Fintech News: October 28th, 2016

This week in fintech: IBM’s supercomputer tackles insider trading, billionaires start socially conscious investing, and the CFPB sides against big banks who hoard your data.

Watson and Financial Regulation: It knows their methods (The Economist)

Ever since developing the first ATM, IBM has been automating financial institutions. Now, the company’s supercomputer, known as IBM Watson, is learning to automate compliance back-offices, using artificial intelligence to catch insider trading and money laundering before it happens.

Investing’s Crowded Conscience (Bloomberg Gadfly)

On a grand scale, nobody has quite figured out how to get millennials to invest. Now, one of the most famous billionaire hedge fund managers is giving it a go. Paul Tudor Jones has announced he’s building an index of the most socially responsible companies, and will eventually issue an ETF that tracks the index.

Cordray ‘Gravely Concerned’ by Attempts to Obstruct Screen Scraping (American Banker)

The CFPB is supporting fintech companies who rely on gathering bank information from their customers. Technically, your bank, not you, owns your data. However, the CFPB has finally taken a side, saying “consumers should be able to access [their data] and give their permission for third-party companies as well.” In other words, back off, Jamie Dimon.

Fintech News: October 21st, 2016

This week in fintech: Embracing fintech culture over fintech adoption, what finance can learn from disruption in the music industry, the invisible bank of the future, and the advantages of dollar-cost averaging.

Fintech adoption vs fintech culture (Bank NXT)

Banks are being called “all talk, no action” and it sounds just like this week’s presidential debate. While banks invest heavily in internal “innovation labs,” many struggle to implement these labs’ ideas into the larger organization. These banks should focus more on embracing a culture of change that rewards challenging the status quo, and less on ways to “out-innovate” the market.

From Sony to Spotify: What the Music Industry Can Teach Banking About Survival (The Financial Brand)

In a nutshell: “just because customers used to consume a product or service in one way, doesn’t mean that method will remain the preferred means of consumption forever.” From Sony’s Walkman to Apple’s iPod to streaming services like Spotify, the music industry has undergone transformations that many predict will occur in financial services.

The bank of the future will be invisible – KPMG (Finextra)

KPMG released research predicting the “invisible bank” of the future, where banks control the internal infrastructure, and consumer-facing products are built by the likes of Facebook, Apple, and Google. The most successful banks will embrace the platform model by driving down costs, building third-party partnerships, and locking down on security.

How Regular Investing Smooths the Market’s Ups and Downs (The New York Times)

Regularly timing your investments is one of the best ways to avoid stressing over market volatility. This strategy, known as dollar-cost averaging, removes the risk of trying to time the market. If you are putting away money every month, you are already taking advantage of dollar-cost averaging. Otherwise, newly popularized automated investing products make it easy to start.

The Big Red Button: Robo-Advisors in a Bear Market

The next bear market will present new challenges to robo-advisors, forcing them to build around the value of human connection and customizable investments.

For the past five years, the robo-advisor has had a good run. Since the aftermath of the financial crisis, algorithmically-managed “robo-advisors” have grown their assets by 250% each year. The robo-advised portfolio was popularized by challenger startups like Betterment and Wealthfront, but incumbents have followed suit in the past two years with their own robo products. Robo-advised assets are near $100 billion today, and are expected to skyrocket to $8.1 Trillion by 2020.

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While the robo-advisor industry was taking off, so was the stock market. From its bottom in March 2009, the S&P 500 has seen steady returns averaging over 12% annually, and continues to hit all-time highs on a regular basis. For passive investors, the market has provided no reason to panic in the past six years. The second-longest bull market in history has made it easy for younger, less affluent clients to dismiss the value of a human advisor and invest their savings with a low-fee robo-advisor.

Because they have built a young client base, robo-advisors will have an especially tough time holding onto assets when the market turns south. Consider:

  1. Young clients saving for retirement have high-risk portfolios with considerable downside potential.
  2. Young clients have never endured a market downturn. They have only experienced the latest six-year recovery, watching their money grow no matter where it was invested.

