Where Next? Evolving Financial Services Through Customer Understanding
Originally published in the FinanceEstonia International Forum 2014 E-Journal in June 2014. As last year, this publication is a treasure trove of insight on the future of the financial services industry from leading industry practitioners.
Prior to the FinanceEstonia International Forum, Aare Tammemäe, Chairman of FinanceEstonia spoke with Nasir Zubairi, Founder and Principal of New Buckland. The discussion considered financial industry consumers and what they really want, the newest disruptions in the FinTech industry and how the “old” and “new” in FinTech can play together.
Aare: Considering the financial industry, what does the consumer really need? Do we even know?
Nasir: That is a big question and there are a broad set of requirements because the mass market is so heterogeneous, both in a big population such as the UK (a core financial market) and within the small population of Estonia.
One conclusion I have reached is that the mass market does not want a fragmented set of services, nor do they want something particularly “disruptive”. To affect the most people I believe the service has to look, feel and behave like a bank – we are not ready to accept a drastically different model for financial services but we are ready for improvements in the quality of service we receive.
We want our money to be stored safely, we want to use our money to pay for goods, we want ways to access credit and investments to increase our purchasing power, we want to perform transactions both domestically and inter- nationally with the least amount of friction and cost possible. And we want it all through a single channel – banking as an enabler of transactions today and trans- actions tomorrow, not a set of products in their own right. That is how we need to frame the business strategy to come up with the right solutions.
Today we have a very fragmented system. Though FinTech firms are doing the right thing by focusing and building core capability in specific niches, the overall friction for customers is arguably getting worse and acting as a barrier to wholesale adoption of the new services. For example, I access TransferWise to perform international payments; I separately access Zopa to make investments and, if needed, borrow money; I access my bank to deposit money and use my card to make payments. Each service has its own access channel and sign-up process; it is too much.
Banks are sticky, the top 5 UK banks still share 85% of business banking and 90% of retail banking. The reason? Even though they are more expensive than the set of FinTech challengers and their user experience is still far behind, they are a one-stop shop for services. Easy, simple, frictionless access is absolutely critical to winning. We have all these brilliant FinTech projects but they need to be homogenised, delivered as a single service to customers.
What might be the concept of financial services in the future? Do you think these new banking-like ventures will be more TransferWise type initiatives or will they merge into this complete service package?
TransferWise has done fantastically well, but is there really any competitive advantage and uniqueness in their technology product? Not really, what they have is great marketing. A number of the new FinTech challengers to traditional banking are not really delivering anything more than innovation in process and some innovation in business model.
If you want to go large and change the game in a mature market such as the UK then something more creative is needed, something which changes the basis for competition in the industry and delivers product and business model innovation that is defensible. I don’t think the current wave of FinTech firms have quite the right model for sustainability, I doubt they are the firms that we will be talking about in 5 or 10 years time.
I think it is still early days in the evolution of financial services. Great things are happening and will continue to hap- pen. I think we will see greater collaboration in the future between financial services firms to deliver better access to customers and reduce friction. I believe we will have more clarity on the industry’s development within the next 3 years.
Are there any other technological ideas around which might change the way we interact with the financial industry?
I believe the insurance and asset management/pension fund sectors are in need of a hack. The insurance sector in the UK is essentially a peer-to-peer network, it works, but in an almost hysterically inefficient manner. The UK asset management and pension fund sector makes billions in profit each year but there is cataclysmic crisis brewing in people not having enough funds for retirement. Obviously there is also still a lot going on in the e-money and payments sectors. I’ve been reading about Facebook’s potential entry into e-money and international payments; that would be an interesting move.
Can you elaborate a bit more on asset management and insurance please? What could the possible disruptions and their impact be on today’s financial industry be?
The overarching problem is that there is a complete lack of transparency in both sectors. I don’t really know why am I paying X amount of money to insure my house, the only thing I know is that it seems like a lot and the price goes up each year. The average man on the street has no idea how it actually works and why the costs are what they are. Likewise in the pension fund sector, no one really understands what is being done with their money.
Transparency sounds very simple, but it’s always quite difficult to achieve. How could it work in reality?
It doesn’t matter if customers actually delve into how each business works, what is being done and why the costs are what they are, but it’s important that customers can easily find out if they want to. It’s about a company’s willingness to show and explain to us how it’s done.
Take the pension fund industry, I’ve had a fund for many years and even I, as an ex-banker, trader and finance professional, get very confused. Why does my pension fund go down at times when there are portfolio management techniques to protect the capital invested and provide a minimum return each year? Why am I charged a 2% administration fee?
Once in a while I receive a written report about what’s been happening with my pension. I don’t understand why I can’t access this information online in real time at my leisure and why it can’t be written in simple English? A rule of thumb for all this financial literature should be that an 11 year old can read and easily understand it (see the Flesch Reading Ease test). My fund has billions under management so I wonder how many customers they have and how many of these glossy reports are being sent out. It is very inefficient and costly in this modern day and guess who pays?
