The opportunity ship has sailed for personal finance management, lending, or #robo advisory sectors of #fintech, according to Rebecca Lynn, co-founder of venture capital firm Canvas. So where are investors looking for new opportunities? “Startups that are addressing the #infrastructure issues of banking, whether it’s #blockchain, or fraud prevention, or compliance,” she said during the Future […]
Bank Innovation
In my first blog of this series on our latest UK banking consumer survey—Beyond Digital—I explained why there’s still plenty of life in the bank branch, since even younger #customers still value human interaction. In this second post, I look at our findings on a much newer and more virtual channel to market: #robo-advice—the new generation of automated financial advice services powered by artificial intelligence (AI).
#Banks across the world are continuing to invest heavily in robo-advisery services, seeing them as a way to deliver personally tailored financial information and guidance at high scale and relatively low marginal cost. The headline findings from our study suggest that this investment is justified, with fully two-thirds of all UK customers and 74 percent of millennials saying they’d be willing to receive entirely computer-generated advice on relatively simple decisions such as which type of bank account to #open (see Figure 1).
Interestingly, an even higher proportion of consumers—74 percent overall, rising to 79 percent of millennials—say they’re willing to receive robo-advice on more complex issues such as what investments they should make. And as Figure 2 shows, when asked why they’d be happy to accept advice from a machine instead of a human, they point mainly to benefits around speed and convenience, cost, and impartiality.
A deeper analysis reveals further significant insights. For example, while 25 percent of all consumers say robo-advisers’ greater impartiality gives them an advantage over their human counterparts, the proportion believing this rises to almost one-third among OAPs—suggesting older consumers are more sceptical about the objectivity of human advisers. And our findings that only 19 percent of consumers think computers are less likely to make mistakes, and that just 13 percent believe their data would be more secure than with a human, suggest the overwhelming majority have limited trust in robo-advisers’ decision making and security.
Our study also indicates that there are some areas of financial advice where consumers feel human interactions have yet to be fully translated into the available technologies. As Figure 3 shows, almost two-thirds think it’s important to have human advisers on hand to provide advice on large, long-term products such as mortgages. In contrast, fewer than half feel they need human guidance on using their bank’s online and mobile services.
And in terms of what they value about speaking to a human representative, consumers rate the ability to ask direct questions and seek personalised advice as the top advantage, followed by being able to get what they need faster, and then humans’ better ability to explain complex issues. Interestingly, having a representative who knows the consumer well ranks very low as a benefit.
So, what does all this means for banks’ robo-advice strategies and investments? Combine these findings with those I presented in my first blog—including the fact that millennials are the heaviest users of branches, tapering down to OAPs as the lightest—and I believe a clear message emerges: Winning and retaining customers in the future will depend critically on striking the right balance between human-delivered and AI-driven services.
Put simply, banks need to recognise that for many consumers—including younger ones—the shift towards computer-generated services cannot succeed if it’s at the expense of access to human service at their local bank branch. And automation must be used to not only make banks work smarter, but also to improve and personalise the customer experience.
It follows that the next challenge for many banks is to reassure customers that they can receive the same level of service from a robo-adviser, and pull together the various threads of information they hold on their customers to create a personalised yet secure service. Consumers’ readiness to accept robo-advice for some financial decisions means that banks developing these services are pushing at an open door. But this doesn’t mean they can afford to shut off their customers’ access to interactions with real humans.
The post Customers are open to robo-advice—with a few conditions appeared first on Accenture Banking Blog.
In my first blog of this series on our latest UK banking consumer survey—Beyond Digital—I explained why there’s still plenty of life in the bank branch, since even younger #customers still value human interaction. In this second post, I look at our findings on a much newer and more virtual channel to market: #robo-advice—the new generation of automated financial advice services powered by artificial intelligence (AI).
#Banks across the world are continuing to invest heavily in robo-advisery services, seeing them as a way to deliver personally tailored financial information and guidance at high scale and relatively low marginal cost. The headline findings from our study suggest that this investment is justified, with fully two-thirds of all UK customers and 74 percent of millennials saying they’d be willing to receive entirely computer-generated advice on relatively simple decisions such as which type of bank account to #open (see Figure 1).
