Looking at my order records the first book I bought on Amazon was in 1999. It was a book about Laos, probably of interest as my yet-to-be-wife and I had just returned from backpacking in the region. Back then, I was a coding web apps at a London bank. We were living through the dot com boom and every day new startups were making headlines. Exciting times.
Those earlier internet pioneers were of course radically changing the face of retail. Amazon were already well on their way having IPO’d two years previously. My 20-something self would have loved to have been able to buy a piece of the company that seemed so revolutionary by allowing you to buy books from your sofa.
According to this Investopedia article, if you had invested $100 in Amazon at their IPO that same $100 investment would have been worth around $120,000 at the Aug 2018 price of over $2k (it has dropped back slightly since). A gain of 120,000% is not bad at all!
Of course, this is an extreme example. Nevertheless looking at the broader market from a historical perspective, the average annual returns of the S&P500 since its origins over 90 years ago stand at around 9% (7% when adjusted for inflation). Investing over the long-term is widely acknowledged to make sense.
But 20 years ago, in my case, investing seemed to be way out of reach. It was something for the old, the wealthy, people who could afford brokers, or personal advisors. Not something for (at that time) young, everyday people with limited spare cash.
Democratization of investing
Fast-forward to the present and things have finally changed. The ability for anyone to invest small amounts into stocks and funds easily and at very low cost is now a reality. It is as easy as buying a book on Amazon.
New digital platforms combined with the rise of passive investment products have made investing cheap, easy, and globally accessible. Index tracking ETFs are increasingly popular as a means of gaining access to markets without having to pay a pricy portfolio manager or do one’s own research. The price war amongst the big asset managers such as Vanguard and Blackrock has driven costs down to historic lows. Many ETF’s now have expense ratios < 0.1%, meaning investing in such products is practically free. In fact, the first ever negative cost ETF was announced recently where they will actually pay you to invest!
We have seen Robo-advisors emerge across the globe as the vehicles that provide convenient digitally-wrapped accessibility to these low-cost products.
On the other hand, those with an eye and a taste for their making own choices can now sign-up to digital brokers in seconds to buy into pieces of their favorite companies or ETFs at very low cost or in some cases commission-free. RobinHood and DriveWealth in the US, and Degiro in Europe are examples. Fractional trading means you don’t need to find $1800 to buy 1 single Amazon share. On such platforms Retail investors can buy small pieces cheaply, and do it regularly to limit exposure to market volatility.
There are now many B2C FinTechs globally offering these capabilities and although growth for some has been impressive, the market for robo-advisors already feels saturated. Offers increasingly need to differentiate themselves to try to attract customers. The low product costs means it is a low margin business that needs volume. Brand awareness issues and high client acquisition costs means many are doomed to fail. The digitally-savvy early adopters that have joined these platforms are fickle and move easily to cheaper options.
The growth struggle for some is arguably due to trust, education, and inertia from the masses. It seems unlikely the majority of people would want to put their life savings into youthful fintech robo’s. In fact, (strange as it might seem to those of us who live and breathe Fin Tech), many people are simply not that interested and unlikely to seek out such platforms off their own backs.
So what next?
Banks joining the party
To be fair banks have long provided some investing options such as custody accounts and mutual fund plans. But these tend to be relatively expensive, have limited servicing, and remain esoteric and distant options for many.
Some are now just getting going with robo-advisors and we see offers appearing across the world. HSBC, Openbank, OCBC, DBS, and JPMorgan to name a few. We’ve also seen some instances of banks launching standalone offers now pulling back such as SmartWealth from UBS or Prospery from ABN. The drawback of going up against the B2C FinTechs with standalone offers means generating friction by separate onboarding of clients and compromising client experience in terms of lack of seamless integration to other banking services.
Towards mass adoption
The big advantage banks have is, of course, their established customer base and the public trust. It is once automated investing products are seamlessly embedded as part of banks digital banking platforms that mass adoption by retail customers could come. For such segments banks are perfectly placed with their large client bases and rich data to target new integrated investing offers and so open up new revenue streams as well as better accompany their clients through their different life stages.
The key is in full integration and slick engagement. Removing the need for the client to know up-front that an investment might be a good idea and having to choosing that option from a dull menu filled with bewildering product names. Cutting out separate onboarding, figuring out which offer is right for them, and manually setting up their transfers. But instead, having a digital banking platform that can tailor itself to the clients’ needs, helping to overcome the indifference, or simply ignorance about investing products.
By making proactive proposals about the products on offer, guiding the client through necessary risk profiling, and filling in any gaps on their financial situation and goals, the bank might then propose and open integrated investment products in a few clicks. By allowing the user to easily set up their standing orders into the investment account, and providing a holistic view of their assets within their digital banking across all their banking and investing products. Expanding services to be an integrated part of the customers’ life for example, by offering spending round-ups towards investment goals as well as savings.
In this way, the future is about using modern digital banking front-office platforms to offer holistic, seamless, financial advice for the masses. Providing advice on the best way to look after their money and best-fit products for their individual circumstances. For example, savings accounts for short-term goals, term-deposits for more security, or ETFs for longer term investment. And as we move further towards Banking-as-a-Platform adding third-party products into the mix.
At least whilst we wait for this future to arrive other options are already there. Today everyone, no matter how big or small, has the possibility to start his or her investing journey and buy a piece of the next Amazon.
Jeremy Boot is Senior Product Manager for Digital Wealth at Temenos