FinTech’s irresistible rise has financial institutions scrambling over one another to take advantage of the sector – but a trio of major pitfalls are present to engulf unwary investors, FinTech author Paolo Sironi explained in a research interview with FinTech Global.
Sironi, who published his second book ‘FinTech Innovation: from robo-advisors to goal based investing and gamification’ last year, sees the FinTech sector not as a crack to the banking world, but a way to transform the banking charter. The way for financial institutions to take full advantage of this is by overcoming these three issues: the unbundling of banks, emphasis on sustaining innovation not just disruptive innovation and changing the digital market from a pull economy to a push.
Bundling and unbundling banks
Sironi believes you cannot ‘break’ banks, as they are already ‘broken’ – if you want a mortgage you go to that advisor, if you want to invest you go to that director’s office and so on. This set of division has made its way through to FinTech, with its various sections such as PayTech, WealthTech and CreditTech – but Sironi thinks that is counterintuitive.
He said, “It makes no sense because advice means building a holistic approach around the individual when you create a platform so that you can more easily invite them to pay for services. You cannot invite somebody to pay for services for a mortgage, loan, etc, if they think the products get less united. So, you need to create something where you invite the client to pay for more exclusively, like their digital family office. That’s why the wealth management world has the secret sauce, to me, to digitise full banking experience, because the bank of the future is like the bank of the past when you were talking to one branch manager only and he or she was taking care of the rest.”
In the past you would have a branch manager who would take care of all the clients problems and speak to the various departments on their behalf, building up trust and knowledge of the client, but it’s very expensive, Sironi explained. With technology, there is an opportunity to create this client centric service but through an AI, where the data is passed from one end to the other and the client is at the centre.
The last quarter for the WealthTech sector saw a record in number of deals, with it reaching 116, this is compared to the 65 in the opening quarter of the year and the 44 Q1 of 2016 received, according to data by FinTech Global. However, this was not a record quarter for deal value with its $541m raised, dwarfed by 2016 Q4’s $753.5m. Personal finance took the largest share of deals and funding, with it accounting for around half of the deals and a third of funding.
As FinTech continues to evolve, people are going to expect transactions to be processed in seconds, not days, but building this engagement where the client is at the centre helps build a thickness and engagement, so they’ll stay with you, Sironi says.
Focusing on disruption is not the way out of disruption
The second trap Sironi says institutions can fall into is unwittingly prioritising a temporary fix rather than a long-term solution. Regulators have forced banks down two routes. The first being financial institutions failing to invest in sustaining innovation and creating more added value, instead going for disruption where they give everyone access to investing, robo-advisors and ETFs – but only the wealthy can afford the extra value. The alternative is to innovate in technology in the proper manner to generate added value.
He said, “To do that they need to do two things, they need to move quantitative financial engines at the level of the distribution network, where conversations with clients would occur. They would also need to have analytics to enrich, augment, better explain their proposition in front of their clients, and that’s when you have cognitive conversations where you can use some sound communication techniques or AI to create more substantiated investment decision-making.”
Changing from pull to push
The final big issue for FinTech is that it is a pull economy, but investing is a push economy. Sironi said this problem boils down to people thinking the model works for consuming and so it should work for investing. Sironi likened the push economy to an impulse purchase, such as doing the weekly shop where you pick up your usual items, which is pull as you’re going with a specific reason, but then advertising catches your eye and pushes you to an extra purchase.
When investing money, the investor will not scour their iPhone looking for the next robo-advisor or UCPS compliant fund, as they want to talk to their friends, family and advisors, because the industry is driven by a supply mechanism and not demand. So the aim is to try and change the digital market from pull to push – a significant challenge according to Sironi.
He said, “One way of doing that is voice, so augmented/artificial intelligence. We can see what Amazon is doing with Alexa: if you ask Alexa to buy some soap, you are offered a soap, but if you go on the web and check the price, it is basically more expensive. So, they’re trying to invite you to use voice instead of going to the web, why? because voice is the new marketing” For example, if a consumer goes into a shop to buy soap, an assistant might suggest an alternative and as you’re talking you might change your decision, he added.
Sironi said, “This might work well for consuming while for investing it’s a bit more complicated. Therefore it would require more cognitive capabilities. It’s not just easy AI, it requires the capability of suggesting relevant pieces of information in order to create a substantiated conversation. The more we get used to voice in our DAILY life, the more we might be inclined to use voice also when we talk to a digital assistant or robo-advisor, then we will start changing the framework.”
People like to rationalise things through conversations. Sironi believes that people don’t buy products, they buy confidence to make investment decision making. This is so they are able to rationalise what it is they are buying. When making a decision of buying health insurance, or saving the money for retirement, they want to consult someone to help them make an informed decision, which comes through talking with a person or AI, he added.
This problem is clearly being noticed by investors, as Sironi said most capital injected into robo-advisors is going into marketing, as it is very expensive, but it needs the push mechanism.
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