INVESTMENT AND WEALTH SERVICES IN THE AGE OF NEOBANKS III. – CHALLENGES OF TRADITIONAL INVESTMENT AND WEALTH MANAGERS

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In the last few decades, traditional financial players have already faced many challenges, such as an increase in prudential requirements, lower interest rates and subdued growth rates. They have adapted to these changed circumstances, but once again, albeit in a different area, they are required to play catch-up in order to compete with this new neobank segment. If it is so obvious that incumbents need change in certain areas, why did this not happen yet? To answer this question we must look at the issue from the point of view of these traditional players so that we can understand why their process of transformation is not as clear-cut:

  • Technology: Banking legacy infrastructure that was built decades ago is crumbling and is now unable to serve customer needs efficiently. The solutions used were oftentimes not designed for a rapidly changing technological landscape.
  • Traditional operating model: Far from the agility of neobanks, complex and strict multi-step decision-making processes and a risk-averse attitude towards radical changes have steered them towards slower, incremental, although safer innovations.
  • Higher costs: Maintaining branches, operating large legacy back-end systems, having long and costly decision-making mechanisms, needing a higher level of regulatory compliance among other things are the reason why incumbents have higher costs per customer, so they are unable to go below a certain price level.

And why does this pose a problem? Because of changing consumer attitudes. Banking services are no longer limited to traditional financial players. As technology has become an ever-growing part of our lives, it has changed people’s attitudes and expectations in many areas. For the sector, this means that the mindset of clients has changed with regard to who has the legitimacy to provide financial services. Banks have lost this privilege, one that was exclusively theirs in the past.

The changes that are affecting investment service providers is quite similar to the picture painted for the entire financial sector. Traditional wealth and asset managers also depend on outdated core systems and face high compliance costs due to strict standards and regulations, increasingly sophisticated customer needs, rapidly changing technological innovations, and pressure to reduce transaction costs. However, these players face additional challenges unique to their segment that are worth paying attention to.

First off, HNWI clients are not satisfied in many areas with the services currently provided for them by their traditional WMs, based on a 2020 global report by Capgemini. The report indicates that these customers would like to have, among other things:

  • A digital interface with interactive reports,
  • An interactive and playful portfolio management flow; a visualised presentation of different investment scenarios,

and what they are most dissatisfied with are the lack of:

  • Personalized notifications about new products / services,
  • Market information for educational purposes, and
  • Added value through services.

In addition to services, 33% of HNWIs are dissatisfied with their WM’s fees, in fact high fees are the top reason for a customer to consider changing providers, as stated by 42% of HNWIs asked by Capgemini.

Artificial Intelligence, Machine Learning and other value-adding technologies not only can increase the overall quality of service but can also cut costs considerably in the long run by increasing efficiency and automation. As we mentioned, HNWI’s are growingly uncomfortable with wealth management fees, which also pushes wealth managers towards digitalisation.

When we take a look at the already ongoing transformation of traditional players in the field of investment services, a few directions seem to be coalescing:

  • Digital self-directed platforms with cost-effective and automated solutions,
  • Improving the quality of the advisory process with digital tools, facilitating the work of advisors,
  • Digital support for active communication and interactions between advisor and client,
  • Online implementation of advisory consultation,
  • Paperless and remote processes on all service levels,

and specifically regarding HNW and UNHW individuals:

  • Transparency by showing the value and composition of the client’s portfolio online through interactive statements, both on mobile and web client platforms.

Of course, we cannot forget that, in addition to cost-side pressure and customer expectations, investment and wealth managers have to face neobanks looking to grab a piece of the market.  If traditional players fall behind in their quest for reform, they will certainly lose the part of their customer base that is open to innovation. Over time, this can mean losing a significant number of customers, leading to a reduction in revenue, which ultimately will also increase the costs of retaining their remaining customer base.

Fortunately, the market tells us that traditional players are opening up more and more towards major innovations, so we just have to wait and see how they square up against their digital challengers. With the last part of this blog series, we hope to have shed some light on what motivators incumbents of today’s financial services sector build upon and what difficulties they face in doing so.

Sources:

https://www.finextra.com/newsarticle/34445/incumbents-vs-neobanks-leverage-new-technology-or-risk-crumbling

https://www.fintechmagazine.com/financial-services-finserv/innovating-locally-global-impact-fintech

https://www.ey.com/en_gl/banking-capital-markets/why-banks-can-t-delay-upgrading-core-legacy-banking-platforms

https://www.accenture.com/_acnmedia/PDF-115/Accenture-Journey-To-Platform-Economy.pdf

https://www.capgemini.com/news/research-world-wealth-report-2020/

https://www.accenture.com/_acnmedia/PDF-147/Accenture-Consumer-Study-Banking-ASG.pdf

https://www.finextra.com/blogposting/18751/are-banks-that-run-on-legacy-systems-able-to-compete-with-their-digital-counterparts

https://voxeu.org/article/bank-business-model-post-covid-19-world

https://www.paysafe.com/en/blog/neobanks-vs-traditional-banks-who-has-the-advantage/

https://www2.deloitte.com/content/dam/Deloitte/au/Documents/financial-services/deloitte-au-fsi-retail-banking-in-the-age-of-covid-19.pdf

https://www.paconsulting.com/insights/what-are-neobanks-and-how-are-they-changing-financial-services/

https://fincog.nl/blog/24/four-things-incumbents-can-learn-from-neobanks

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