Tying the Pieces Together : A Conversation with Ilam Mougy of Stocks Live

The following is an excerpt from a recent conversation between Nathan Richardson, Founder & CEO of TradeIt and Ilam Mougy, CEO of Stocks Live.

Ilam Mougy wanted to do more than just trade stocks on his phone. He wanted to get advice on how to pick winners and more importantly, be able to chart and track all of his investments in one place. But when he reached out to brokerages to inquire about incorporating them into his app, he found that it would need to be done manually and therefore was impossible from a development perspective.

He knew he’d need another way. The Stocks Live CEO and I sat down to to talk about the integration of TradeIt and TradingView into his app and how our API enabled him to easily integrate users’ portfolios in one click.

Nathan: Tell everyone a little about Stocks Live.

Ilam: Stocks Live is a complete mobile financial solution that helps investors pick and track winning stocks, mutual funds, ETFs, cryptos and more. We offer all the tools investors need to sync their accounts, chart their progress and even see the portfolios of top investors. We are more focused on tracking investments than trading them.

Nathan: So how does the app work?

Ilam: Users sync their brokerage accounts to the app and can track and trade within the app. Our app helps users choose investments, create charts of their progress and our scanner functionality lets them follow the exact investments of what we call ‘gurus’ — successful hedge fund managers like Warren Buffet and Ray Dalio.

Nathan: What made you reach out to TradeIt?

Ilam: I didn’t (laugh), you approached me. When I first built the app, I needed a way to seamlessly integrate users’ portfolios. But, as you know, because APIs aren’t universal from brokerage to brokerage, integrating them wasn’t possible from the development side. When we first launched, there was no way to sync the app with the user’s broker. They could go to a brokerage and open an account but the only way to track that account within Stocks Live was by manually inputting their stocks, purchase price and quantities. A daunting ask.

Someone from TradeIt found me on the App Store and approached me at a trade show, suggesting you’d be a great fit. And honestly, it didn’t take two minutes for me to be convinced, and I did the entire integration in less than a week. Now users sync their accounts once and never again, giving them one app for all their assets in one view.

Nathan: What else has the API integration allowed you to do?

Ilam: With TradeIt’s Account Opening product users can go into our Broker Center within the app, compare and contrast fees and offerings and choose who to open an account with based on what’s best for their needs. In less than five minutes and with one button, they can open that account directly in the app. This is exponentially faster than doing it on the broker website, filling out forms and waiting days for approval. It offers a value-add to the user and moreover, acts as a revenue driver for us since the brokers pay per opening.

Nathan: Talk to me about some of your results.

Ilam: Well, we’ve seen a 20% increase in app downloads and use since the sync feature integration. And there’s been an increased demand from the community around supporting other brokers. So brokerages, you all need to get on board! (laugh)

Nathan: Have there been any hiccups or struggles with the integration?

Ilam: Like any tech integration, there’s ongoing maintenance around feature upgrades, but every addition is maybe a week of work, which is nothing in the software paradigm. Your team is extremely responsive. If I get a user question, within 24 hours there’s a reply and resolution.

Nathan: As you know, we were recently acquired by TradingView, which I see as a perfect marriage of our two technologies. How has that acquisition affected your integration?

Ilam: I’m really pleased about this! StocksLive has a charting engine but not as powerful as TradingView. They have a full library of tools. Our users now have access to all the charts they need to visually view and map their investments. With the integration of TradingView, we now offer three distinct charting features: native charts, TradingView and Tradergram, our new animated charts. I’m very excited about these and no one else is doing them.

Tradergrams visually detail the journey from purchase to sale of a user’s stocks. As we know, people respond better to visual stories and without charting, investors are essentially blind. All they know is the price, but they can’t see the progress. With the addition of these animated charts, users now get both, a built-in feature and an added bonus.  

Nathan: I’m also excited to see how you’re capitalizing on these features and capabilities. Any final thoughts?

Ilam: I see the addition of TradeIt to our app as a full solution. And, there’s a synergy with TradingView and TradeIt that makes these two components vital for any investor. I’m excited to see where else we can go with Stocks Live and how we can further help our users track and trade.

Is that free trade actually free? Part II

This is part 2 in our series on market data fees which will further dissect the effect of data sourcing and real-time vs. delayed stock quotes. If you haven’t already, check out Part 1, which broke down Payment for Order Flow and the hidden fees and broker revenue streams coming from Alternative Trading Systems and how this unwittingly affects investors.

