

Why start a paper on fintechs with these debt concepts, will you mind?

Precisely because the underlying principles of disruption and of digital revolution will sort of tease the historical actors whose maneuverability is challenged.

You will agree that the financial industry, particularly in asset management, is considerably more complex than 30 years ago, both due to the inventiveness of actors and also because of ever denser regulation.

 

Once upon a time, this was a barrier to entry, amongst other things because computing resources focused on support functions and made those a tremendous cost of entry.

Due to a kind of incestual or inbreeding link between innovation and regulation, the majority of IT resources have been devoted in recent decades to meet the regulatory complexity.

Yes but… it appears that now fintechs do integrate the regulation from the outset, thanks to big data tools… and this at a very low cost.


4- The New Tools Are Opening New Channels and New Segments

The prodigious development of IT tools (more and more efficient) and of access to information (less and less expensive) brings nowadays disruptive solutions both at the production side (decision support through big data and nosql, optimization of decisions through machine learning, lower costs) and at the distribution side (opening digital channels, precise customer metrics, adaptability of the product offering, simplification of the user experience).

You understand therefore that this enables agile new players to enter the industry by capturing very quickly margin rich niches, and furthermore, due to their ability to lower their tariffs, to petrify historical actors.

Moreover, the entry point of fintechs is often a left over segment : BtoC and Y Generation.

y generationBtoC has indeed long been considered the preserve of large financial networks and the customer acquisition cost in this segment was perceived as as prohibitive.

It is not the case anymore.

Y Generation who took the brunt of the 2000 & 2008 crises has a very poor image of the historical player and brings breaking usage habits (numerous small purchases, search apparently free services)

 

Y Generation is especially Web 2.0 fit. Mainly for its interactivity and virtually tailor-made offerings.

Remember the Web 1.0 and mass management practice of asset management! Today this concept of “one size fits all” is completely incongruous for the new user who replaces the old consumer.

It is he or she who will have the economic power for the next half century… it is also this generation that educates previous generations on digital!


5- Thus Brings New Rules and New Actors

One of the outstanding features of this change is propagation. Whether positive (see Amazon – “preferred brand”) or negative (see Volkswagen). Propagation takes multiple aspects(image, use…) and heavily impacts the acquisition cost.

In short, the new values : simplicity, accessibility, transparency, interactivity, personalization, attractive prices are the drivers for Y Generation usages and by spread for the other generations (+ 65 years old are for example one of the highest growing segments on social networks).

In this environment, we see that some FinTech are set up in a few months with perfectly agile production tools.

As “the periodic table of financial technology” shows to us, new actors abound for the last 5 years:

FinTech periodic table
https://www.cbinsights.com/blog/fin-tech-periodic-table/


6- Asset Management Will Live Its Digital Transformation

All this said, unlike many other branches of industry, the FinTech remains relatively confidential in pure asset management.

We mainly observe roboadvisors (Wealthfront, Betterment – Fundshop – Marie Quantier) or multi-managers (Coinvestor)… but even the biggest newcommers still got a tiny market share (Wealthfront, one of the largest for now, announces 2.6 billion AUM against assets 50 000 billion for the world’s 400 largest managers).

Still, the growth of these new players is very significant (70% / year)… and continuouly accelerates!

More impressive is the wave of personal savings or personal saving app online.
They stand very close to asset management in that they supply or rely on money market funds.

The biggest: Yu’e Bao, closely linked to AliBaba, rose to nearly 100 billion before experiencing withdrawals related to the weakness of interest rates and the crisis of the Chinese market. But already Oinky, Digit, Acorns, Accumulate introduce individual savings app that rely more or less on monetary funds.

These actors directly address the mutual funds management and the business of the asset manager, but other players also invade the savings industry with sometimes very different models:

We can name some little more complex “crowd” solutions such as Lending Club, of course, as well as the french Prêt d’Union, Lendix or Finexcap that are also coming close of using asset management mechanisms. Similarly we see the crowd investing with actors like Crowd Cube and the emerging US platforms (now that the Jobs Act allows their launch).

Finally, brokers are not outdone : companies like MotifInvesting, Wikiwealth or InvestorGuide bring decision support tools to investors who thus can directly manage theyr investments. Note that MotifInvesting evolves toward ETF building!

