Unless they adjust their business models or collaborate on change, asset managers may find it difficult to thrive in a digital environment, experts told a London forum hosted by technology company Calastone.
At the stroke of midnight on New Year’s Eve 1999, the so-called Y2K bug failed to cause the catastrophic damage that many had feared. Global computer networks didn’t freeze, aeroplanes weren’t grounded and civilisation survived. But look around today and you will see a different kind of millennium bug engulfing the planet.
We speak of the millennial consumer, someone inhabiting a digital society, living in a gig economy and at the same time creating their own on-demand economy. They are willing to share personal data through online transactions and interactions, but in return they expect a quick service through a simple app and not a single tree cut down in the process. They are at one with nature and at one with technology.
Financial services and especially asset managers are famously struggling with these consumers.
“Not worth it and don’t have any money,” some of them say.
Well, consider this. There are 2 billion millennials on the planet and those in the US are due to inherit $30 trillion from their parents, according to Philip Clarke, founder of Hunch.
Clarke, whose firm is an innovation consultancy, was speaking at the April Calastone Connect Forum in London in which Funds Europe participated.
Remember this too: when we talk about millennials, we are not just talking about the millennial consumer. There is also the millennial entrepreneur – someone who is making everything in life happen for his or her peers and making it happen faster and better than older companies that cannot adapt.
The financial services businesses that millennials talk about are Acorns, Nutmeg and Moneybox, said Clarke, referring broadly to the new breed of low-cost, tech-driven money managers.
Calastone, which runs a funds transaction network, hosts its tech-focused forum each year. This year, attendees from the asset management community were given a vision of where the industry needs to head if it is to harness digital and stay relevant to all consumers, not just millennials.
Nigel Walsh, a partner in Deloitte’s technology practice, highlighted America’s Hartford Steam Boiler (HSB), which traditionally provides insurance for machinery, but which has since used data to become a “pro-active service agent”.
He said: “Hartford Steam Boiler bought a bunch of IoT [Internet of Things] companies and went from being a company that sat waiting for claims and sending out engineers to being a preventative maintenance company.”
The point is that the firm harnessed tech and data, enabling it to move from a reactive to a pre-emptive business model. “It’s almost as though you are not buying insurance, but buying a warranty that has insurance as a buy-product,” added Walsh.
On a journey
HSB, which is now owned by Munich Re, is hardly a millennial company. It was founded in 1866. The point, though, is not that it created technology (the tech and data are readily available) but that it has simplified the lives of its customers. It gives them a better experience, or ‘journey’, to use the millennial vernacular. Companies that become ‘pro-active service agents’ like HSB go beyond tech and data to make life easier for customers.
“’You left your windows open – shall we shut them?’” Walsh said, invoking the robo-message of home management apps. Similarly: “’Your blood sugar is a little bit low. We’ll make an appointment at the doctors for you.’”
He added: “It may seem a little strange and too much, but actually, if it makes my life more convenient and we get more joy out of it at the end of the day, then why wouldn’t we do it?”
Could incumbent asset managers emulate the likes of HSB to become more convenient in people’s lives? This is a big question in the industry, with no straightforward answer.
Pete Townsend, chief executive at asset management and fintech consultancy Norio Ventures, said: “Customers are increasingly leading complex lives and [financial service providers] sell them products that were built 40 years ago: the credit card, the personal account, the savings account, the pension, the mortgage.
“These things don’t join up at all … those silos don’t serve the interests of the modern customer.”
Business models and collaboration
So there is a snapshot of the vision and the potential. But still, what about the solution for asset managers?
It may be useful to think about it less from the tech perspective and more from the standpoint of how business models must change.
“There are technologies that are enabling change [but] it is business models that disrupt rather than technologies that disrupt,” said Townsend. “People vote with their feet. Airbnb are disrupting the hotel industry, not because they built a better hotel – it’s because they made the experience better and are connecting with their customers.”
Something else is needed, too. Perhaps the strongest message to come out of the forum was the need for industry collaboration in order to create tech-related efficiencies, not just in digital fund distribution for millennials, but the wider tech processes that underline distribution for all customers.
An example is the management of investors’ fund subscriptions. This is hardly a fluid activity, and traditionally the remit of transfer agents (TAs) and fund administrators.
Toby Glaysher, head of global fund services international at Northern Trust, spoke of the need for more innovation here, as there is too much form-filling and document-showing at the moment. No consumer likes this – indeed, millennials detest it. Presumably not many TAs care for it either.
The area is ripe for disruption, said Glaysher, but added: “This won’t happen unless the TAs and fund administrators get themselves in order.”
Yet the opportunity for asset managers to harness technology has been there for years, said Nick Wright, chief executive of fund solutions at specialised technology supplier DST.
So why hasn’t the industry cracked the technology problem? “It’s not because we are a bunch of idiots that can’t do it!” he said.
Again, he pointed towards collaboration. Much of the failure surrounding automation and STP was down to a shortage of standardisation and interoperability, he said.
Glaysher added that Swift, the interbank messaging protocol, was a success both for standardisation and industry cooperation, as it involved commercial banks and asset servicers working together.
However, he lamented the fact that the funds industry had been unable to achieve ‘digital passports’, an initiative designed to make fund subscriptions and redemptions paperless and quick.
A lack of appetite for working together makes Glaysher doubt that blockchain – seen as revolutionary for the TA sector - will have a part to play in the funds industry any time soon.
Campbell Brierley, Calastone’s chief innovation officer, said blockchain - also known as distributed ledger technology (DLT) - could revolutionise funds. “DLT does give an opportunity to go to the board and say we’re going to make it cheaper, better, faster ... we can make that customer experience much better and cheaper.”
Although front-end technology which in banking is used to heighten customer experience “was not there yet” in the funds industry, Calastone’s “mantra” was to enhance the whole value chain “so that when that volume hits, we don’t all faint”, said Brierley.
Katrina Sartorius, managing director of institutional business at Aegon, could point to an example of successful collaboration over standardisation and automation. About 90% of order routing now goes through STP protocols rather than fax machines.
“How did that come about? It was because different people who were competitors got together and said, ‘This needs to work more efficiently,’” she said. It was achieved because “competitors invested together”.
Sartorius highlighted blockchain’s potential for making investing less frictionless and cited the involvement of Luxembourg’s financial regulator, the CSSF, in leading industry collaboration among the country’s huge TA sector.
Luxembourg has a large economic interest, given that TA firms have large operations there.
Asset managers everywhere have an interest in blockchain, too, if it can lead to more frictionless transactions. After all, those millennials and their trillions will not wait around.
Pictured - Edward Glyn, Head of Global Client Relationship Management at Calastone
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