Real-time vs. delayed

Today, investors demand and deserve real-time data in order to have the information they need to take action. With the change in the trading landscape, new players in the space (e.g., BATs, IEX), the emergence of “dark pools” or Alternative Trading Systems (ATS firms) and the advent of media portal licenses for market data on finance sites, information is available to most of us in a split second from multiple sources. But that information, that data, needs to be transparent and reliable. Investors need to know — and are entitled to know — the source of the information they’re basing their investment decisions on.

With new technology comes new regulation

In 2005, the SEC issued the Regulation National Market System (Reg NMS) because they saw a need to strengthen the trading regulations around changing technology. Reg NMS contains four parts but the most relevant one is the Order Protection Rule, or trade through provision, which guarantees investors get the best price at the execution.

Previously, with trade throughs, an order could be carried out at a suboptimal price, even though a better price was available on the same exchange or another exchange. Now with RegNMS, trades must be conducted at the best price, no matter where that lowest price is available.

The complaint around this was that it forced traders to do business on a venue that was the cheapest but perhaps, in their estimation, not the most reliable or the fastest, in essence removing their choice of where to conduct trades. There was also a concern this would result in worse outcomes for institutional orders.

Here’s why this matters. All of the images below were captured within a 90-second window. Almost all are time-stamped and all but one (which explicits states it’s delayed data) claim to be real time. However, the price varies for each one and the time stamping varies, potentially due to the source not in fact being real time. So, if you’re making trades based on what you think are real-time quotes, are you in fact getting the most accurate data?  

Real time with a full timestamp, down to the second…though those timestamps vary despite being captured within the same 90-second window.  

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With just the date and no timing, it’s a little suspect…

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A full timestamp and a reference that the quote is delayed.

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The more you know

To the retail investor, Reg NMS ensures National Best Bid and Offer (NBBO) when they place a trade, providing an unambiguous benchmark for assessing execution quality. US  brokers pay a fixed fee to the exchange per user to access this real-time pricing data. “The data are priced so that individual investors pay very little and the professional investors who value the data the most and profit from it the most, pay for it the most.” Redistributors of the data also pay the exchanges to display that data on websites and apps.  

Further, Reg NMS mandates Vendor Display Rules whereby publishers, portals, app developers, etc., must display the source of their data and its timeliness, as we showed above. Keep in mind that the SIP feed with the NBBO is only required where the data is actionable, though many publishers will still present the NBBO to their users.  

The key, however, is that the investors need to know what the source of the data is…is this CBOE’s feed? Is it Nasdaq?  

SIP on this

Similar to our post about screenscrapers, we’re talking about transparency to the end user. In this case where they get their data, rather than where their data is being used.  

The issue with this according to James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University, “there is not a good counterfactual for what the current U.S. market would look like without the SIP data.” From his studies of transparency, he found that without good quote and trade information, transactions costs for all investors would increase significantly (emphasis added).

What’s the price of doing business?

For NYSE- and NASDAQ-provided market data, all pricing is mandated by the SEC.  The pricing is publicly available on their sites. These fees break down based on professional vs. non-professional users with lower cost options such as Nasdaq Basic, or Nasdaq’s NLS. Fees can range from $50,000 to upwards of $100,000 per month for SIP feeds; while real-time feeds can also be accessed for non-professionals for as low as $0.25 to $10 per user per month. As an example, the CBOE1 feed — distributed by the CBOE — is an alternative for non-professionals, as it gives publishers a lower cost option for displaying real time, without trading.  

Recently, the SEC rejected fee increases requested by the NYSE and Nasdaq. Not because they were too high, but because they didn’t demonstrate that “these fees are fair and reasonable and not unreasonably discriminatory.” The striking down of these increases was done “to more efficiently and effectively ensure that market data fees are set, reviewed and regulated in the best interest of our markets and our Main Street investors,” according to a statement by SEC Chairman, Jay Clayton.

It’s time to pull back the curtain

The simple fact that investors, perhaps, aren’t getting the most recent information, or know the exact source of that information, does affect their pocketbooks. It just might not be with fees. Publishers need to disclose where the information they provide is coming from and the timeliness of the data, allowing investors to make an informed decision. Access to this market data is essential to America’s world-leading capital markets because all participants need timely and complete data to make informed decisions for all customers.”

