Imagine seeing a person using a Typewriter or a Floppy disk these days. Millennials aren’t even going to recognize them. Shocking, isn’t it? Such is the rate at which things are becoming obsolete in this digital era. Technological innovation, along with changing customer preference, is enough to change the landscape of any industry.
The Asset Management Industry is going through the same phase of volatility. Challenges, now, are not only restricted to regulatory or business related anymore. Apart from the shrinking fee margins, every day the incumbents are faced with tough situations; and with the advent of technology, the asset management world is changing considerably. These challenges, gnawing on the industry, can be categorized into three buckets –
- Technological Innovation: Technology is disrupting the industry at all the levels of the value chain from back-end processes to the customer-facing interfaces. Newly mushroomed FinTechs are providing a superior customer experience through lean operations and their nimble structure. The sudden change has put margin pressure on the incumbents and has forced them to rethink their business models now.
- Governance: After the financial crisis of 2008-09, the regulators, across the globe, have become extremely sensitive. Country-specific regulations are putting pressure on the companies, while upcoming regulations such as BASEL-IV are going to tighten the noose further. Recently, GDPR mandated the organizations to change the way they collect and use customer’s data. These changes require the organizations to reinvent their legal and risk & compliance systems.
- Changing consumer preferences: Rising income and changing demographics have led to an emergence of a new customer segment. This segment is young and dynamic and is not afraid to shop around before settling for anything. These consumers demand superior customer experience and a seamless process to enable them to invest on their own if they want.
The challenges have presented an opportunity to innovate, as well as to disrupt the industry. The core areas for focus would be – New/Differentiated Products; Technology innovation; Customer experience; Risk Management.
These areas have led to a flood of FinTechs, which are trying to solve customer problems with an entirely new perspective with technology as the focal point, and few market leaders adapting to the change.
FinTechs changing the landscape:
- WeathTechs – FinTechs that create digital solutions to transform the wealth management industry. Motif, Wealthfront, Betterment, India-based Scripbox are few of the examples of WealthTechs.
- RegTechs – Companies that address regulatory challenges in the financial services industry through innovative technology solutions. Truiloo, Tradle, Elliptic, FundApps, and Alyne are few of the examples under this category.
- PayTechs – FinTechs that bring innovative technology solutions to the payment domain. Few of the start-ups in this category are Venmo, India-based Paytm, Fino PayTech, Earthport, and Inpay.
Growing trends in the industry
- Robo-Advisory: Considered as a disruption in the industry, Robo-Advisory uses abundant data available to the companies and suggest products based on investor’s attributes. Fintechs, as well as traditional asset management companies, are increasingly adopting robo-advisory within their ecosystem. For instance, Charles Schwab, an investment service company based in California, proactively took up the challenge and built a robo-adviser within the company. The model became an immediate success and is providing approx. 27% return on a 2-year basis.
- Exponential growth in Data & Analytics: Companies have started capturing customer’s footprints at all the points – digital or a physical medium. A pile of unstructured data, collated from the above process, is facilitating the growth of Advanced Analytics, including machine learning platforms to mine the enormous data, predictive analytics to understand and target the customer, and visualization engines to create an intuitive display of information. Based on the data gathered from different platforms, companies can collate the risk profile, income level, life stage of the customer and can offer personalized portfolios and services. For instance, BNY Mellon, a New York-based banking and financial services company, launched OpportunityView solution (an Analytics tool) to help advisors and brokers to increase returns for their clients.
- Automating the distribution channels: The distribution channels are not homogenous across the countries. For instance – the distribution process in the Asia Pacific is extremely inconsistent. In Scandinavian & Swiss markets, banks are the distributors while in the UK, Netherlands, and Germany, platforms or Independent Financial Advisors are the distributors. Companies are coming up with innovative automation solutions to bring uniformity and to make their platforms sticky for these advisors/distributors. For instance, DSP Blackrock, an asset management firm, launched a business platform called IFAXpress for its distributors to grow, monitor, and manage their business by providing a seamless experience to the customers.
- Alternate Payment systems: The major impediment faced by the end-customers were limited methods of payment. Companies, as well as governments, are acting as facilitators to ease the pain point. Payment solutions by one of the leading Payment service providers in Europe and Unified Payment Interface by Indian Government in India are few such examples.
- Blockchain to reduce costs, execution time and to address security-related risks: Big sharks in the market have already started investing in technology, for example, blockchain-based KYC. For instance, Fidelity, a financial services company based in Boston, has joined blockchain group IC3 to support various blockchain initiatives in the financial industry. Many organizations have started providing Blockchain-as-a-Service (BaaS) to ease off the process for financial services companies.
- Migration towards SaaS applications & Cloud Computing: Cloud providers such as AWS & Microsoft Azure have lowered the overall cost of adoption. Though the adoption is relatively slow in the financial services industry due to data security concerns, organizations have started adopting a mixed model.
- Robotic process Automation: Organizations are reaping the benefits of RPA in middle and back-office functions. Increased operational efficiency, quick Turn-Around Time (TAT), and enhanced customer experience have proved to be a game changer.
Technology is an enabler in the asset management industry. It will help existing companies to grow and new entrants to differentiate. The new entrants have forced the incumbents to rethink their business model, at all the levels of the value chain. Collaboration & Cooperation will be the way forward in this digital era.
In the current landscape, there are no hopes for the laggards. They might just become the floppy disks of the past. Darwin’s theory of evolution portrays the picture perfectly; the ones who adopt the change would survive, and the others who don’t would perish.