Interestingly, an even higher proportion of consumers—74 percent overall, rising to 79 percent of millennials—say they’re willing to receive robo-advice on more complex issues such as what investments they should make. And as Figure 2 shows, when asked why they’d be happy to accept advice from a machine instead of a human, they point mainly to benefits around speed and convenience, cost, and impartiality.
A deeper analysis reveals further significant insights. For example, while 25 percent of all consumers say robo-advisers’ greater impartiality gives them an advantage over their human counterparts, the proportion believing this rises to almost one-third among OAPs—suggesting older consumers are more sceptical about the objectivity of human advisers. And our findings that only 19 percent of consumers think computers are less likely to make mistakes, and that just 13 percent believe their data would be more secure than with a human, suggest the overwhelming majority have limited trust in robo-advisers’ decision making and security.
Our study also indicates that there are some areas of financial advice where consumers feel human interactions have yet to be fully translated into the available technologies. As Figure 3 shows, almost two-thirds think it’s important to have human advisers on hand to provide advice on large, long-term products such as mortgages. In contrast, fewer than half feel they need human guidance on using their bank’s online and mobile services.
And in terms of what they value about speaking to a human representative, consumers rate the ability to ask direct questions and seek personalised advice as the top advantage, followed by being able to get what they need faster, and then humans’ better ability to explain complex issues. Interestingly, having a representative who knows the consumer well ranks very low as a benefit.
So, what does all this means for banks’ robo-advice strategies and investments? Combine these findings with those I presented in my first blog—including the fact that millennials are the heaviest users of branches, tapering down to OAPs as the lightest—and I believe a clear message emerges: Winning and retaining customers in the future will depend critically on striking the right balance between human-delivered and AI-driven services.
Put simply, banks need to recognise that for many consumers—including younger ones—the shift towards computer-generated services cannot succeed if it’s at the expense of access to human service at their local bank branch. And automation must be used to not only make banks work smarter, but also to improve and personalise the customer experience.
It follows that the next challenge for many banks is to reassure customers that they can receive the same level of service from a robo-adviser, and pull together the various threads of information they hold on their customers to create a personalised yet secure service. Consumers’ readiness to accept robo-advice for some financial decisions means that banks developing these services are pushing at an open door. But this doesn’t mean they can afford to shut off their customers’ access to interactions with real humans.
In my next blog, I’ll look at the changing role of banks’ contact centres. Watch this space.
The post Customers are open to robo-advice—with a few conditions appeared first on Accenture Banking Blog.
#Robo-advisors are coming, just in time for the next generation. #Morgan Stanley is launching its own robo service in the fall of this year, as a way to more directly benefit its clients, the incumbent recently announced. The service is geared more towards the coming wave of consumers than the current, according to Andy Saperstein, […]
Bank Innovation
It’s hard to keep up with the pace of technological progress in financial institutions these days– so many #customers simply don&8217;t. Despite all the efforts from major FIs, banking customers globally say they have #never #heard of technologies like #blockchain, #robo advisors, and even digital wallets. Blockchain, unsurprisingly, lead the pack, with almost 60% of […]
Bank Innovation
For years, we’ve heard people proclaiming the demise of the bricks-and-mortar #bank branch, supposedly swept #away by customers’ mass-migration to online and—increasingly—mobile alternatives. But as our latest UK banking consumer survey—Beyond Banking—confirms, there’s still plenty of life in the bank branch. Put simply, customers still want to be able to visit branches and experience the face-to-face contact they enable.
In fact, a major theme of our findings is how highly customers still value #human interaction, and how much they want to have a conversation with a real live person about their major financial decisions. What’s more, this desire isn’t limited to older people. Quite the reverse: As our research demonstrates, the younger you are, the more likely you are to be a regular user of a branch.
Given that this trend is coinciding in with an ongoing shift by younger consumers towards more innovative channels—the likes of wearables, social media and instant messaging—it’s possible that the continued strong usage of branches is a transitory effect. But our study gives no indication of that. And the findings will certainly give #banks pause for thought as they plan out future strategies for their physical branch networks.
