Turning threat into opportunity: how asset and wealth managers must embrace FinTech
16 March 2016
The stakes are high for asset and wealth management businesses: our new research suggests that financial services is ripe for disruption from agile and innovative new FinTech companies, and that firms in this sector of the industry are especially vulnerable. Equally, FinTech represents a tremendous opportunity – established players that are able to harness innovation, often by working with FinTechs, have much to gain.
Financial services companies believe almost a quarter (23%) of their business could be at risk from FinTech firms over the next five years, warns our research, though the new entrants themselves expect to take as much as a third (33%). The report, Blurred Lines: How FinTech is shaping Financial Services, suggests pressure on margins, cited by 67% of survey respondents, is the biggest fear for established financial services companies as they contemplate the threat posed by FinTechs; while 59% point to loss of market share as a major concern.
In other words, the report suggests not only that many companies face losing significant chunks of business to FinTech competitors that are just emerging, but also that the business they do retain will be less profitable.
However, the impact of these trends will not be felt uniformly across financial services – and asset and wealth managers are right in the firing line. Established businesses in the sector see 22% of their market as vulnerable to FinTechs, behind only fund transfer and payment companies (28%), and banks (24%).
Indeed, asset and wealth management is seen as the third most likely sector of the financial services industry to suffer major disruption over the next five years, behind those same two peer groups. Close to 40% of survey participants picked it out.
Still, these are relatively early days - FinTechs are only just beginning to gain traction in incumbents’ markets. While just over half (51%) of the asset and wealth management companies in our research see their own sector of the financial services industry as the most likely to be disrupted over the next five years – fewer than one in three (31%) of respondents from other sectors picked it out. Beyond asset and wealth management, that suggests, the threats posed by FinTechs to the sector are not yet widely understood.
Nevertheless, the danger is very real – and it spans a number of different areas areas, as the emergence of ‘robo-advice’ technologies threatens to undermine both execution-only investment providers and traditional financial advisers. New technologies that give greater power to self-directed investors – for example, by reducing the asymmetry of information between professionals and non-professions – could disintermediate established players. Mobile channels are becoming more important.
In the back office, meanwhile, blockchain technology has the potential to transform the settlements process, delivering huge cost savings to businesses able to incorporate it. Advances in robotic processing offer further efficiency gains. Data analytics provides a means to build much stronger relationships with customers that have previously shown little brand loyalty or engagement in this sector of financial services.
Established asset and wealth management companies aren’t yet certain what to make of these developments or how to exploit them. To take just one example, more than a quarter of the asset managers (27%) in our survey are not at all familiar with blockchain. Across financial services as a whole, while 56% of companies recognise the importance of such technologies, 57% are either unlikely to respond or unsure about how to do so.
Against this uncertain backdrop, how do asset and wealth management businesses respond? Above all, they must recognise that while FinTech poses a huge threat, it also brings valuable opportunities. Those firms that are able to harness the innovative new technologies, incorporating break-through ideas into their own business models, will be able to build powerful new connections to their customers – both existing and new – while simultaneously driving costs down.
Doing so will not be easy. Asset and wealth managers have traditionally found innovation very difficult – in a highly regulated marketplace, where the incumbents are typically large and hierarchical organisations, the pace of change has tended to be slow. Robo-advice, for example, presents an opportunity to tap a huge new market of underserved investors, who may subsequently become valuable lifetime customers looking for a broader range of services, yet the demands of regulatory compliance have unnerved many traditional businesses.
In practice, the partnership approach represents the sector’s best option – just as it does for other financial services business. Overall, 32% of survey respondents are already involved in a collaboration with a FinTech company.
Not that such partnerships are without difficulty. Established financial services companies worry about how they will manage issues such as IT security, cultural clashes and regulatory problems as they pursue new collaborations. One in four companies across financial services currently has no interaction with the FinTech sector at all.
Asset and wealth managers have much to lose if they fail to confront the risks posed by new technologies. Yet with the right partnerships, harnessing exciting new innovation, FinTech can be transformative for the sector, boosting brand value, engagement and trust, as well as revenues – this is an opportunity that is too valuable to ignore.