With financial technology, or ‘fintech’, banks, insurers and investment managers will not become superfluous. They will however be forced to make a strategic decision to invest in new technology to maintain their customer relationships. This is the view of Patrick Lemmens and Jeroen van Oerle of Robeco New World Financial Equities.
“Apple, Google and Amazon will never become full-service banks. This would force them to comply with strict legislation and regulation that they do not want. But it is clear that tech companies will offer more simple financial services. And that the banks will increasingly use digital technology for their products. Financial technology or fintech will not be so disruptive that the banks have had their day. But the financial sector will be significantly changed as a result of fintech and will look very different in ten years’ time. There will be a clear distinction between the winners and the losers.”
Patrick Lemmens (portfolio manager) and Jeroen van Oerle (trend researcher) are keen to bring some differentiation with respect to the consequences currently being ascribed to fintech. For their investment fund Robeco New World Financial Equities, they translate the trend to digitalization into investment opportunities. They invest for instance in companies offering financial products and services based on digital technology or supply these technologies to financial institutions.
The provision of digital services in the financial sector is changing rapidly. Payments, borrowing, automated financial advice (robotic advice), looking for investors (crowd funding) and investing through the Internet or apps on mobile phones or tablets. It comes down to this: financial affairs will become simpler, faster and cheaper for consumers. The media is full of innovative start-ups with new services that apparently will make traditional, slow-moving and expensive banks, insurers and investment managers ‘superfluous’. Quite commonly, one encounters the term 'disruptive', suggesting that the financial sector will be disrupted by the application of digital technology. Intermediary links will be removed.
Lemmens and Van Oerle do not think that it will go that far. “We think it is more likely that banks, insurers and investment managers will work together with fintech companies to make their operations more efficient and more customer-friendly.”
For the financial sector, it is important to distinguish between 'digitization' and 'digitalization',” says Van Oerle. "Digitization means the recording of data, which started with the conversion of analogue information into digital files. Digitalization refers to the use of digital technologies to use these data for business processes, for customer relationships and for new services."
"Banks, insurers and investment managers are leading the organization and use of data, but are lagging behind when it comes to the application of digital technologies in their customer interaction,” concludes Van Oerle. "This is giving all kinds of start-ups an opportunity to get in between the traditional financial institutions and their customers. They are using innovative technologies for services and thereby making convenient use of data files and the existing networks that were built by the traditional institutions. It’s about control of the customer relationship."
But there are also opportunities for traditional financials, in Van Oerle’s opinion. They still have the customer data and the technology for exploiting this is generally available. “Banks, insurers and investment managers will have to make a strategic decision to move from investing in new technology in order to offer new services to investing in customer satisfaction. Or, they can decide to lose the relationship with the customer and become a provider of an efficient infrastructure for newcomers from the technology sector. Implementing new technology is expensive. Financial institutions focusing only on cutting costs are having difficulty in taking this crucial strategic decision.”
‘Investment managers and financial advisers need to invest heavily in technology’
Digitalization means thinking like a customer. Consumers are looking for a solution for their financial issue and they do not care who provides that solution, says the trend researcher. Van Oerle cites automated financial advice or robo-advice as an example of how technology offers new possibilities for interaction with customers. Low-wealth individuals, customers that banks and investment managers never used to consider to be interesting, will now become a new market. Technology offers the possibility of servicing these customers at low cost and in large volumes.
Technology companies are getting in between the bank or investment manager and its customers and offering financial advice through digital applications. For example, by offering them online questionnaires to complete and linking the profile thus created to automated investment funds like index trackers or ETFs provided by the investment manager.
"There is real danger that the customer relationship will be lost,” says van Oerle. "Investment managers and financial advisers will thus have to invest heavily in technology and enter into strategic cooperations with technology providers. The big difference between the technology trend and other trends is that it is now possible for non-traditional players to enter the financial market. Robot advisers were created by tech companies and not by investment managers, and have come into use as a result of strategic alliances with financial institutions."
Fintech is not always investable for fund manager Lemmens, since many companies are still at the venture capital stage and do not have a market listing. “Fintech is a broad term. There are investment opportunities in areas such as payments, electronic trading platforms and specialist software for the financial sector,” he explains. “For Robeco New World Financials we invest in companies such as Visa and Mastercard, and Vantive and Paysafe for electronic payments. We play the trend of digital investment advice with trading platform Charles Schwab. Banks and insurers need to invest heavily in IT to keep up and win the battle with the fintech start-ups. We have Temenos, DH Corp and Cognizant in our portfolio, which supply software specifically developed for financial institutions.”
It is not possible to separate the fintech winners from the losers at this stage, say Lemmens and Van Oerle. The disruptive effects are not yet sufficiently visible to do this. There will however be what one could call a Robin Hood effect in the financial sector such as has already happened in disrupted businesses like music, taxi services (Uber) and hotels (Airbnb). The use of data and technology leads to greater transparency, which benefits consumers.
Also have a look at the mutual funds Robeco Global Consumer Trend Equities which invests in the digital consumer, the emerging consumer and strong brands, Robeco New World Financial Equities which invests in 'digital finance' or ‘fintech’ and Rolinco an fund which more general invests in structural trends.