Fintech’s next steps

Fintech: the all-encompassing term for technologies powering innovation in the financial services sector. After the 2008 financial crisis, fintech slowly earned its merits as a term to be aware of and — for some in the financial services industry — scared of. But over the past decade, traditional financial services firms have learned to embrace and even innovate, thanks to fintech leaders who came before them in an effort to make an industry known as old-fashioned, new.

But much is still to be done. The fintech revolution is forcing the financial services industry and everything it touches to evolve quickly. Can the industry keep up, or will it bow down to incumbents?

 

The digital evolution of wealth management

Betterment, Wealthfront and Future Advisor are just three fintech examples of robo-advisor startups that have successfully disrupted the wealth management sector. As of March 2018, Betterment had $13.5 billion of assets under management (AUM) and recently introduced socially responsible investing options, a nod to Millennials and Gen Y, to which social consciousness is at times just as important as money itself. Wealthfront now has $10 billion AUM while Future Advisor holds $1 billion.

So far, the employment of fintech has been mostly in the area of robo-advice, where firms have moved to provide less costly and more consistent advice to their clients. The advisor-driven model is very expensive to operate and, therefore, one of the objectives of robo-advisor platforms is to allow more clients (not just the wealthy, ultra-high net worth clients) access to quality financial planning advice that match their specific goals.

“As regulatory trends have shifted in many jurisdictions to a fiduciary vs. suitability-based model, the robo platform delivers more consistent advice that can be supported through the use of well-tested algorithms,” says John Garvey, global financial services leader at PwC. “If structured well and tested properly, this type of model should reduce regulatory risk and deliver to the fiduciary standard.”

The development and acceptance of robo advising platforms falls in line with what is currently taking place amongst the nation’s different generations: the process of significant wealth transfer from baby boomers to younger generations (GenX, Millennials, etc.) who are more technologically savvy and rely on the convenience and customer experience delivered by the likes of Apple, Amazon and AirBnB.

“The challenge for wealth management firms, particularly at the higher ends of the wealth segment, is to navigate this transition by digitizing more and more of their customer experience, while keeping an important role for the human advisor,” Garvey explains.

But robo-advisor firms are far from controlling a significant portion of the managed wealth out there. In fact, a recent report from McKinsey shows just how small these players really are. The research and consulting firm states, “assets with a robo remain well below $100 billion — a mere speck against the more than $20 trillion in client assets in the U.S. market. Clients aren’t aware of these offers — less than 10% of affluent clients have heard of even the biggest digital attackers.”

And only 45% of investors with portfolios of $10,000 or more have even heard of this emerging technology, according to a survey released recently from Wells Fargo. And far fewer, just 5%, have actually used a robo-adviser.

 

Insurtechs (and beyond)

From Embroker and Roost to Coverwallet and Lemonade, insurtechs are multiplying faster than possibly any other segment of the fintech space. Case in point: On July 11, Next Insurance, an Israeli digital insurance startup that helps small businesses get coverage, raised $83 million in its newest round of funding.

Traditionally, such funding has come from venture capital firms, though that trajectory may be shifting. The global nature of insurtech makes insurance investing attractive to two additional groups of capital providers: technology companies and developing markets insurers. In May, Willis Towers Watson published their quarterly insurtech briefing for Q1 2018, showing that their “Venture Capital Investor Survey” participants predict that 20% of insurtech funding in the next several years will come from tech companies.

“Taking a look at the product deployment strategies of Google, Amazon and Facebook, we see investment in products and services with global potential,” the insurer notes. “Further, tech investors are well versed in developing and running technology pilot programs in smaller countries in order to deploy successful solutions into large developed markets afterwards. Additionally, there is a wave of insurtech investment from the tech giants of developing countries. Tencent, Alibaba and Ant Financial are rapidly growing in their domestic market in China while building technologies that will enable them to conquer developed markets in the future.”

