The future of finance
It’s beyond cliché for a Strategist to use a chess analogy so I’ve opted for poker instead. Having an effective strategy is often about anticipating what’s likely to happen and plotting a course of action that will achieve success whilst the context continually changes.
Like poker, if you have the right strategy, your opponent’s moves have often been anticipated and sometimes fit neatly into your plan – it’s almost reassuring when they do. If you don’t, then you’re probably reacting in a knee-jerk way to what your competitors are doing and it feels like the control rests with them.
So let’s consider what might happen in banking and finance tech over the next few years, whilst keeping in mind that it’s really easy to make predictions but you’re highly unlikely to get them right. As Evan Esar said "An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today. "
Open Banking and PSD2
In summary, Open Banking and PSD2 mean that should you want to, you’ll soon be able to share financial information like your balance and transactions with regulated third party sites and apps and also use these third parties to make online payments straight from your current account.
If you want to know more, Equator’s Director of Innovation wrote a great piece on open banking here.
The result of this is that there’s going to be a fair bit of pressure on banks over the next few years because up until recently, they were the only commercial organisations who had access to that data. Now that customers can share it with other companies should they want to, there’s likely to be a raft of new and existing companies looking to address any unmet customer needs.
Aggregators and the supermarkets of finance
In anticipation of these changes, a lot of businesses are already attempting to bring all your accounts and finances into one place – this is called account aggregation. For example, the likes of Money Dashboard, Cleo, OnTrees (owned by MoneySuperMarket) and HSBC/FirstDirect.
This could make a lot of sense as people often have a current and savings account with one bank, a mortgage with someone else, a pension with another provider and sometimes a credit card elsewhere too. If you could manage all of it from one place, it could be significantly easier in the same way that supermarkets are more convenient than a separate baker, butcher and grocer.
But it’s also an absolute goldmine for whoever you entrust with your data because they’ll have a full picture of all your finances. This is why account aggregation is of so much interest to a comparison site like MoneySuperMarket (who bought OnTrees back in 2014 and MoneySavingExpert in 2012) as they’ll be able to see what services you use and how much you’re paying for them. That allows them to make recommendations for alternatives and take a commission should you switch. As a customer, you can potentially benefit from those recommendations.
As Finance & Technology Research Centre director Ian McKenna said at the time: “Such services are likely to be the cornerstone of next-generation advice propositions as they make it easy to build a detailed picture of a consumer’s finances. Most UK financial institutions have yet to grasp the potential of these services. This move by MoneySuperMarket means they may learn the hard way.”)
AI and financial assistants
Managing all your finances on one platform and getting relevant recommendations for utilities and finance products is all well and good but the real benefit to a customer will happen when a company solves a much larger problem – automated and pre-emptive independent financial advice.
That’s no mean feat as doing it properly requires having data from across the whole marketplace, all of an individual’s financial data, the processing capabilities to provide the correct advice on a one-to-one basis and the ability to stay on the right side of some very complex regulations.
In short, it’s might require AI and the technical capabilities of a larger player like Google, Amazon or a smaller organisation who are right on the cutting edge and likely to be bought out eventually anyway. Alternatively, it could be a big, innovative and tech-focused bank.
If the companies that do this play their cards right, then the benefits are huge as they could become the middle-man in almost all financial transactions and the customers main or only financial relationship.
From a customer’s point of view, this means that my finances are essentially looked after for me by a digital personal assistant (think Google Assistant or Alexa but quite a few versions later) who can compare the entire market and shift my money around wherever it’s going to work best for me.
Assistant: “Ian, due to some recent changes in the market, if I switch your mortgage from [traditional bank] to [plucky challenger] I can save you £90 a month. I also reviewed your pension funds and would recommend switching 15% of your pension from [Fund A] to [Fund B]. In total, I estimate these two changes could provide you with an extra £3,160 across the next two years. Are you happy for me to proceed?”
Assistant: “Great, I’ll start processing that for you now.”
You get the gist.
Changes in the market and what to consider
Although, if this does start to happen, there might not be many providers in this new marketplace that need to be compared. A concentration of providers occurs naturally as those with the highest numbers of customers typically have the most funds to work with and therefore can reduce their rates in order to attract even more customers. Once the relationship with all my providers is managed through one app or assistant – their branding and service become less and less relevant and the rate more so.
So, in summary – if I were a betting man (which I’m not), my money would be on the following scenarios playing out:
- We know Amazon are already looking at banking and some of the larger tech companies will also have decided that there’s even more money to be made in finance than there is in advertising (Google, Facebook) and many other services (Tencent) along with the many startups already in this space
- They expand their assistants further into finance, initially with account aggregation and market comparison then into advice
- They consider that since they now hold the key customer relationship, their trust and the necessary capital, it might be easier if they ran the bank too
Where does this leave financial service providers in the UK?
Well, it will be increasingly important to:
- Use technology to create value as efficiently as possible because rates could become even more important over the next few years
- Thoroughly research and analyse everything that’s going on within these spaces (and not just the usual competitors either) so that there are as few surprises as possible
- Be ready to compete with tech companies in the areas where they are stronger and really clear about what you have and do better than them
- Bring together the personnel, partners, budget, tools and processes to innovate and explore unmet customer needs before someone else does. For example, if you’re the only ones holding your customers financial data at the moment – how can you better use it to add value to them?
- Be willing to open up through APIs etc. as those that don’t risk getting moved to one side but also wary and incredibly well-informed regarding the long-term consequences of doing so
- Have a long-term strategy in place that considers all these different elements and plots a suitable yet flexible course of action
Going back to the poker analogy for a second, the banks and providers that fail to do this might find their chips slowly declining outwith their control whereas the ones that do it really well will stay in the game much longer.
It’s also vital to try and assess what the other companies are thinking. Keep an eye on any organisation joining the table who you weren’t expecting – they might be a card shark who knows something you don’t and doesn’t necessarily play by the same rules as the rest of you.
Lastly, like business, you can’t always control the hand you’re dealt but it’s important to play your cards right.