RoboAdvisors: The New Destination For $

Shifting Dollars

As more and more younger investors are embracing robos and ETFs vs. actively managed portfolios, the dollars being invested are shifting. As we look ahead to where the assets are going, it’s impossible not to wonder what this means for the economics of the investment firms, asset managers and brokers. ETFs are growing and they’re also a lower cost investment vehicle. Schwab’s annual report is a great example of how assets are flowing into lower cost investment options (ETF growth is booming – up 19%) and the number of client accounts continues to grow (more on that later). But while it’s always good to see growth, and great to know people are investing (!), does this mean there’s a reset coming as it relates to the fees generated (or not) by investment products?  

For large incumbents there’s a cushion, because they’re more diversified as it relates to product offerings, and in turn, revenue streams. But with the shift to a lower cost product like ETFs, and the combination of Millennials pouring money in and Boomers pulling money out, there’s less investing in traditional mutual funds, creating a shift in how incumbents need to think about their revenue streams. And while these companies are seeing gains, with Schwab’s stock price up over a 10 year period, what does this mean for their long term offerings and strategy?

Vanguard is currently king of the robos with $101 billion in AUM, roughly half of all robo assets. In addition to their command of the market, they also see a bump since they serve as the low cost ETF provider to Betterment and Wealthfront. The fees from distribution through these channels translate to more additional revenue for Vanguard.

Schwab is sitting comfortably at number two, with $27 billion across its robo platforms. But the pure-play robo startups, while not in the same hemisphere, are currently holding their own. Betterment and Wealthfront have $13+ billion and $10 billion in AUM, respectively.

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According to a recent report by PricewaterhouseCoopers, experts estimate that robo-advisors could see their AUM increase by over $800 billion over the next five years as they continue to plow investors’ money into ETFs. And A.T. Kearney estimates that digital advice could grow to over $1 trillion by 2020, a 68% increase over current levels.

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Who Is Driving Growth?

It’s no secret that Millennials are heavily investing in ETFs and mostly via robos. As we’ve talked about before, it’s a low barrier to entry vs. mutual funds or advisory solutions and investors at this age simply have less assets. But interestingly, new findings of emerging Canadian robo-advising companies describe a higher-than-anticipated demographic of baby boomers and Generation X clients with 44 being the average age of clients. Part of this rapid growth in AUM is due to older clients with larger retirement savings.

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However, according to LendEDU.com, American Millennials are distrusting of robo-advisors, with many stating they still prefer traditional advisors. In addition, a large proportion of millennials who don’t use robo-advisors haven’t heard of them, showing that robo-advising has yet to penetrate the Millennial market.

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And while Gen X and Boomers might be investing in ETFs, the majority of them and their dollars are invested in mutual funds and/actively managed portfolios. These represent greater asset volumes and are also higher cost products.

Will there be a pendulum shift?  

It does appear that way. As older generations move into retirement and withdraw funds, the AUM in traditional mutual funds, actively managed portfolios and among advisory solutions will decline. But, because younger generations are continuing to earn and earn more, it’s likely they’ll continue to pump more into ETFs. The set-it-and-forget-it type investing is ripe for this new audience who wants to dip their toes in the water, including the introduction and usage of target funds as options in 401Ks and IRAs. In fact, according to Statistica as of 2018, passive investing is growing exponentially in the US:

  • AUM in the Robo-Advisors segment currently amounts to $283 Billion
  • AUM are expected to show an annual growth rate (CAGR 2018-2022) of 22.8% resulting in the total amount of $643 Billion by 2022
  • In the Robo-Advisors segment, the number of users is expected to amount to 12 Million by 2022
  • The average AUM per user in the Robo-Advisors segment amounts to $43,039  

Bringing it back to Schwab, their active brokerage accounts are up 6%, their total client assets are up 21% and their proprietary mutual funds are up 19%.

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However, total assets among their ETFs more than doubled from 2013 to 2017, an astounding $204 vs $436B. From 2016 to 2017 alone, that was a CAGR of 37% among ETFs vs. 20% for mutual funds during the same period. And only 7% when you look specifically at Schwab’s proprietary mutual funds.

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Some final thoughts:

  • As more investors jump on the ETF & Robo bandwagon and less use full service advisory services and higher cost Mutual Funds, what happens to the fee structure of these firms as more assets move to the lower cost products?
  • Will there be a need to create a new model and what will that model look like?
  • Could we see, as we’ve talked about before, an Amazon Prime model of investing?  

Share your thoughts below or tweet us.

 

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

Is an ETF Bubble Looming?

