Incumbents vs. FinTechs: Product Offer Throwdown

Previously, we have done comparisons on mobile account opening and the design of these offerings as it relates to incumbents vs. FinTechs, so we thought it only fair to do a more detailed comparison based on product offerings and where the industry is headed. While you can call our design evaluation subjective, our side by side product and feature comparison demonstrates how the large incumbents serve a stronger set of offerings to a broader base of investors, but at the expense of simplicity. While the FinTechs have limited offering but a more honed feature set.

Set-It-And-Forget-It

Pretty much everyone is working on some form of a robo, and many have already started their own. In fact, due to competition for passive investors from low fee, automated investing startups like Wealthfront and Betterment, incumbents (Schwab, Fidelity, E*TRADE, TD Ameritrade) were quick to roll out at least one automated investing account and many now offer more than one option.

While the incumbents are dominating AUM (Vanguard $112B and Schwab $33B vs. Betterment $14.5B and Wealthfront $11B), the independent robos are pushing the tech envelope. “For people who are looking for a quality, digital online experience, independent robos are a step ahead of the incumbent ones.”

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The start-ups are forcing banks and brokers to adopt technology faster than ever before, while the established players are pushing the robos to incorporate more traditional services in their products. In fact, many of the digital-only startups are layering in human advice to complement their automated offerings. This should give pause to any incumbent, or at the very least, make them rethink their features and user experience.

In a Galaxy Not Far Away: Pricing Wars

Whether it’s executing trades, managing portfolios or simply owning mutual funds and ETFs, costs have been collapsing on Wall Street. Feeling the pressure from low cost or no cost entrants like Robinhood and Tastyworks, Fidelity finally slashed trading commissions to $4.95 in February of 2017.  This quickly resulted in similar changes from the other incumbents (Schwab, E*TRADE, TD Ameritrade), and Fidelity and Vanguard have also aggressively cut fees on ETFs. Now, with J.P. Morgan offering fee-free trading and access to research and portfolio building tools to their 47M customers, it just may become the industry standard.

And while Robinhood gained attention for attracting more than 5 million users, and a $5.6 billion valuation, in just a few years, J.P. Morgan, the biggest U.S. bank, has a distinct advantage: it already has financial ties with half of American households. In other words, market share is up for grabs and while low fee or no fee might hook customers in, what will keep them needs to be more thought out than simply “free stuff.”

Tales of the Crypto

While none of the large retail brokers have added direct trading of cryptos, there have been a few interesting developments. TD Ameritrade and E*TRADE allow crypto futures to be traded on their futures trading platform and Fidelity and E*TRADE both have innovation labs exploring uses of blockchain and crypto. “It’s no secret that we are actively exploring cryptocurrencies, including Bitcoin and other digital assets in our Blockchain Incubator at Fidelity.”

For a large conservative financial firm, Fidelity was early to realize the potentially transformative impact of cryptocurrencies and blockchain technology, even allowing users to link Coinbase accounts via a web widget. But while they’ve been experimenting, other FIs have been diving in, from big traditional exchanges that offer bitcoin futures, to companies such as Square and Robinhood that allow users to trade digital coins.

Robinhood, which earlier this year added crypto trading, only offers this feature in select states. Square added crypto trading to their Cash app in late January, with Square Cash averaging 2M downloads per month, 3x the growth rate of Venmo. Coinbase surpassed Charles Schwab in the number of open accounts in late 2017 (11.7M vs. 10.6M), but the value of those accounts is still a fraction of the value of Schwab ($50B vs. $3.26T)

Not everyone is on the blockchain bandwagon. As E*TRADE’s Lance Braunstein says, “For me…it feels more like a solution waiting for tangible problems to emerge. We don’t have a dying need to use blockchain.” But as we’ve written about in previous posts, with blockchain’s ability to greatly speed up processes and reduce cost, why doesn’t everyone have a dying need to use it?

Amazon of Investing

While all of the challengers in the investing space have well-defined customer journeys and easy to use interfaces, there’s still a large difference in the breadth of the offering. Customers with specialized needs (securities lending, bonds, futures, trust capabilities, advanced options tools) will probably be better served by more established players. While customers seeking to simply capture market returns with excess cash will probably enjoy the better digital experience and onboarding provided by the newer players in retail brokerage.

What interests us is how both facets are pushing the others to be better. FinTech is pushing the incumbents to simplify, while the incumbents are pushing fintech to be more than just a pretty interface. But the question is, will anyone become the Amazon of investing? Will anyone ever have everything for everyone? And what will that look like? Time will certainly tell.

 

Time’s Running Out to Adopt an API Strategy

As the connective tissue linking ecosystems of technologies and organizations, APIs allow businesses to monetize data, forge profitable partnerships, and open new pathways for innovation and growth.

So why isn’t everyone using them?

Adoption of APIs

More and more APIs are being adopted across all industries—travel (Google Maps), food/entertainment (OpenTable, Spotify), communication (What’sApp, Messenger, WeChat). Companies like Button are partnering with brands to help distribute their offerings to a large developer community and that are eager to strengthen their mobile experience via the use of APIs. APIs, to these organizations, equal opportunity, and access.

In fact, companies that have moved aggressively to embrace APIs have profited handsomely. Salesforce generates nearly 50% of its annual $3 billion in revenue through APIs and for Expedia, that figure is closer to 90% of $2 billion.  And, as Professor Rahul Basole has demonstrated through infographics and a simulation, first mover advantages matter for API strategies. Just look at this graphic contrasting Amazon and Walmart.