The Moment of Truth

The true value of a financial advisor is not “beating the market,” it’s keeping clients calm during a downturn. When the markets are booming, a financial advisor’s job is pretty easy. When the market tanks, panic sets in and the phone starts ringing. The robo-advisor has yet to prove it can replace a human advisor when times are tough.

To Liquidate or Not to Liquidate

In the robo-sphere, there is no clear consensus on how to manage anxious clients. Betterment and Wealthfront both discourage their clients from switching their risk profile and only allow them to change it once a month. However, when the Brexit vote caused investors to panic this June, Betterment froze trading for its clients for three hours. While this may have prevented some clients from selling low, it also caused some to lose trust in an algo product that doesn’t allow for human override.

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Most robo-advisors restrict tweaking your portolio.

Other robo-advisors, like Hedgeable and E*TRADE’s Adaptive Portfolio, also employ active strategies for risk management. Instead of holding put, these robo-products reallocate funds to less risky assets when volatility kicks in. While this feature may be enough to calm some investors, it is still algo-controlled and unlikely to satisfy investors looking for a big red “override” button.

The Human Touch Returns

Some time in the future, long-term investors may trust algorithms enough to not bother intervening on their own. Right now, investors are still warming up to the idea of not being able to tweak their portfolio on their own. Until this behavioral pattern changes, robo-advisors will need tools that capture their clients’ trust during times of volatility, even if it leads to lower returns in the short term.

bad tradeFor less confident investors, having someone to call might be enough. More sophisticated investors may demand more autonomy in a downturn, such as the ability to override and tweak their default portfolio. In the end, robo-advisors will need to prioritize the loyalty of their sophisticated clients over their commitment to passive-only investing.

Right now, the portfolio override button is like the steering wheel on the self-driving car. It’s comforting to know it exists, even though you are more likely to crash if you use it.

Fintech News: October 14th, 2016

This week: UBS and Merrill Edge both launch their own robo-advisor, compliance offices warm up to automation, and Google’s huge fintech opportunity.

How Google is Poised to Become a Dominant Investment Manager (Forbes)

make-money-online-and-googleUnlike the Chinese tech giants, Google, Facebook and Amazon have been hesitant to enter financial services. But Google has a unique comparative advantage if it does. Google can see real-time search trends, giving it an informational advantage over traditional managers. The company is also collecting a database of high quality satellite imaging. This would allow them to track everything from business supply chain operations to the number of cars in a store’s parking lot.

UBS to launch UK ‘robo-advice’ service (Financial Times)

UBS is joining other incumbent banks by building their own robo-advisor to compete with startups. They will offer the service to accounts over £15,000 and charge 1% in fees for passive investing, and 1.8% for active investing. This move comes at a time when wealth managers are grappling with the decline of human advisors, the traditional mutual-fund sales channel.

‘A Robot Could Alleviate This Drudgery’: Bank Compliance Meets AI (American Banker)

One of AI’s most promising use cases is compliance, where parsing through thousands of pages of laws and regulations is expensive and time-consuming for banks. Other easily-automated tasks include catching money launderers and detecting rogue employee behaviors.

 

Fintech News: October 7th, 2016

 

This Is What Millennials Actually Use Venmo For (Bloomberg)

The largest US banks are teaming up to build Zelle, their own Venmo-killer, but are they too late? This article looks into emoji usage on Venmo, and the stickiness and brand loyalty that the payments app has built with Millennials. The most popular emojs? Anything related to drinking, eating, traveling, and paying rent.

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Source: LendEdu

When Will Fintech Regulation Grow Up? (American Banker)

Fintech Regulations have lagged behind the industry. Here’s what US regulators need to do to catch up to their peers in the UK, Singapore and Hong Kong.