ETF Folklore

“From the industry perspective, what’s brilliant about ETFs are they have the ability to work well under pressure. Any time we’ve seen dips or a bear market, we’ve seen ETFs be a good haven because all you’re doing is going to a different side of a trade.” – Global Asset Manager with >$1T AUM

The appeal of ETFs to investors is diversification. The ETF surge represents a shifting investment ecosystem away from active, toward passive. According to a Charles Schwab 2017 ETF Investor Survey, the percentage of ETF investors by demographic is as follows: 56% of Millennials, 44% of Gen X and 30% of Boomers. In fact, an astounding 96% of millennials see ETFs as a necessary part of their investment strategy, perhaps because they have less money available to invest.

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ETFs are appealing because:

  • They have lower expense ratios
  • You can purchase fractional shares
  • They are more attractive for people with little knowledge
  • Typically there’s no minimum to invest

Crunch Time

However, many ETF investors are unaware of the risks of investing in ETFs. Some [watchdogs] see an ETF bubble that is set to burst, even though what is being invested in is more of an investment wrapper than an asset class in its own right.

Our current financial system is geared towards a much lower average life expectancy. Yet, as people live longer, their portfolios need more durability. So what is the liquidity of ETFs and the ability for ETF companies to unwind when, for example, a boomer needs to start drawing down? Or, what happens during a crunch?

Facing Liquidity

“I’m not worried about ETF liquidity. There’s always fear of that but I don’t think there’s suddenly going to be a liquidity drought in asset classes. It’s really at the very back of our heads.” – Large Pension Fund

High-frequency traders, traditional active fund managers, and other value investors believe that one of the challenges for ETF companies will be unwinding their positions. For some financial institutions that own ETF providers, exiting subscale market positions may prove to be attractive. The rapid growth of the ETF market means that we’ve seen comparatively few exits. In a consolidating market, ready buyers could be plentiful. But the challenging economics of ETFs could mean that sellers find exit valuations disappointing.

Mistaken Valuation

Cash inflows to an ETF that has large holdings of a specific company could misprice a company blindly. “In the largest products, where most of the money sits, about 90% of trading that occurs is in the secondary market, according to Vanguard’s research. That means ETF investors are passing investments between themselves, and not having to transact with fund managers.”

Another reason for concern, a July report from Cirrus Research cites that, “companies with higher ETF exposure have steadily underperformed their counterparts since last June.” While the rise of robo advisors reflects this changing paradigm, a lack of understanding drives ETF demand and introduces risks. And it shows no signs of slowing down with 61% of millennials planning to increase their ETF positions. So while wealth managers used to be too expensive for the masses, automation is changing that and ETFs are democratizing the investment world.

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ETFs played a role in the sell-off in 2015:

  • According to SEC, exchange-traded products experienced higher volume and volatility than standard stocks
  • Swings in price seemed arbitrary among otherwise similar ETFs
  • Many of the shares owned by investors were dealt by short sellers (unbeknownst to the investors)
  • As investors realize they own ‘synthetic’ ETF shares, the situation could explode

Before the Burst

Banks and trading firms happily sell and trade ETFs when the market is calm. When they can buy at a discount and sell at a premium, these firms will continue to offer ETFs in large quantity. But when that is no longer a probability or possibility, the suppliers of ETFs will most likely disappear, essentially undoing the entire system. But there are ways to fix the bubble.

‘Physical’ ETFs have much lower risk because they are actually hard backed by the underlying security. Diversifying with equities that aren’t usually tracked by ETFs can help avoid market cap bias.

How Close is the Burst?

Millennials are pouring their investment dollars into ETFs. They’re also the target of many of the robo advisors and FinTech’s helping investors begin to grow their wealth. Many of these robos and “set-it-and-forget-it” FinTechs are leveraging ETFs in their portfolios due to the lower price point, dollar-based investing, etc.

That said, could the potential burst or liquidity crunch be stalled due to the influx of Millennials investing in ETFs? Or is that a temporary distraction? Will the robos and FInTechs potentially suffer the same fate?

Case in point: look what happened to some of the robos that got squeezed during Brexit as people demanded access to their funds. Will this instance be a case of only time will tell, or are these brakes on their potential roller coaster?   

What do you think?

 

 

 


1, 2 Citibank “New Approaches to Active Management & The Need for Manufacturing        Flexibility in an Era of Asset Class & Factor Investing” 2016
3 Financial Times
4 Bloomberg

Screen Scraping’s SODA Framework Explained

SODA

Recently, Yodlee, Quovo and Morningstar announced that they were launching a joint initiative “…to enable secure, open data access for consumers in regard to their financial data.”  They’ve created the Secure Open Data Access (SODA) framework, a set of consumer-centric principles for data access and financial data security to promote transparency, traceability, and accountability in the financial services ecosystem.

