Author: James Painter, CEO
Last October, Jersey held its first fintech conference which was a fantastic opportunity for all of us working in financial services to discuss how technology is impacting and steering the direction of our industry. I was also grateful for the chance to offer my own insights at the conference about the way fintech is changing the profitability of financial services, and as we go into 2016, I would like to share my reflections on the continued role fintech will play in our sector.
Firstly, fintech has been around for a long time – and we do need to take a measured approach when considering its implications for established financial services providers. So far in Jersey, fintech doesn’t seem to have made a material impact on the profitability profile of our financial services sector. However, there are some key developments that we need to be aware of.
As the implications of fintech for our sector are diverse, I want to focus on two key areas; the role of the Independent Financial Adviser (IFA), and the way in which foreign exchange is transacted.
Fintech and the role of the Independent Financial Adviser
Following recent legislation, we have seen a total overhaul in the IFA sector’s working practices in the UK and the Channel Islands. Each jurisdiction had its own variants of legislation, but the core concept was to stop IFAs being paid commissions from the service providers that they recommended their clients invest with.
Before this change in legislation, an investor would approach an IFA looking for advice. The fees for their services accumulated rapidly, looking something like:
- IFA advice fee 0.50%
- Life Wrapper Fee 2.25%
- Underlying Fund / Portfolio Managers 1.50%
- Total Fee just over 4%
While 10 years ago, when interest rates averaged around 5%, it was still possible for an investor to make a small return after paying such fees, in today’s low interest rate environment, investors will be left with very little return if pursuing such a model.
This has been mitigated to a degree by the advent of RDR, RFA and GFAS, which remove hidden commissions, but there is still the issue of fees diminishing return. This is where fintech has stepped in. An example of an alternative fintech solution is Nutmeg, an online business offering low cost portfolio management solutions. Such platforms reduce fees by taking out the middle person, enabling the same underlying investment but at a far lower fee.
As I’ve explored in a previous blog however, these disintermediating platforms aren’t a panacea; while technology can effectively risk profile an investor and come up with an appropriate profile solution, it can’t offer emotional support in testing market conditions. When stock markets are falling sharply, an IFA offers a reasoned ear, assuring clients that corrections are short-lived and markets will soon recover. Without this there is a significant danger that investors will see news headlines, go online and press the “sell” button at the worst possible time, needlessly crystallising a loss.
While fintech can be disruptive in these circumstances, it’s best used as a tool within the traditional IFA model rather than as an outright solution – combining the data-driven approach that fintech enables with the personal expertise that an IFA brings to the table.
Foreign Exchange (FX)
Now let’s consider an instance where technology is benefitting intermediaries and creating a re-positioning of profitability between different financial services sectors.
Foreign exchange was traditionally the exclusive domain of the banks. I believe the reason that banks have been able to make such large profits in this area is because there’s a great deal of confusion among investors about how these markets work. An unfortunate consequence of this confusion is that certain market participants are able to quote prices that are very costly to their clients.
A good example of this is the blatantly extortionate rates at airports, where foreign exchange providers reassuringly state “No Commission”, while offering rates at a 15% spread away from the market price. What’s the difference between a commission and a spread? Absolutely nothing! Both represent a loss for the client and a profit for the FX provider.
So where and how is this issue being addressed? Previously a market intermediary, such as a trustee requiring an FX, would simply place the trade with the bank where the entity they were administering held its bank account, and the bank would quote a rate and execute the trade.
The trustee may have felt it prudent to check the rate to seek preferential terms elsewhere, providing some sense of perspective, but this didn’t provide any guidance as to whether the rate was appropriate in the first place.
This has been a major issue for financial intermediaries, as they quite often had no access to live market data. The charge they were suffering through the market ‘spread’ was entirely down to the decision of the trader on the other end of the phone.
This arbitrary situation is untenable for clients – and innovative web platforms such as our own, Enhancefx, have provided an alternative way forwards. Through these platforms, intermediaries now have the mechanism to source live market prices on a website that allows them to deal directly with the market – at the true market price.
The growing popularity of online platforms to conduct foreign exchange will make price transparency the new normal, and the only accepted way to win FX business. This is an example of fintech improving historical methodologies by providing transparency of profits earned and a far better rate for the person requiring the trade. A further benefit is that these platforms provide financial intermediaries with the opportunity to undertake the FX trade themselves, benefiting from a service fee that is both transparent and disclosed to the underlying client. This will shift the profitability of conducting FX from the banks to the currently less profitable sectors.
Jersey mustn’t make the mistake of getting carried away with the more extreme proclamations being made about fintech, instead we need to approach it as a new cornerstone on which to reposition our offering. The bigger picture is really about promoting a holistic culture of innovation within our finance industry and recognising that innovation isn’t always high-tech; it’s about designing better work processes and creating new business models that will deliver high growth, more enriching jobs and, ultimately, better services for our customers.