At production side, the Asset Manager 2.0 is offered the assistance of big data specialists and machine learning (QuantCube – Infotries …) Crowdsourced research (Estimize), Integrated Services (Addepar) ; these tools solve other daily concerns: the fraud detection, governance requirements tracking , risk, compliance…

At distribution side, continuous adaptability to the service requests of these new users, who are already accustomed to digital offers of other industries, is a key feature of the digital transformation.

The engine of all this is “metrics”: continuous measurement of user practices. These measures begin of course by identifying the best customer acquisition channels and contribute to the growth hacking.

these tools will solve other daily concerns: the fraud detection, governance requirements tracking , risk, compliance …

At distribution side, continuous adaptability to the service request of users already accustomed to digital offers of other industries is a key feature of the digital transformation.

The engine of all this is “metrics”: continuous measurement of user practices. These measures begin of course by identifying the best customer acquisition channels and contribute to the growth hacking.

Let’s quote Presse Citron (fr):

“The Growth Hacking, before beeing a set of knowledge and skills, is primarily a state of mind. A state of mind brought by openness, imagination and questioning of all actions by data and testing.”


7- New Players Will Challenge the Incumbents

The coming years will therefore see a revolution in the practices of asset managers.

digital disruption figuresThis is where comes again the topic of technical debt : defying the historical actors, we see emerging :
– The new players that we have seen
coming partly thanks to cost reductions, thus dramatic lowering of the barrier to entry
– And non-financial actors (Telecom – see Orange’s recent intentions – and Retail and Social network giants…) those can be very tempted to enter as their own staff is already a customer pool and of course they may offer a new service to their customer base.

When you get to know that startups break even point is at hundreds of thousands clients, even sometimes tens of thousands, you grasp their opportunities!

In summary, technical and human infrastructure of the historical actor can be a hindrance to the development: it must integrate with the existing.

This where a pure startupper has no such constraints as well as where the non-financial player doesn’t meet blocking interaction with its existing IT.

Indeed, the historical actor still focuses on its known segments and, if he takes initiaives on new distribution channels, he’ll remain very constrained by his existing infrastructure.

…dixit investment bank staff (who are thoretically the most advanced in IT production tools):

Why don’t you like working at BNP Paribas?

(…)
3 – And all digital is not for tomorrow, “IT tools of another age, too heavy process”, “Long and inflexible project processes

Why don’t you like working at Natixis?
(…)

3 – Not always easy to master computer skills: “A computer system resulting from several mergers”

http://news.efinancialcareers.com/fr-fr/222944/les-vraies-raisons-pour-lesquelles-les-banquiers-adorent-ou-detestent-travailler-chez-bnp-socgen-et-natixis/

The tactics of the historical player will either be competitive intelligence or development through external financing, this in order not to remain constrained by the existing. (see for instance UBS Innovation Lab or Axa Lab – but we see much less initiatives @ asset management level apart from Blackrock hiring Google staff).


8- Staff Skills Will Evolve

In any case, this revolution imposes staffing for non financial actors and restaffing for historical actors:
Business knowledge is of course a prerequisite, if only because of regulatory complexity.

But the ability to understand the new tools, to quickly analyze metrics of the customer’s uses and to have an understanding of the new competition, in short of being able to grasp all the parameters of the digital transformation, is the most critical skill to get. CxO ability shall become a norm.

Finally, the culmination of all this and the argument that will attract the new users is the HCD (Human Centered Design) which encompasses UI (User Interface) design and UX (User eXperience).
The winners in the digital economy are those who make things simple (remember how Apple made smartphones that a two year old knows how to handle).

… as asset management appears complex and sometimes incomprehensible (…this bringing 500 pages BtoB RFP’s as well as BtoC pitches on tax and performance… indeed very appealing! ) you get with me that tomorrow’s winners are those who have understood the UX design!

In short, we are in the U to U World (User to User). As you have got it, it is a knowledge and also is a state of mind.

where is UX

 

About the Author

Amaury de Ternay has an extensive dual expertise of financial markets/asset management and digital/strategic marketing. Thanks to his management experience, he looks for the big picture, thanks to his passionate mind, he likes the essential detail. Amaury loves sharing ideas and… the challenge of continuous evolution. He also loves cooking and golf !