We’ve done a lot of talking lately about open data and why it’s so important for consumers and businesses. This ranges from allowing for increased innovation to the importance of APIsLet’s dissect what this announcement doesn’t say:

SODA Broken Down

“To ensure that the aggregator bread-and-butter business isn’t scuttled completely, or at the very least taxed into oblivion by the banks, aggregators are stealing a march by positioning themselves as consumer advocates.” – Drew Sievers, CEO of Trizic Inc.

1) Mention of Financial Institutions

How can you protect data or open it up without partnering with the very people who provide the customer info in the first place? What we do know about this deal is that there’s no clarity on where the data goes, no clarity on how to control users’ access from the FI side via these three companies and no comparison to PSD2. The bank’s data is what the aggregators are mishandling, either intentionally or unintentionally.

2) APIs Not Included

The three SODA aggregators don’t say that they will no longer screen scrape. They have positioned themselves to appear on the side of the consumer while stopping short of adopting more secure methods of data sharing like APIs. They also criticize the government for a lack of clarity but suspiciously stop short of advocating for new legislation that would most likely restrict their operations. “The move is partly a response to other industry proposals that the SODA framework developers see as too restrictive.”

3) Data Resale

The framework benefits a data aggregator company that makes money on selling the technology. Yodlee has taken heat on reselling anonymized data to investors and others. But they say the framework is designed to put the consumers’ needs first.

The sale of this data is one of the big areas of interest among hedge funds. Many are interested in non-traditional data sets, and consumer portfolios/activity is one of those data sets that’s viewed as interesting data to hedge funds. With all the money available for data, it’s hard to believe they are going to leave those chips on the table and walk away.

4) Plaid and Finicity

The two missing players are smaller than the others but also used widely and screen scrape the same universe of financial institutions. “SODA’s purpose is to consolidate Yodlee et al.’s position and ward off the threat of large banks stepping in and regulating the market themselves, since it is more often than not banks’ data that’s used,” says Sievers. If this is true, why not include all the aggregators? Are Plaid and Finicity being excluded for being too small? They do the same thing and use data the same way. So why were they left out? Plaid has declined to comment on this announcement citing a lack of expertise regarding Yodlee, but it does make you wonder.

Where’s the beef?

Essentially, there’s not much here. There’s no clear benefit to the investor and the protection of their data and there’s no clear benefit in terms of security.

APIs are the big missing piece in all of this and what’s really needed above and beyond these “made up” frameworks. APIs give everyone more control, allowing FIs to benefit the users and truly keep their information secure and protected.

In Europe, the Europeans believe they own their own data, but that’s not true in the US. This is the mind shift that needs to happen to give people more control of their data and in turn, their privacy. No acronyms needed.

Acct Opening – Big Spend, Little Innovation

I’m on Top of the…Sales Funnel?!

FIs spend most of their marketing dollars on account acquisition. In fact, in 2017, the US financial services industry will have spent $10.1 billion on digital advertising, a 13.1% gain from 2016, according to eMarketer. But for all this spend there’s been almost no innovation in this space. And that lack of innovation is losing customers and costing FIs millions. It’s time that FI’s begin to ask:

  • Is there a better model?
  • How can the account opening process be improved upon for an easier flow for the end user?  

In a previous post, TradeIt conducted time trials to open a new brokerage account on mobile. Completion of those applications ranged from 6 to a staggering 12 minutes. So what were the pain points and causes of abandonment?

  • Too complex
  • Too many steps
  • Took too long
  • Required information not readily available

The biggest challenge in a mobile age is that none of the account opening processes are “native to iOS” (or Android) and all require users to go to a responsive web application that’s driven from the 20-year old Affiliate link model that was designed for desktop. So, with each additional minute and extra field to complete, or with clunky mobile interfaces, the number of completed applications falls significantly. There goes your sales funnel…and your profits.

Bye, Bye, Bye

According to Forrester, 54% of people filling out financial application forms abandon prior to completion, and on top of this, a recent study by SaleCycle saw financial abandonments reach an average of 79.3%. This is a huge, wasted opportunity considering that customers who attempt to complete an application are expressing a genuine interest in your products and services. In other words, if your process is quick and easy, they will complete their sign up quickly and easily. If it’s not, then you’ve lost a customer and revenue.  

As you can see below, Acorns’ account opening flow is super streamlined, moving the user from beginning to end in an easy progression of screens with limited questions.  

