Digital Strategy Digital Transformation

Can digital be a major driver for growth in the finance sector ?

Léa BERNARDIN
Written by Léa BERNARDIN

My work in finance marketing this past year has yielded many questions, namely, what is the place of Asset Management in the future, and how could digital be a driver for growth in a sector currently marked by stagnation due to the economic crisis? Indeed, digital tends to be the norm in other sectors, but within finance there seems to be a lag. So I will explain how digital can not only be an incredible tool, but also a crucial growth driver for this sector if we capitalize on this trend.

Why does this sector need to capitalize on this trend ?

  • Increasing pressure on compliance

Year after year, controls in asset management have risen. Markets in Financial Instruments Directive (MIFID) announced key elements in the action plan of financial services launched by the European Commission. These should radically change the financial landscape because they involve both structural changes in the market and organizational changes in firms. This directive aims to better protect the investor, particularly with regards to increased transparency of operations and prices.

Digital becomes interesting when considering its implications in facilitating trades which will gain in speed and efficiency.

  • Consumer behavior evolution

The millennials which make up a growing portion of the client pool are increasingly focused on saving money. This Y generation will compose the next labor force, and many appreciate a digital lifestyle for its convenience and rapid diffusion of information. These new clients look for more personalized services, allying technology and performance.

  • Rise of competitors

FinTech is a large term which includes all activities coming from banking, new technologies and social medias. They are emerging and revolutionizing the landscape by changing the way customers remove to their services. This trend forces the main actors to review their strategy, and with good reason. More than 200 robo advisors (virtual counselors) exist in the USA and a dozen in Europe. The thing is, once you are installed in the sector, entry barriers are thin, so only controls can be brakes because they are not the same, depending on the structure of the companies and can force them to propose different, less functional products.

  • Needs of new growth drivers

When banks take steps to answer the digital need of their clients, it generates costs from the transformation, but also provides trade opportunities and results in decreased charges, which boost their bottom line. However, projects like robo advisors are money drivers: the market actually represents 19 billion dollars and are projected to reach  2 trillion dollars in 5 years in the USA. FinTech does not give free access to their platforms and their subscription system generates a sound remuneration.

  • Use of new distribution channels

Whether we talk about classic management, corporation funding, way of payment or money transfers, FinTech players understood that their strength would lie in breaking the codes of the market to compete with well-established competitors. Here are some examples of their ingenuity :

  • Stocktwits : a B to B platform which brings traders and investors together to trade. It permits a more precise and better traceability of the exchanges and to emit trends.
  • Afrimarket : Money transfer solution to Africa. People can send money to a partner commerce for their relative to collect a particular good.
  • Lydia: people can pay back their relatives simply through email, a text message or the scan of a QR code.
  • TransferWise: a parent can financially support their children abroad who will actually receive the money someone deposited in the bank in the same country. It permits the avoidance of exchange fees and international transfers.

How to control the codes of this trend?

  • Understanding the trend

Digital encompasses strategy and actions driven through the web, social media and connected objects. To surf on this trend in finance, it’s essential to turn to FinTech, especially for robo advising in Asset management. They are virtual counselors whom, depending on the customer’s profile and his will of risk, propose an investment portfolio to him. It’s based on powerful and complex algorithms, which as the secret of these pure players, are essential to be able to propose this service. But the main key is to understand how FinTech breaks the market’s habits.

  • Business model

FinTech makes money essentially thanks to the management fees they apply on their services, which are less expensive than those of classic banks. For example, with Yomoni the customer knows that the fees will never be more than 1.6% of its investment a year.

Here are 5 business models for robo advisors :

5 business models for robo advisors

  • Financing method

– Research and development investment
– Commercial or financial partnership
– External development by buying a business/FinTech

After the crisis, customers are looking for more transparency and less fees. That’s what Fintech proposes: giving the management back to the client and allowing him to control his own investments.

ExpectationsAnswer
Performance–          Low costs
–          Diversification
Reactivity–          Digital technologies
–          Ease of use
Personalization–          Reach the personal aims of the client (other than performance)
–          Put the client at the heart of the process
Flexibily–          Do it yourself mode
–          Possibility of clients meeting thanks to technologies
–          Large range of fiscal envelope
–          Adjustable offer according to the different types of clients

So digital is the inevitable path to take for classic finance players if they don’t want to see their activity decline.

But despite the keen interest for this trend, it’s necessary to conclude by keeping in mind the dark points it reveals :

  • Algorithms: They propose standard answers and may be useless in particular situations (psychologic sensibility, stepfamily…).
  • Finance on the same system as Uber: Big companies fear this phenomenon due to disintermediation, promise of transparency and fees reduction. But banks’ monopoly is not totally threatened because they keep a powerful position, everything depends on the side they choose. Some new actors will rely on banks and other will compete them depending on the potential of growth they anticipate.
  • Difficult reconversion process: it costs a lot, the information system has to be readapted, it needs training…

About the author

Léa BERNARDIN

Léa BERNARDIN

Junior Marketing Project Manager in Finance

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