So, what does the research tell us? As Figure 1 shows, while use of mobile banking services is surging, branch usage by all customers remains remarkably consistent year on year—and indeed in 2016 edged up to its highest level since this research began in 2010.
A breakdown of the 2016 findings by age (see Figure 2) reveals what many might regard as a surprising outcome—with millennials being by far the heaviest users of branches, tapering down to OAPs as the lightest. While this age profile is probably affected by factors such as millennials’ higher numbers of financial transactions and the fact that it’s easier for them to physically get to branches, the correlation between youth and higher branch usage is clear and undeniable.
And what are customers using branches for? The answer—as Figure 3 shows—is activities like seeking advice, accessing services and fixing issues. Indeed, branches far outstrip all other channels for advice and service access.
What’s more, the use of branches for research and advice is becoming more frequent, with a significant step-up since last year in monthly interactions for these activities (Figure 4). And a comparison with historic data from previous years shows that self-service initiatives in branches are gaining traction, underlining their evolving role as service hubs.
All of this leads us to the million-dollar question: What kind of banking model do customers actually want? The answer, as Figure 5 shows, is a blend of physical and digital channels—a proposition they find much more attractive than a pure digital bank with no branches.
The message is clear: Banks should create strategies that accept and optimise branches’ ongoing future role, while also looking to harness ongoing digital innovation to deliver better service experiences at lower cost. But the shift towards computer-generated services for customers cannot be at the expense of access to human services at their local branch.
In my next blog on our UK banking consumer survey, I’m #going to look at the findings on a key focus area for digital innovation in banking: so-called ‘#robo-advice’. Stay tuned.
[1-5] Source: UK findings of Accenture 2017 Global Banking Distribution & Marketing Consumer Study—Beyond Digital
The post Why bank branches—and human contact—are not going away any time soon appeared first on Accenture Banking Blog.
Getting a line of #credit from a bank is so passe — try a wealth management #service with a #robo-advisor. Wealth management company Wealthfront has just released its new Portfolio Line of Credit, an offering that will allow clients to borrow funds based off of their investment accounts. The mobile-based service &8212; which marks the […]
Bank Innovation
Automation of investment advice has gained enough momentum for even the “non-disruptors” to get involved. So what’s the best strategy for deploying this new #technology? Royal Bank of Canada makes a case for build vs buy with its new digital advisory tool. The bank piloted MyAdvisor this week with 500 of its customers in Canada. […]
Bank Innovation
We are only about three months into the year, but robos have already made waves in the wealth management #space, and the ongoing debate of human vs #robo vs hybrid models continues. If you haven’t been following: Yesterday, Charles Schwab — one of the more “traditional” players in the wealth management space &8212; launched its […]
Bank Innovation
#Challenger banks are a fascinating bunch. As varied as they are — Monzo, Atom, Tandem, Starling and other UK market newcomers — they have one thing in common: obsession with amazing customer experience, customer-centric propositions and fee transparency.
I love these amazing propositions as much as anyone — however, I had a chance to work on a project with one of the UK challenger #banks recently which included deep diving on a #business model for one of the considered products in the bank’s pipeline.
The project (along with Stephen Lemon’s quote — even though I don’t think he was addressing the challenger banks at all) got me thinking about what comes next after the amazing customer experience and value propositions? Will the challengers be able to sustain these experiences under financing and profitability pressures?
Consider the following example — Monzo is trying to make itself useful for traveling card holders as it informs on its blog:
“At Mondo [sic], we love to travel and hate to play games with our banks while we are away. You’ll be pleased to hear we don’t charge any fees for using your card abroad, neither at points of sale nor at ATMs. ?…We pass the MasterCard exchange rate directly onto you”1
Or another one — Atom Bank has recently (February 2017) announced the best fixed term saving accounts proposition in the market which “annihilates” the rest of the competition as reported by This Is Money:
Put-upon British savers have been thrown a lifeline with the surprise launch of a one-year account paying 2 per cent today…Beating the current top-paying one-year bond by 0.4 percentage points, Atom Bank has sent ripples through the savings market and provided an account which currently beats inflation.2
We see similar amazing customer value deals emerge across challengers. What’s next for the challengers then from a business model perspective?