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Dollars are moving to mobile, but no one is fixing mobile  

By 2019, advertisers will spend more on mobile than all traditional media, except television, put together. Why? Because that’s where the eyeballs are. And your customers. According to Zenith, mobile ad spending for 2017 grew 34%, to $107 billion.

FIs that respond to this need and continue to ramp up their already heavy investment in both the online and mobile channels will be better positioned to drive incremental sales, build customer loyalty, and provide an outstanding customer experience.

Innovate to Acquire

Meeting long-term customer acquisition goals for an FI requires identifying and capturing market opportunities while staying ahead of the competition. In a world of specialized products for highly segmented target audiences, being able to launch a new bank customer acquisition program faster than the competition means getting the largest part of the market share. For every month of delay, some of your customer base moves to another product with a competitor. That lost revenue over time accumulates and creates a revenue gap that will never be filled.

At the Benzinga Global FinTech Awards last week, the big brokers spoke about the need for innovation. TD Ameritrade cited:

  • 40% of their trading is happening on mobile  
  • They are doing 250,000 trades/day

The brokers on the panel—which included TD Ameritrade, Schwab, Interactive Brokers and TradeStation—agreed that constant innovation was a necessity in an age when retail brokers interfaces are being compared to Amazon and Google for being clean, easy and intuitive. As we highlighted in a post last year, 72% of millennials would rather bank with Google, Facebook or Amazon than their existing financial institution. The mobile experience is key to this and easy interfaces are what will get them to visit and stick around.

Quick and Easy

What Robinhood, Acorns, and Stash get right with their native/mobile-enabled tools is to allow users to open an account in under 5 minutes. Why? Because those tools were built from the ground up with mobile—and the end user—in mind. They know what’s important when looking at customer acquisition and creating that experience:

  • Hone: Get the message right
  • Streamline the process: avoid pitfalls that will cause potential clients to abandon the flow
  • Focus: Only include the must-have know-your-customer components
  • Make it native: If you do one thing and one thing only, make it native

Friction Isn’t Fiction

Everyone working in fintech should know that reducing friction at key transactional points in your user journey is critical for adoption, conversion and repeat long-term use. Just remember that your users don’t necessarily understand the ins and outs of why the financial industry has to do some of the things it does. So while they expect it to be complex and difficult, those who can make it easy and fast will surely win the acquisition game in the long run.  

 

Screen-Scraping and the Halo Effect

Don’t Believe Everything You See

“Trust is a key strategic asset which creates growth opportunities and defends against competition. It allows deeper customer engagement across products and services.” – Nobel Prize winner, Robert C. Merton

We’re going to talk about screen-scraping again. Because we think it’s so important to be aware of what this means for both consumers and FI’s. You can get more background on the process of screen-scraping and what it means for the future of banking as well as the importance of API’s and innovation in our previous posts here, here and here.

One of the ways screen-scrapers are getting access to customer data is through a halo effect.

This is the foundation of the modern concept of brands. Essentially it means that when we develop a favorable impression of a brand when interacting with one partner at a firm we tend to view the whole firm in a favorable light. Our impression of that firm’s brand is strengthened. Thus creating a halo around that entire firm that is associating with the other brand.  

Screen-scrapers are using logos to build trust and credibility and then turning around and selling the data they’ve so trustfully obtained. By using the logos and trademarks from financial institutions, it engenders trust among the end users who associate the brand of Broker X with their money and the security that their financial institution provides. However, most FIs have not in fact granted permission or rights to the screen-scraper for them to use the logos in the first place. The trust of the logo makes an association for the end user, but this is an abuse of the institution’s mark and negatively impacts the end user and the institution itself.

The Anti Trust

Let’s be honest, most Americans aren’t enamored with big banks or financial institutions these days. However, seeing a logo of a familiar name in one of their finance apps will undoubtedly create a feeling of assurance that things are on the up and up; that their information is safe. As an end user, we’re putting our faith and trust in the visual association of the broker or bank brand on a third party site. And in this case, that trust is unfounded.

I Didn’t Sign Up for This

When this logo appears, it signals to the end user a perception of the financial institution’s endorsement of the technology, thus they willingly link their account. As we’ve argued in previous posts, the screen-scraper can then go in and grab their data — any of their data — and use it and sell it. These companies are selling that data many times over, charging their partners per linked user. But where’s the end user’s cut of the profit? And how many places are they selling it to?  