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Finance is Far Behind

However, when looking at the Finance industry, banks and brokerages are lagging behind in API adoption. Screen-scraping—which we’ve written about numerous times—doesn’t allow for reliable data connections to banks and is a huge security risk. However, screenscrapers are widely used and via the halo effect, end users are tricked into submitting their information that results in loss of control over their own data. All of that can be alleviated with the adoption of APIs which use information in a more effective and efficient way. APIs still allow data sharing but in a way that creates a safe, seamless experience for both users and creators.  

A Change, She’s A Coming

Luckily things are changing. In Europe with PSD2, APIs are becoming the new standard. The U.S. is likely a few years behind, but Asia, always an early-adopter, has already recognized the need for APIs in order to have a competitive edge. Frankly, the entire finance industry should be looking to find ways of unlocking the potential which will impact and, ultimately, provide benefits for all involved.With the objective of stimulating competition in banking, monetary authorities across Asia are looking at this themselves and starting to put in place a number of Open API directives and specifications designed to dramatically reduce barriers to entry, create opportunities for nimble and innovative players in the market, and encourage competitiveness within Asia’s banking sectors.

Open for Business

Singapore got on board early with Open Banking and their open market strategy saw DBS, a financial services group, launch the world’s largest API developer platform last November. “A platform-based approach, underpinned by an extensive ecosystem of participants that all adhere to common standards, is crucial in enabling banks to quickly access, integrate and deploy new APIs from Fintechs and developers.” In other words, it’s time for everybody to get into the sandbox and play nice.

Follow the Money

McKinsey estimates that as much as $1 trillion in total economic profit globally could be up for grabs through the redistribution of revenues across sectors within ecosystems. Even more, reason to adopt APIs which are integral in bringing together organizations and technologies in these ecosystems, creating a significant competitive advantage. One bank created a library of standardized APIs that developers could use as needed for a wide variety of data-access tasks rather than having to figure out the process each time. Doing so reduced traditional product-development IT costs by 41% and led to a 12-fold increase in new releases.

And yet, there are still just a small number of firms with fully developed API programs, making it now or never time to capitalize on this window of opportunity.  “Today, a firm without APIs that allow software programs to interact with each other is like the internet without the World Wide Web.” For FIs, even with systems that might be more antiquated than others, APIs can help

bring your processes into the 21st century, better connect you to your customers, create money-saving efficiencies and drive brand loyalty.

So the question we have to ask is, what are you waiting for?

 

 


1 Venkat Atluri, Miklos Dietz and Nicolaus Henke, “Competing in a world of sectors without borders,” McKinsey, July 2017

Can AI Drive Alpha for ETFs?

In our previous post we touched on the potential of an ETF bubble. The exponential growth of ETFs, especially from younger investors who want to set-it-and-forget-it, means there’s an opportunity for providers to increasingly use Artificial Intelligence in smart alpha and active products. But what can AI do for your business and investment strategy?

Like Humans, Only Better, Faster, Smarter

AI tools can intake data, learn from it, and act on it to meet specific objectives. But they can do it more quickly and efficiently. In fact, machines running AI algorithms can process large amounts of data in the blink of an eye. Market data is dynamic. Machines can react instantly to fluctuations to best identify ideal investment strategies. They can also read through thousands of pages of market reports in seconds, while simultaneously connecting new market signals with recent ones detected in other markets. It would take a fund manager hours to do the same thing a machine can do in split seconds.  

AI Has No Ego or Emotion

Investors tend to make poor decisions because it’s their money they could lose. Money is emotional. But machines don’t get stressed, tired, or angry. There’s no winning or losing. They operate in a purely logical manner and make decisions based only on evidence and indicators. When you remove emotion from the equation, you make better decisions. There’s no holding onto a position because you think it might change. There’s only analyzing the facts and deciding based on what is happening, not what might happen.

Disrupting the ETF Industry

ETF positions are decided on by an AI system that processes market signals, news articles, and social media posts. Daily trade recommendations in an AI capacity are not only easy, but cost-effective. Smaller fintechs and individual developers have unprecedented access to this technology. Perhaps you read about AIIQ from EquBot, the first exchange-traded fund to use AI technology to pick stocks from developed markets outside of the U.S. It leverages IBM’s Watson capabilities to build predictive models that identify 30-70 U.S. stocks every day that have the best appreciation potential.

IBM’s open APIs and developer-friendly portals charge per API call once a product is live. This sort of scalability makes AI accessible to anyone, regardless of size or motivation. And, as you can see from the below chart, ETF providers who aren’t taking advantage of AI are losing out on revenue.

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All About the Alpha

Experienced traders are turning to AI in order to maximize profits in up markets and minimize risk in down markets. Because AI leverages Natural Language Processing, Sentiment Analysis, and Numerical Data Processing to analyze social sentiment with lightning speed and precision, it can maximize alpha. It takes a human three seconds to analyze a tweet, but it takes AI less than one millisecond to analyze a tweet as bullish or bearish.

Since AI doesn’t need to sleep, it can be working 24/7, even when the markets are closed, trying strategies that might be difficult to execute for traders. And because of the amount of data available, risk is mitigated because AI will know when to get out before it’s too late. An AI system can make daily stock recommendations that the ETF manager can then use to shift positions, increasing alpha.

Compete or Go Home

An important aspect of any AI strategy is partnering with external developers. Because, in order to compete with the top financial firms in your sector, you need to leverage machine learning or risk being left behind. In fact, you might already be.

Are you leveraging AI in your business? We’d love to hear about it.