A graphic example of business model failure: Zuno is (or rather was) an all-digital bank that was launched in Central Europe (Slovakia and Czech Republic) back in 2010 as a project of Raiffeisen Bank International.
On one hand, I admit that the comparison to current UK challengers is a bit stretched ( or preposterous?).
After all, these are different markets and admittedly Zuno was not up to par in level of innovation and customer centric approach as its UK peers are (in the end, Zuno was an outpost of an incumbent bank).
Some of Zuno’s assets: mobile application, premium credit and debit cards (source: http://www.zuno.sk)
Before disregarding my comparison, consider the many similarities between Zuno and its UK counterparts:
Ultimately, Zuno did not achieve profitability and in total lost approximately 130 million euros over its lifetime. Eventually, Zuno was shut down:, its banking license voluntarily revoked and its customer assets transferred to other banks within the Raiffeisen Group.
What is the main takeaway from Zuno’s failure? It is not rooted in a market maturity issue or misalignment of the value proposition (in fact, the 266,000 accounts in Zuno’s markets would translate to somewhere around 1.1 million accounts in the United Kingdom).
The failure was purely on the business model side and inability to monetize its customer base on the credit side. As Zuno’s CEO at the time pointed out, the only mistake [they made] was that the bank had not started building its credit product portfolio from the get-go, which, in turn, led to their inability to generate revenues in a low interest rate environment.6
Simply put, the business model grounding of the bank’s market operation was amiss.
I would wager all challengers are in a net loss-generating phase of their existence. They make big positioning and product bets to scale their customer and deposit bases which will be monetized in the mid- to long-term timeframe.
On one hand, this is nothing unfamiliar in the startup universum. Snap, for example, has recently reported in its IPO filing losses of $514.6 million in 2016 and “may never achieve or maintain profitability”.
For various reasons I don’t think the challenger banks will be able to afford such liberty with their bottom-line results. The question then remains — how will challengers banks generate enough money to satisfy venture capital expectations, cover their operating costs and create meaningful profit?
In the short term, the evidence of this can be seen with one of the earliest market entrants to the neo-bank space, Berlin-based N26. The now fully licensed bank has moved on from its previous modus operandi with Wirecard and free of charge service offering.
N26 is now starting to monetise on new users on card issuing, ATM withdrawals and introduction of first paid products such as premium current account with an insurance bundled in.
As we also know N26 has introduced its partnership strategy which will presumably generate incremental revenues for the bank as well. N26 now distributes the likes of Transferwise and vaamo, a German #robo-advisor — “N26 is using vaamo’s API to offer clients N26 Invest, a co-branded solution that lets users select from three investment strategies depending on their risk tolerance.”4
Current N26 pricing (source: N26.com):
However, I would argue that monetization efforts as seen with N26 are only the very first step in a long way to profitability for the neo-banks.
Let’s take a step back and see what lessons are there to be learned on profitability and revenue streams from traditional players in the banking market.
Note: Profitability of retail banks is a complex and complicated area of study — full academic studies and white papers by consulting firms are devoted solely to discussing its intricacies. For purposes of this article, I will try to keep it simple and put forward a couple of highlights I personally find important in context of implications for the challenger banks.
Retail banks have two primary sources of income: interest income; and fees and commissions income.
Interest income is primarily earned by a bank lending money to customers and charging interest on the amount lent. A bank earns interest income by lending money to customers at higher rates of interest than it costs the bank to borrow funds from depositors and/or wholesale markets.
Fees and commissions income: banks earn fees and commissions income by charging customers fees for services and receiving commissions from, and participating in profit-sharing agreements with, other product providers. Examples of fees and commissions include fees for use of an overdraft, fees for packaged accounts, and income from the ATM (cash machine) network.7
An interesting insight on a UK retail bank product profitability comes from Credit Suisse research. Unsurprisingly, the most profitable products can be found exclusively on the credit side of retail products:
“Among the banks we have studied, we find that mortgages are the most profitable lending product (average ‘clean’ RoE of 28%), followed by credit cards (26%); with SME lending (12%) and consumer credit (7%).”5
In fact, Credit Suisse attributes such a weight to a successful mortgage offering that it is singled out as one of the three key profitability drivers for UK-based retail bank.