Workplace pensions in the UK are a key channel for retirement savings. People go through multiple jobs during their career and each new employer will undoubtedly utilise a different fund manager for their pension provision. Most people I am sure, as I, would like to consolidate their pension funds at each step to the pension provider of our newest employer. However, transferring funds from one pension fund provider to another is a ridiculously opaque process and the fees charged for consolidation are staggering. I understand there are costs involved in fund redemptions but, again, there is little transparency on why the costs are so high.
Many pension funds, such as mine, invest in overseas assets to spread risk. Each time they purchase or sell these overseas assets they require foreign currency. The funds, due to lack of diligence and specialism, are often charged up to 10bps on the currency exchange by their custodian (Russell Research report 2012) – think about that, it’s crazy! I am certain there are other areas where costs can be significantly stripped out to benefit the customer. Saving 1% in costs and increasing performance by 1% in the UK pension fund sector as a whole would lead to a 25% increase in the total value of pensions, that’s something worth striving for!
Should we wait for the insurance companies and pension fund providers to figure it out and make changes themselves?
Just as in banking, large firms in the insurance and fund sectors have stopped caring about the customer. They have delivered innovation but the value of these innovations has been captured internally and boosted profits. Innovating for profit is fine, but you should always share the profit of innovation equitably with customers to protect market share for the long-term. No business is ever safe.
There needs be an incentive for change to occur. The government in the UK is pushing for some reform and this could be a catalyst for innovation and improved service. New entrants also pro- vide an incentive for change by providing more competition, pushing existing participants to deliver more accountability and transform their practices. However the barriers to entry into the insurance and investment sectors are significant – can any new entrant make a dent big enough to start a wave of change within the industry?
I believe in starting small. Resolving any large problem starts from focusing on a small piece, fixing that piece and moving onto another piece, eventually you solve the whole problem. Like a big jigsaw puzzle – start with one corner, solve the corner, move onto the next corner, etc.
It’s an open opportunity for FinTech then, there is no one battling this cause.
As most people, I just want to see my pension fund go up and have confidence that I will have enough money to enjoy my retirement. The service providers’ job is to fulfil this need.
I am sure there are ways to better fulfil this need. The Government needs to be more actively involved in fuelling new innovation and ideas in the sector. We are sitting on a ticking time bomb – what will happen to society and the economy in 20 years when people cannot afford to retire? The problem is actually even more acute in the US, the average American only has $10,000 saved towards retirement.
Is there an opportunity for the “old” and “new” players to work together? As you said, the newcomers’ impact today is still very small.
They will absolutely work together. Spanish banks are doing some interesting things with innovative FinTech firms; Morgan Stanley is actively looking to partner with best in breed FinTech firms to enhance their capabilities and State Street partner with FinTech firms to broaden the range of services they offer clients. HSBC have just set aside £200m to invest in new innovation projects and partnerships.
Traditional firms will not disappear as long as they adapt and embrace new ways. I can see a world where a number of banks focus on being the “smart pipes, the plumbing of financial services” providing a foundation for other industry participants to sit on top, in turn allow- ing them to focus more on servicing customers.
If banks decide to innovate in their business then shouldn’t they find the companies out there which are already solving these problems?
They need to develop a capability regard- less of whether they build in-house or look for partners outside, they need a skill set in innovation. Experts need to be brought in to build the capability. All banks need to be investing in new talent that understands and can implement innovation processes. I have no doubt that we are nearing a fundamental change in the way customer’s use and access financial services, nobody really knows the entirety of what that change is yet, but it is coming. Banks need to be prepared to respond to the new threats, to have agility in process and, ideally, be the ones driving the change. Those that do will be the businesses of tomorrow.
In relation to Estonia, could that possibly be a small Estonian bank with good marketing and other tactical skills? Could such a bank become successful in Europe if it had the right offering?
Of course! With an aggressive and well thought through strategy there is no reason why an Estonian Bank couldn’t be the next generation leader in financial services across the world. In this day of technology businesses can scale so rapidly it is shocking. There are many examples from other industries where small firms, largely ignored initially, have quickly risen to lead.
Honda is one of my own favourite case studies. Though they had quickly become a large domestic producer of motorcycles nobody outside of Japan had heard of them. In the early 1960’s they began mass producing the Super Club, a 50cc moped now considered the “Model T” of motorcycles and the biggest selling motorcycle in history. They exported this model to the US, a country dominated by big bikes and by a big manufacturer, Harley Davidson. American Honda Motorcycle Company took control of the US motorcycle market by the end of that decade by really understanding their customers and using that knowledge to drive innovation in product, process and business model that blazed them past incumbent industry participants.