The digital age: More than online investment
In Part 2, I only scratched upon the surface of changing buying behavior. This was intentional as this exercise is to thought provoke and not draw any firm conclusions or actions given much more research is needed to do so - including most importantly engaging with the audience being discussed.
The interaction between financial services and their customers has changed significantly over the past decade. Incumbent retail and commercial banks have made considerable progress in how their customers can interact with them online. Competition from start-up digital banks and payment providers intensified the need for adoption into digitalization, so too has the momentum of online interaction of businesses in all sectors.
The growth in digital financial services was needed to help satisfy demand and expectations. The millennial generation were certainly the largest population driving this but many generation Xers were calling for it too. More and more customers expected the immediate and flexible access to a range of products and services afforded to them in other areas. The traditional financial services industry was slow to adapt. It is important to remind ourselves as to why there was slow adoption to appreciate the rationale of what is being done today.
There are many plausible reasons for the sluggishness in adaption including resource allocation priorities associated with ongoing regulatory change, legacy technology infrastructure and cyber security. Another reason though, which is not generally acknowledged, is that there might have been a general unwillingness to accept that radical change was needed. Even as financial services saw the changes in behavior through their clients and their clients client, they were still not adapting at the speed other sectors were. Buying habits and changes to lifestyles have always changed over time but digitalization meant it effected all businesses everywhere. Banks were on the high street in every town and city in the UK for example. The were practically next door to their business customers who were experiencing the affects that the growing momentum of online shopping was having on them, but their banking neighbours must have thought at this time that they were immune.
At the turn of the decade an online auction company rapidly growing wanted to offer its customers an easier and safer way of making payments through their website. They approached the banks and asked them as to whether they had the capabilities that could meet this challenge. If not, could they build something. For one reason or other, the banks could not rise to the challenge, so instead e-bay bought a small start-up company and subsequently Paypal entered the global stage. Arguably the fintech era was born. For the banking industry, what should have been a wake up call witnessing a non-financial institution entering their territory, was not taken as seriously as it might of been.
Twenty years on and we've seen how much more banks lost market share in areas they owned in the twentieth century. Irrespective of other events including the financial crisis and its aftermath, the banks failed in adapting to the digital age even when sticks were being prodded at them from all directions. So one is compelled to ask the question as to why?
Ron Shelvin, a Managing Director for Fintech Research at Cornerstone Advisors wrote an article for Forbes[1] in July 2020. After reviewing conclusions drawn from research pieces by both The Boston Consulting Group and Financial Brand as to how the effects of Covid-19 will accelerate digital transformation in retail banking, Ron pulled no punches in declaring that the findings were wrong.
He agrees that banks legacy systems need a full overhaul, he suggests Artificial Intelligence will be a key component in the future but is only in its infancy today, but more relevant was Ron's observations that a new generation of senior executives is needed.
"Among the execs surveyed by Cornerstone, 85% said “corporate culture” was a barrier to transformation. The problem isn’t the underlings who “just don’t get the need for change.” The problem is that, with 30 to 40 years of industry experience, many of the current set of leaders have developed deeply ingrained beliefs about how the industry works.
While there is a growing number who recognize the need for their own beliefs to evolve, this is a lot easier said than done. Back in the 1980s, many organizations were slow to adopt personal computing. The real uptick in usage didn’t happen until Baby Boomers took over the C-suite.
Digital transformation in banking isn’t going to happen until the Gen Xers and Millennials dominate the executive committee."
The same observations can be attributed to the asset management/investment fund industry. Let's not forget, many asset managers are bank owned and the banks are still a major fund distribution channel. It's at this point that I want to assure you that any criticism in this article is viewed as a term of endearment. I've worked in Financial Services for more more than 20 years. Throughout that time, I've met some incredible people in the form of colleagues, clients and supplier relationships, many of whom are friends. The organisations that I've been privileged to work for in general strive to be a force of good for people. companies, communities and economies. That aside, there are some people, as there probably are in all other industries, who are in senior positions at a time of their life when radical change is not in their interest, and then there are others who read a few Mckinsey articles and make changes not suitable for either the organisation's prosperity or its customers.
Coming back to the present, the reality is that banks and other financial institutions are making some headway but much more is needed. The consequences are that branches are closing as footfall decreases and most of their apps developed are transactional in nature. As a consequence, they are becoming limited in offering any informed advice. In order for any potential change in buying behavior to be achieved, it is vital that the target audience gains an understanding as to why they should be considering personal change, and more importantly, how they can go about doing it without disrupting their daily lives.
Millennials and Generation Z are the investors of the future. While there is evidence to suggest that contributions towards pensions are being made in certain jurisdictions, by them or on their behalf, supplemental income from investments may be required for there future financial security. As a result, managers need to tap into the habits and thinking of these generations to remain competitive.
As Part 2 noted, these more socially aware generations are demonstrating a stronger focus on which companies are aligned to their beliefs, so it is only inevitable that their interest is and will be in ESG products. However, it would be naïve to assume that just because this generation are more socially conscious they are willing to sacrifice potential returns or gamble with the scarce disposable income. The Calastone report [2] suggested that when choosing an investment fund, the ethical choice was behind other more traditional factors such as returns, fees, transparency and reputation.
If these findings are reflective of the large pool of potential customers, there are a number of areas that managers need to be considering. While the level of returns vs. fees continues to be reviewed throughout the investment lifecycle in seeking operational efficiencies, transparency and reputation need equal attention.
The digitisation of reporting can meet the transparency desired by all investors if the data being fed is appropriately formatted and easily accessible. A potentially bigger challenge for managers is reputation. While positive past performance will always attract investors, other buying criteria can influence decision making. While the funds industry is already seeing smaller fintech firms gain entry to offer investment products, the potential of a technology giant or ecommerce group gaining entry could be significant.
Nearly three quarters of millennials would be open to buying investments from a big tech company according to Calastone’s report (existing and non-existing investors). These giants understand the digital customer experience and have already gained significant brand loyalty with their chosen audience. While social media’s reputation has been dented, there are few signals to suggest other household names are suffering to the same degree.
A key element of their success is their ability to leverage the vast amount of data they have accumulated, which has enabled them to deliver a personal experience to their customers. Additionally, the implementation of Artificial Intelligence (AI) tools that are using the data and executing a seamless experience to the point where it is conceivable that customers are unaware they are interacting with a bot. However, as Ron Shelvin pointed out earlier, AI needs to be addressed with a lot of caution when interacting with humans.
The Calastone findings suggest millennials do not invest, yet more than three quarters would consider investing with Google or Amazon if financial products became available.
It could be argued that respondents value and respect these brands because they offer products that fit their lifestyles, and they assume that expertise would extend to investment solutions. Investment manager brands do not yet have a similar emotional connection.
This potential threat is not limited to wealth managers only. Asset managers need to consider that people are investing into pensions. It is feasible that as the pension industry continues to evolve, choice will be very important. Many company pension plans in the UK for example already offer a plethora of investment strategies to choose from to suit the individuals' lifestyle ambitions. If a younger investor’s choice of investment strategies includes one being sponsored/supported by Amazon or Google who equally offer ESG alternatives, it is not outside the realms of possibility this would be the popular choice.
In summary, the digitisation of the industry needs to continue but possibly closer to home. Without the necessary data, it will be very difficult to understand audiences and their behaviour, which in turn will result in a questionable digital customer experience.
Part 4 (which is coming soon) will review how data enablement could help enhance the customer experience but also explore the risks and ethics of utilizing it.
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