Millions of Customers + 1000s of Companies = Millions of Screens Scraped and Countless Data Points Up for Grabs

Screen Shot 2018-05-04 at 2.52.29 PM.pngAn Ounce of Prevention

Luckily, all is not lost. Companies like Fidelity and Ally are ensuring their information is secure and are increasingly moving towards APIs for third parties to access their clients’ data. In fact, TradeIt’s SDK specifically helps partners integrate our technology, allowing their developers to integrate faster with simple customizations. This ensures the end user that they’re protected and gives them total control over what happens to their data. By partnering with brokers to access their APIs, TradeIt only accesses the information that the broker makes available.

Here’s how it works:

  • Through a broker’s API, we allow the end user to log into their brokerage account securely.
  • We don’t view, access or retain their log-in credentials.
  • After the user consents, the broker provides an encrypted token.
  • This token will expire, and once it does, the connection is severed.
  • In order to continue to view their portfolio and/or send buy or sell orders from their favorite app to their broker, the end user will need to relink their account.

Safety First

How this differs from traditional screen-scraping is simple: we don’t retain log-in credentials and continue to access and scrape the end user’s data however we see fit. Their information is not available to us. Nor should it be. Not only is this safer in the event of a data breach, it provides true trust with the end user. We only show the logos of brokers with their permission.

Many Financial Institutions are requiring aggregators to sign agreements where the aggregator/screen-scraper is liable for the data in the event of a breach. Not surprisingly, many aggregators are pushing back and not signing these agreements (ostensibly because it cuts off their revenue stream).  

But, as we move into more transparency around banking, brokers are embracing this change. TradeIt has consent pages and end-user agreements that explicitly inform the investor that we’re accessing their data on their behalf. It’s more than just a logo, its an agreement between the broker and the third party. This puts the end user at the forefront, not on the backburner. Which is where they should be in the first place. After all, it’s their information.

In the Question of Data Control, APIs are the Answer

Abracadabra, Watch Your Data Disappear

Whoever said ignorance is bliss obviously never unknowingly shared all their data. As we mentioned in a previous post, consumer data is being screen-scraped into the ether and this creates so many issues around control and the assumption of privacy. Once your data is scraped, it’s gone. Neither the bank or institution, nor the end user has any control.

The problem, as ever with the tech industry’s teeny-weeny greyscaled legalise, is that the people it refers to as “users” aren’t genuinely consenting to having their information sucked into the cloud for goodness knows what. Because they haven’t been given a clear picture of what agreeing to share their data will really mean.

Miss Jackson if You’re Nasty

It’s all a question of control. And APIs are the answer. They offer banks and FIs the ability to control what pieces of data and how much are grabbed by a permitted 3rd party. For example, at TradeIt—from some of our brokers’ API—we see only seven days of transaction history, while others might show 30 days. Typically no one provides more than 90 days but the depth of history varies. In addition, for things like an order blotter, some brokers only provide the current days’ orders. These smaller pieces of data ensure less is shared, though what is shared is timely and relevant.

You Get My Data and You Get My Data, Everybody Gets My Data

With screen-scraping, once you provide your ID and password to the 3rd party, their bots do the scraping and can grab anything that’s available, including your transaction history and all of your accounts under that single login. For some banks or brokers—if the broker is part of a larger financial institution that offers a diverse product set—that could be your brokerage account, retirement account, mortgage, even credit card information. Most end users likely don’t realize that once they give the screen-scraper their login, they have it, and they can and will use it until the password is changed. What’s worse most of the screen scrapers don’t have trademark rights to the logos that are on their service integrations, therefore falsely leading the consumer to believe the institution approves it. In the meantime, they’ve still grabbed that data and it’s gone…to who knows where.

APIs Create a Goldilocks Solution, They’re Just Right

In contrast, most APIs are programmed to call for specific account balances since these services and endpoints are more distinct and inherently control more access to just the needed data. This is why the European Banking Federation’s position is that screen-scraping is an outdated, first-generation technology that should be replaced by APIs, which it sees as a more secure way of enabling direct access to customer data for third parties.

Not only do APIs offer a more tailored solution where you essentially get only what you need, they create a huge potential for innovation. As we demonstrated in a previous post about your data being open for business, companies like Fidelity are already showing consumers who has access to their data and allowing them to control whether or not that’s ok with them.

fidelity_access.png

In Tech We Trust

Brokers need to push themselves to invest in APIs. Ever since the invention of the FDIC, FIs have been associated with trust as it relates to consumer’s money. The theory with bank robbery was that they aren’t hurting anyone since the money is insured. Except now with screen-scraping, we are getting hurt…with our privacy…or lack thereof.

