Financial services firms must become tech firms, says Octopus

A “nirvana moment” at London investment institution Octopus Group has seen it become the latest established firm to launch an in-house tech incubator to keep pace with disruption in the industry.

From Airbus to Coca-Cola to Disney, the trend of launching internal tech accelerators is well established across the corporate world, and with their deep cash reserves many financial services businesses are already heavily involved in the space.

Head of Octopus Labs Richard Wazacz said the programme was initially established, “to build back-office, tech-enabled products and services that can really transform financial advisors and clients use of financial services.”

It was while establishing the financial services group’s recently-launched peer-to-peer offering Octopus Choice that Wazacz claims the company, “had a nirvana moment when we realised rather than being a financial services company that uses IT, we needed to become a technology company that does financial services.”

From internal innovation to startup incubation 

After establishing Octopus Labs as a space in which to develop self-built projects, the company realised the environment it created was prime for other young companies to grow in, away from the usual types of risk associated with launching startups.

Wazacz highlights access to capital as a key selling point as founders “don’t have to spend half their time running around the city trying to raise money.

“If they can convince the Octopus shareholders and board that some of the ideas are sensible, they’re willing to invest.”

Octopus’ distribution network is also important, with Wazacz saying, “we work with 3,500 financial advisors and have about 60,00 customers as an audience we can go and test our new products on.”

The firm announced the first cohort of companies from Octopus Lab’s first 12-week programme at the end of September. The four companies are investment news aggregator CityFALCON, investment apps MOOLA, Squirrel and Freetrade, as well as independent advisor platform AdviceFront.

“They’re all companies that we think either have a proposition that we think could help financial advisors or potentially pivot to be of benefit to advisors and their clients,” said Wazacz.

The machine-aided advisor 

This financial advisor space that Octopus has operated in for 16 years is one that many more startups are looking to disrupt. With machine learning capabilities becoming more accessible to young startups and smartphone apps opening access to such services to more people, the role of the traditional financial advisor is under threat.

Octopus, however, believes there is still a long future for traditional advisors but that the UK market is currently, “underserved from a tech perspective.”

Rather than so-called ‘robo-advisor’ services replacing advisors and leaving high net worth individuals’ and investors’ money to algorithms, Wazacz suggests, “financial advisors will have a very important part to play in society in helping individuals and companies manage their wealth and plan for the future.”

As with many industries that are seeing growing use cases for artificially intelligent (AI) interactions with consumers he says it will be a “hybrid of technology and human intervention” that defines the future of this space.

This is already a growing trend in the customer services space where AI-powered chatbots are increasingly fielding customer queries and helping to make operations that do include human interaction, such as call centres, more efficient.

The shift from transactions to relationships 

The growth of robo-investment and asset management services highlights a wider trend in FinTech as it matures beyond single transactional apps into relationship-based services rethinking insurance, mortgages and pensions. The challenge that will make or break these businesses, aside from tech, talent and capital challenges that all startups face, is their ability to build trust.

“They’re not one hits,” said Wazacz. “They’ll work together for 10 or 20 years and entrust them with their pension and long-term care.”

“If you are going to give a company your money you want to know that they’ll be there in 10 or 20 years’ time. That what the big banks and insurance companies have.”

Centuries-old brand names may give the incumbent players a leg-up in gaining consumers’ trust but changing customer demands in financial services is leaving these sectors venerable to disruption.

Wazacz considers the solutions incumbents offer, “inflexible and not very appealing to people in the way they were in the past.

“People are more demanding of a tailored approach. They want more transparency and to understand things more and that’s where you’ll see disruption starting.”

Failures and acquisitions 

The potentially massive revenues up for grabs in long-term services is drawing in more startups and investors and, invariably, not all will be successful.

“Lots of people need to try and some will fail and some will succeed, but that’s the nature of innovation,” said Wazacz. “The FinTech companies that will be successful will be the ones that figure out how to build strong relationships with their customers really quickly.”

Rather than just startups “other trusted brands in the market, like Google or Apple could actually foster that FinTech relationship with customers,” said Wazacz.

“Ultimately business is all about distribution and owning the customer and once you have the customer and the brand you can offer all kinds of value added services.”

Adding new value-added services is one way that established financial instructions are aiming to keep abreast of customer demands and the development of FinTech.

“There will be some M&A happening,” said Wazacz. “A lot of the established financial services companies will take defensive approached to stay in the market by buying tech.”

For long-established financial institutions considering partnering with or acquiring FinTech startups for the teams, technologies or products, the challenge does not lie in getting the cash together to make purchases but in effectively integrating an acquisition or FinTech partner into an organisation’s workings.

“A lot of these companies understand the importance of innovation, technology and the new ways of doing things, but they’re big organisations that have different investment horizons and they have to answer to different shareholders and stake holders who are looking for different things,” said Wazacz.

“It’s a big ask for a bank or big insurance company to invite a startup in and very quickly get comfortable that they would allow that it to go and talk to lots of their clients and distribution partners.”

Copyright © 2016 FINTECH GLOBAL

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