2014 was an exciting year for payments, and digital solutions played an important role in rewriting the rules of product design and customer engagement. Did anyone have a better September than Jack Ma, CEO and founder of Alibaba, whose business is largely online powered via its digital payments subsidiary, Alipay? Probably not! Long-awaited by many in the industry, Apple officially entered into payments, Starbucks continued to gain customer traction on its payments app, and Uber officially became a verb in discussions centered on payments and commerce. Thousands of startup founders were collectively able to raise c.$1B from investors in 2014.
Banks had an eventful year with digital becoming front-and-center in most planning and product decisions. Most banks adjusted their digital wallet strategies, forged new partnerships, acknowledged the role of digital in risk and compliance management, and desired products that employed a Uber-like experience. One bank CEO, for instance, said “… the industry is in the midst of a transition that occurs once every 100 years."
While most of banks’ digital efforts have focused on retail applications, such as for lending, cards, loans and mortgage products, but 2015 will be the year when digital applications will gradually expand to other areas of bank businesses, such as Wealth, Investment, and Asset Management. Failing to ignore the ramifications of digital on these areas and lack of planning will negatively impact market share, and subsequent effects will become evident in a few years’ time – arguably when non-traditional competitors will have usurped the bank’s existing business.
A seismic shift in the way wealth and asset management customers, i.e. wealthy individuals and small corporations, are interacting with financial service providers and its implications for banks, are as follows:
- The advisory model is moving “digital.” Traditional advisory model is being commoditized by digital services. Sophisticated investment products and instruments are now being recommended via digital advisors – the so called robot advisors. Cloud-based trading is on the rise. The role of human advisors is being limited to providing “personal service” to most valuable clients, such as instantly accessing client risk and investment profiles to provide recommendations for investments.
- New regulations are demanding fixed fee-based commissions, with trends toward low-fees. Fees and commissions are trending down to as much as 0.25 percent – 0.5 percent, compared to an average of 1 percent – 1.5 percent in the past.
- Wealth management is moving down the market. Wealthy individuals now constitute a larger pool of individuals including those with as low as $250K to manage in assets. This compares to an average of +$2M in assets to manage today.
As the 2015 annual strategic process kicks off, banks should consider an overall “digital-first” approach to platforms, products and services. Digital-led solutions can play an important role in addressing emerging trends in wealth and asset management, while positioning banks to maximize use of assets across the different businesses to drive cost efficiencies and boost operational agility.
For instance, as the advisory model becomes digital and cloud-based trading picks up, banks can design and use the same cloud and data management platforms to enable advisory services as they do other digital services, such as payments, loyalty, tokens, biometrics, etc. Use of digital building-blocks will help control costs and make up the difference in reduced profits realized from the new “low-fee” based commissions. Strengthening digital capabilities will help attract the growing and digitally-savvy high-net worth individuals, many of whom make banking decisions much the same way as they do for books, music and other products.
Designing a digital bank is a multi-step journey. Digital solutions and new business models are gaining momentum and forever changing the operational playbook of banks. Taking action ‘now’ and designing an overall “digital strategy” is key for banks to take advantage and reposition itself for a new era of competition and growth.