 

Regulation

There remains a bit of legal ambiguity surrounding fintechs. Earlier this year, the Basel Committee on Banking Supervision released guidance titled, “Sound Practices on the Implications of Fintech Developments for Banks and Bank Supervisors.” Within it, the committee called for a more even playing field between fintechs, banks, credit unions and other lending institutions.

In June, the Bank for International Settlements (BIS), a forum for the world’s central banks, published a statement saying regulations enacted after the 2008 financial crisis to provide cushions for banking busts and reserves during banking booms should also be applied to fintechs.

On a more microeconomical note, in February, several states agreed to standardize their approaches to approving fintechs for money business licenses, which are used by companies including cryptocurrency exchanges and payments fintechs. Regulators in Georgia, Illinois, Massachusetts, Tennessee, Texas, Kansas and Washington will accept licenses from each other’s jurisdictions given to a specific fintech.

And though it’s difficult to predict the “next big thing” in fintech or insurtech, especially when it comes to regulation, it helps to look at what is happening in China vs. the rest of the world. China has allowed technology companies to provide more and more wealth and banking services with minimal regulation.

“Companies such as Tencent and Alibaba are becoming serious players in banking and wealth management,” says Garvey, confirming Willis Towers Watson’s survey findings. “In the rest of the world, mostly because of regulation, we have largely adopted a ‘co-opt and integrate’ model where fintech is being developed and leveraged by mostly legacy financial institutions. There are some standalone fintechs like Upromise, which are 100% digital and gaining market share, but offer a very narrow, targeted product or service set.”

Garvey notes that we are, however, beginning to see the emergence of more broad-based digital-only players, particularly with the advent of “open banking” initiatives such as PSD2 (Revised Payment Service Directive) in the EU and elsewhere.

 

Adaptation to innovation

As the number and scope of fintech and insurtech firms increases significantly over the next few years, banks will need to look at how to respond — and that may mean becoming fintech firms themselves. Take Fidelity and Morgan Stanley, for example. Both firms already set up their own robo-advisory platforms. Fidelity launched Fidelity Go in 2016, while Morgan Stanley launched Access Investing in 2017 in a bid to interest younger clients, to whom the firms can eventually offer more services. Meanwhile, JPMorgan Chase and Goldman Sachs both have robo-advisor platform plans in the works.

Considering the current fintech landscape, how might other firms — and its employees — survive the transformation? Innovation is key, Garvey says.

“In my discussions with executives, we focus on a number of topics. The first topic is innovation. There is so much innovation going on outside of the walls of any one financial institution that to truly take advantage of this, it requires a different approach than in the past.”

More specifically, Garvey and his team are helping their clients define specific business problems and opportunities and conducting various processes whereby solution providers/innovators around the world can provide their proposed answers, approaches, etc. This ranges from extensive use of crowdsourcing to leveraging specific platforms to develop better solutions than the status quo.

As Garvey explains, one major insurance company recently created a challenge to re-write one of their most successful underwriting algorithms. An external response was selected. Notably, the internal team response was not even in the top 10.

“The second thing we are focused on is creating the scenario to disrupt your own business,” he says. “But do it in an intelligent way. For example, we have clients that are developing alternative digital-only businesses but covering a different client group or geography so as not to disrupt the existing business before the model is proven.”

Adapting to business landscape changes due to technological innovations is an important part of any strategy. The financial crisis one decade ago left a bad taste in the mouths of consumers, investors and the general public — and rightly so. But not being able to see the opportunities that have risen from such a crisis only means we are doomed to repeat it. Embracing innovative technology can go a long way in the industry’s fintech and insurtech chapter, which proves to be far from over.

 

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Emily Holbrook is a former Editor in Chief of National Underwriter Life & Health and Retirement Advisor magazine. She has covered the financial, risk management and insurance industries for more than a decade, with her work appearing in Risk Management, National Law Review and Huffington Post. Emily graduated with dual degrees in Finance and English and worked in the financial industry as a fixed income trading administrator and analyst before becoming a full-time writer and editor. Emily now owns her own writing, editing and content strategy company, Red Label Writing. She can be reached at emily@redlabelwriting.com or on LinkedIn.