Free Stock Trade App Robinhood Monetizes With $10/Month to Buy on Credit (TechCrunch)

Robinhood, the free-trade brokerage, has released a premium subscription plan, Robinhood Gold. For plans ranging from $10 to $50 a month, clients can trade during after-market hours and trade on varying levels of margin. This program’s success will pan out interestingly, as finance is one of few industries where subscription models have not taken off.

Scottrade: Who Will Acquire It? (Barron’s)

Scottrade revolutionized the discount brokerage when it introduced $7 trades in 1998, keeping the price steady ever since. Now, in the latest episode of online broker acquisitions: Scottrade is reportedly getting bought. Possible bidders include TD Ameritrade and Charles Schwab.

Seeing Sideways: the Distributed Customer Experience

Since the late 1990s, the online investing experience has been monopolized by online brokers. From physical branches to call-centers to websites and mobile apps, online brokers acted as a one-stop-shop for their customers to research and transact. Need to research a stock? Check your broker’s website for analyst ratings, fundamental data, and a risk profile. Need to check on your investments, place a trade, or add money to your account? Go to your broker’s website or app.

Today, the broker’s monopoly on the customer experience is weakened due to three new market dynamics:

  1. The internet has given investors endless places to conduct research.
  2. Investors expect highly customizable online experiences.
  3. Investors can now research and transact from third party websites and apps.

Brokers should not fear the distributed customer experience. They should embrace it as an opportunity. Brokers offer a product that is not replaceable: the ability to place trades at fast execution speeds, a safe place to store investments, and a funding portal. Whether the customer logs in via their broker’s website or via Snapchat, the broker still receives a commission when they place a trade. In other words, in the fragmented digital landscape, the broker’s most valuable asset is its ability to serve as a platform and a marketplace.

Brokers who adapt to this change will capitalize on the assets generated by their platform; brokers who resist will struggle to hold onto market share as their competitors tout a more customizable product suite.

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Adaptive Brokers

Adaptive brokers will embrace their platform capabilities by extending their APIs across the digital landscape. This will create touch points with their customers in the apps and websites that they already visit regularly. The adaptive brokers will go to the customer instead of waiting for the customer to come to them.

For adaptive brokers, APIs will become powerful asset gathering vehicles. By integrating their product across the landscape of third party content producers, they will leverage these third party apps and websites as sales and product channels. Rather than devoting huge resources to developing their own niche products, adaptive brokers will plug into the niche products that their customers already use. From the customer’s point of view, the adaptive broker is tech savvy, customer focused, and flexible: all critical selling points to millennials, 75% of whom care more about up-to-date technology than in-person customer service.

By opening up to third party integrations, adaptive brokers will empower themselves to create their own great products down the line. Armed with customer engagement data from third party apps, brokers will learn how their customers interact in diverse environments, and use those insights to optimize their own product offering.

Resistant Brokers

On the other hand, resistant brokers will have a tough time in the distributed digital landscape. New investors will be turned off by a broker that forces its customers into a mediocre one-size-fits-all experience. Thus, customer acquisition costs will skyrocket as new investors choose more adaptive open-platform brokers. Even existing customers will be less engaged for resistant brokers, since engaging with their broker requires going out of their way to navigate to the broker’s app.

Most importantly, change-averse brokers will miss out on crucial customer interaction data, as they do not have access to the websites and apps where their clients research their investments. Without a real-time feed into what drives customer engagement, antiquated brokers will lose touch with their customer base, and struggle to build innovative products that stay up to speed with the competition. From the customer’s point of view, change-averse brokers will appear technologically out of touch and ignorant to their desire for customization.

The Customer Experience, Reinvented

The message to brokers is this: embrace the distributed customer experience, or you risk losing the customer all together. Your APIs are an increasingly important way to understand what drives client engagement while creating new touchpoints with current and potential customers. The digital landscape is changing, and brokers will only be fully disrupted if they fail to adapt.