As technology evolves and allows for endless possibilities, investing in methods to engender trust and yet that also support the new ways individuals want to interact with their money, track their wealth and/or use tools for better financial decisions, is vital. Brokers and FIs need to enable that, to securely open their data with controls to prevent misuse or even breaches. This is what will create real trust with their users.

Don’t Build a Wall

Firewalls and detours aren’t the answer. It’s not about closing things off, it’s about opening them up. With the new sharing ecosystem, and with millennials having more trust and more interest in tech-driven brands, FIs need to work to remain relevant. In order to do this, you need to be an active member of the ecosystem and invest in technology that supports these behaviors.

Because, while users may be content to share some of their personal info in order to use your service now, it’s only a matter of time before they realize just how much and possibly decide it’s not worth it.

“We have consistently warned our customers about privacy issues, which will become increasingly critical for all industries as consumers realize the severity of the problem.” – Jamie Dimon

Are they really getting what they signed up for, or worse, paid for? You need to provide comfort and control to your user. If you don’t, they won’t tick that agreement box and they’ll move on to someone who can.  

How Open Banking Can Result in More Innovation

Playing Safety Catch-Up

As we outlined in our last post about the practice of screen scraping, in order to protect user’s data, it’s extremely important that financial institutions start moving towards APIs. With the PSD2 initiative, officially the Revised Payment Security Directive, Europe is ahead of US in terms of best financial institution security and consumer privacy practices. And if the recent Facebook/Cambridge Analytica scandal is any indication, it’s more likely that the US will see a data protection movement similar to what we’re seeing in Europe.

The question isn’t if PSD2 will be adapted in the US, but rather when? Before we try to answer this question let’s take a closer look at what PSD2 actually includes.

What is PSD2?

At its core, PSD2 or Open Banking is about protecting consumers. It enables bank customers to use third-party providers to manage their finances. Banks are obligated to provide third-party providers access to their customers’ accounts through open APIs enabling them to build financial services on top of banks’ data and infrastructure. This places an emphasis on consent via security, innovation, and market competition.

Third-party providers can be either Account Information Service Providers (AISP’s) or Payment Initiation Service Providers (PISP’s).

  • AISP’s provide users with aggregated information about their payment accounts in a single location, such as transaction history, account balances, direct debits etc.
  • PISP’s facilitate the use of payments via online banking with regards to online fund transfers, direct debits, credit cards transactions, etc. This is a game-changer when it comes to avoiding credit card fees and other transaction costs.

By enabling fintechs, large technology firms, other banks, and even certain retail organizations to go head-to-head with banks as PSPs, PSD2 aims to provide lower costs and higher security for consumers and to afford merchants greater flexibility to differentiate customer experiences, including payments.

APIs give the financial institutions the ability to manage security and control compliance risks while at the same time giving users access, control and visibility into how their data is being used—a win/win.

Control Begets Innovation

Giving consumers control of their data and who has access to it opens the door for new innovation and new partnerships where security and compliance are givens. PSD2 creates opportunities for banks to compete as technology innovators, wielding powerful analytical tools to extract valuable insights from their vast stores of proprietary data. And market dynamics and customer attitudes may favor banks that can capture opportunities quickly and effectively. In fact, 35% of banker’s surveyed said in the payments arena, FinTechs were the most likely to benefit from the implementation of PSD2.

There are countless other services FinTech companies could provide if they had access to customer transaction information. Currently, most banks cooperate with data requests, but they can be slow to respond or sometimes block them entirely. PSD2 will make it compulsory to both share the data and build systems capable of making this trade real-time. A massive win for consumers and businesses.

So When Will PSD2 Come to the US?

There’s no timeline right now, but there are several factors that could compel this directive to happen in the US sooner than later: requirement of screen scraping companies, FinTechs and FIs to release known data breaches; a regulatory push; another Equifax breach; a consumer-driven movement; or even FIs finally having good personal finance management capabilities.

Smart companies will start preparing so the minute we have our own Open Banking, they’re ready. Or better yet, start acting like PSD2 is already here. That means:

  • Building and opening up APIs to allow your customers to have control
  • Thinking about how you can innovate once restrictions are lifted
  • Understanding the control APIs provide for consumers and why this is a benefit
  • Learning how Open Banking can save you and your customers both time and money   

Creating more transparency and providing consumers with more control over who can access their data is a great thing for investors and an even better opportunity for innovation. How will you capitalize?  

 


1 McKinsey Global Payments Practice PSD2 Survey 2017