Going digital is not enough on its own



Expert article for the Fintech & Insurtech Special of Netzwoche from 6 November 2019

Robo-advisors are not really catching on in Switzerland. Market penetration is apparently minimal and the share of total assets under robo-management is vanishingly small. Success stories are few and far between, though not unknown, and the central question remains: what does a robo-advisor need to succeed?

Robo-advisors are a hot topic at the moment as many believe such systems are set to replace traditional asset management. The reality, however, looks rather different. According to the latest asset management study carried out by Lucerne University of Applied Sciences and Arts, robo-advisors account for no more than 0.01% of all assets under management in Switzerland, and market penetration is likewise at a mere 0.01%.

The Glarner Kantonalbank, which is discontinuing its automated investment service Investomat from the end of November 2019, is a topical example of the challenges facing robo-advisors. One reason for the poor success rate of robo-advisors in Switzerland is said to be the high fees: with an average flat fee (including product fees) of 0.95%, the services on offer in Switzerland are considerably more expensive than abroad. These comparatively high fees are thought to be driven by substantial client acquisition costs and a dependence on financial instruments supplied by external providers. This has led some to conclude that the key to success lies in cooperating with corporate clients, with concomitant access to an existing customer base, and holding one’s own universe of funds. But this assumption does not tell anything like the whole story. Fintech start ups like Viac have demonstrated that there is more than one way to skin a cat. Thanks to its community, network effects and word-of-mouth, Viac, a digital Pillar 3a solution, has managed to acquire around 15,000 active customers in less than two years.

Why should a customer choose a robo-advisor?

The key factors differentiating a robo-advisor from a traditional asset manager are undoubtedly the comparatively low costs, fee transparency and, for tech savvy customers, the user experience. Unlike with cheaper approaches that involve manual dealing in exchange-traded funds or index funds carried out by individuals themselves, the stand-out feature of a robo-advisor is that the customer is spared the bother of buying and selling financial products – the intelligent system takes the place of the customer in making and implementing such decisions. From a consumer perspective, a robo-advisor must offer a peerless user experience at excellent conditions, with low barriers to entry and exit – or, to quote Viac co-founder and CEO Daniel Peter, “Apple usability at Easyjet prices”.

Achieving attractive costs through light-touch integration

A key prerequisite for being able to offer low prices is maximum efficiency in the running and delivery of all the background processes. To achieve this, as many of the manual stages as possible have to be automated. Costs for delivering such processes should remain more or less constant as customer numbers grow. This is the only way to guarantee a cost structure that will make it possible to offer customers attractive pricing, which is ultimately a sine qua non for survival in the market.

One of the cost drivers in automation is typically integration into ageing, cumbersome systems, so-called “legacy” systems, and care should be taken here to ensure that integration is carried out with as light a touch as possible. This means that only what is absolutely necessary should be connected. A first step would be to avoid integration of a core banking system and the associated dependence on its processes, for example. If in doubt, it may often make sense to implement a customised process independently and from scratch rather than increasing complexity by integrating a third-party system.

Focusing on the user experience

The truism “first impressions count” is just as relevant for digital products as it is for interpersonal relationships. In the case of robo-advisors, this applies to the onboarding process, which should be simple, intuitive and take no more than a couple of minutes; registration should be limited to the bare essentials and it should be possible to pause the process at any time. Unnecessary obstacles linked to existing business processes or systems should on no account be placed in a customer’s path. Indeed, they should be eliminated from the processes or systems entirely, with a view to lowering operating costs and maximising automation. The user experience should be at the heart of all planning and must shape all processes and systems.

Low thresholds for new customer segments

Digital products like robo-advisors have the potential to appeal to new customer segments. Those who had previously never invested in financial instruments may suddenly become interested as they can try out the services on offer with very little effort. The key? Onboarding must be quick and easy, the minimum investment threshold must be low, and exit modalities must be indicated transparently from the outset. For most customer segments, the entry threshold will, thus, be considerably lower than if they had to get in touch with a personal bank advisor themselves. It is nonetheless advisable to offer a range of communications channels in case a customer feels the need to ask a question – doing so reduces the chances of losing the customer during the onboarding process. A chat function, for example, is a low-threshold way of making contact and it may even be possible for a chatbot to answer standard questions – ensuring 24/7 service. Constant availability and a capacity to answer several questions at once can have a positive effect on the customer experience.

Opportunities for personal contact

Technology helps us to deal with routine tasks (e.g. rebalancing a portfolio) efficiently, and with a near-zero error rate, allowing humans to concentrate on high-value work. If customers are looking for personal contact via chat or on the phone as they encounter a problem, or a chatbot has reached the limits of its usefulness, this presents a unique opportunity to improve customer satisfaction with high-quality advice and, in a best-case scenario, to boost the word-of-mouth referral rate. It is, therefore, crucial that highly trained staff are available to deal with customer issues in such cases – actual humans should have minimal involvement in automatable back office tasks and should instead be deployed in client-facing situations whenever possible. This typically has a very positive effect and, when correctly implemented, a combination of digitalisation and the human touch can create an experience akin to that of a traditional sales scenario.

The combination of digitalisation and personal contact pays off

To succeed, a robo-advisor must by fully focused on the user experience and fees must be lower than 0.95%. This is only possible when every back-office process has been radically automated. If customers have a problem or a question, however, they will want it to be sorted out by a person, not a machine. In other words, going digital is not enough on its own.

This article was written by Matthias Leumann, Team Lead Finance Solutions and Senior Project Manager, Ergon Informatik.