From the challenger’s perspective, it is interesting to note that the most profitable retail product is at the same time one the most complicated to distribute digitally (Oliver Wyman):
It turns out that interest income — i.e. charging interest on outstanding liabilities — is an extremely important revenue stream for the incumbents.
What’s more, share of interest income has increased significantly — from 65% in 2008 to around 75% in 2013 according to Credit Suisse research. Beyond cyclical trends, ‘there has been a more structural shift in the industry’s ability to generate peripheral revenues beyond pure interest-related income.’5
AT Kearney reports that ‘Different regulations, such as free current accounts, lending fee limitations, and caps on interchange fees, have impacted (and will continue to impact) banks’ ability to generate fee-based revenues.’ According to CMA, AT Kearney also reported that the share of net interest income in UK retail banks’ total income was the highest in Europe at 82%.
Another point of view besides the regulatory limitations is that traditional banks are simply not good enough at generating ‘innovative’ revenue streams from context and customer relevant 3rd party service offerings, new types of partnerships and beyond banking offerings — which might where the challengers could shine.
Perhaps unsurprisingly, it turns out SME business is extremely important for the large UK incumbents.
In fact, revenues from personal current accounts for the eight largest banks totalled £7.44 billion in 2014, while SME revenues for the seven largest banks totalled £7.1 billion in 2014.
Unsurprisingly still, banking SMEs is much more lucrative on a per customer basis compared to a retail current account customer.
Naturally costs are a big part of the profitability equation.
Consider the following — according to Oliver Wyman, 30% of all costs of a typical retail bank in the UK is consumed by its branch network. An additional 20% is eaten up by IT; a huge chunk of it certainly going towards maintaining legacy systems.
Oliwer Wyman:
In addition, it is estimated that on average, 5–6% of their revenue base is given up by the big retails banks as an effect of impairments.
I believe challengers have a great opportunity to alleviate the short to mid-term pressure on their bottom-line and competitive positioning if they are smart about their cost base, deployment of resources and investing into the right #technology and processes.
The following two points are courtesy of Credit Suisse research:
Scale alone is not enough, but is a necessary attribute — Although not enough on its own to determine profitability, our analysis suggests that without scale it is very challenging for a stand-alone business to be in the top quartile of sector profitability.
Funding structure…is one of the most important differentiators. We see a clear positive bias [in regards to UK retail banking profitability] towards a higher proportion of current accounts/low interest bearing deposits.5
Finish reading at Medium. Got a perspective? Please join the debate!
1 Monzo Blog, https://monzo.com/blog/2016/07/06/how-to-travel-with-mondo/
2 A one-year savings account at 2%: Atom Bank blows away rivals with new inflation-beating rates, http://www.thisismoney.co.uk/money/saving/article-4252282/Atom-launches-new-one-year-fixed-rate-savings-paying-2.html
3 ‘Very questionable models’: The cofounder of a #fintech startup addresses the elephant in the room, http://uk.businessinsider.com/currency-clouds-stephen-lemon-questions-fintech-business-models-2016-6
4 vaamo Partners with N26 (Formerly Number26) http://finovate.com/vaamo-partners-n26/
5 Credit Suisse UK banking Seminar — 2015 Update, https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1050375611&serialid=D3fAivrz0KjVObVAhNsc5e1OnBva50uGToQzZoM6ekA%3D
6 Celý príbeh Zuna: Klienti ho chceli, investori nie https://www.etrend.sk/trend-archiv/rok-2016/cislo-41/zuno-banka-konci-klienti-ju-chceli-investori-nie.html
7 Competition & Markets Authority, Retail banking market investigation — Retail banking financial performance, August 2015, https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk
8 Oliwer Wyman, Perspectives on the UK Retail Market, November 2012, http://www.oliverwyman.com/our-expertise/insights/2012/nov/perspectives-on-the-uk-retail-banking-market.html#.VbIMPPlViko
[linkedinbadge URL=”https://www.linkedin.com/in/tomasvysny/” connections=”off” mode=”icon” liname=”Tomas Vysny”] is Co Founder at The Booster Labs
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