Digitalisation comes before Digital Transformation
Although industrialisation has reached the financial sector, many companies have catching up to do. Networking, collaboration, data – these are the new core concepts in wealth and asset management. On the one hand, it is about making all available and accessible in a digital format to increase the efficiency of business. On the other hand, it is central to understand the changing customer wishes and implement the right digitalisation strategy.
Switzerland remains the most significant offshore centre with net new money growth of around 550 billion Swiss francs until 2022. Nevertheless, the wealth managed by independent wealth and asset managers, including family offices is stagnating. What is the reason for this and what must we do to convince clients of our services?
Innovation- and technology-driven changes create new business opportunities. However, there is a difference between digitalisation and digital transformation. If systems, information, and communication technologies are implemented to increase the efficiency of existing processes, we speak of digitalisation. This is the case when customers use mobile applications as the primary channel for communication, which in turn drives demand for new digital investment solutions. In this context: every information that is not available in bits and bytes may soon become obsolete and irrelevant.
Reinvent your business
Digitalisation usually leads to efficiency gains. It is the basis for new business models because new markets and new customer needs can only be served by adopting technological innovations. Precisely, disruption occurs when new players serve markets and customers that have been neglected by established companies. Challenger banks can be agile fintech companies, neo-banks, or firms from outside the financial sector.
Few of the approximately 2’400 independent asset managers in Switzerland have technological support in portfolio and investment management, risk control and compliance. When it comes to digital customer interfaces, there seem even fewer to be ready for the future. The fact is that industry 4.0 has already arrived in banking and we see first banks transforming themselves into technology companies employing artificial intelligence. Transaction and customer data are intelligently linked and evaluated using algorithmic procedures in such a way that customers are served with personalised solutions via digital platforms regardless of time and place.
Some banks have learned from leading technology companies in the USA and China and collect data with loyalty programs, among other initiatives. UBS offers its clients the opportunity to categorise their financial transactions and evaluate them in a budget plan. Information on the client’s investment behaviour has been used for years. Psychological behavioural patterns, which lead to irrational decisions, have recently become actively supplemented by robo-advisory services. The ambitions of some tech companies to penetrate financial services is undeniable. As a consequence, social media data will soon be included in sentiment analysis.
Data without meaning is worthless
The digital representation of physical objects (Internet of Things), events or unstructured data derived from client meetings is the starting point for innovation. Research conducted by the Business Engineering Institute St. Gallen confirms that falling transaction costs and marginal costs in all areas of information-based added value (data collection, storage, processing, and transfer) will change traditional business models. The cost-effective availability of information reduces information asymmetry (uncertainty) in exchange for services and changes customer interaction. Neither mass production of financial products and pushing them to the market nor mass communication will work in the future.
The monetisation of data is structured into internal data that customers generate through interactions with the bank and external data from other sources outside the company borders. The more diverse the data sources, the more specifically the customer’s wishes can be satisfied. The smart use of data is a source of enormous potential. Chinese juggernauts such as Alibaba, Tencent and Baidu are well advanced in collecting data and using predictive analytics. Customer wishes that have not yet been recognised can thus be anticipated.
One trend is fully integrated mini-programs that cover all areas of life. The so-called super-app continuously collects and links data depending on what the consumer is doing; payments, investments, insurance, shopping, travel, health, or social media activities. To benefit from such an ecosystem, traditional financial institutions must open up and embrace alternative models to co-create value through collaboration with fintech companies, search engines or e-commerce platforms.
Although there is vast potential in data monetisation, according to a study by Boston Consulting Group, only a third of the data available to banks are further processed. For independent asset managers, the number is assumed to be insignificant. One reason could be that most business owners are at retirement age. They are not technology-savvy and have shown little interest in the digital innovations of recent years. Throughout their careers, they have focused on serving clients and managing portfolios.
Independent and individual
Inheritances and succession arrangements represent a third of the net new asset growth at Swiss wealth managers. This can be a crucial factor in the demand for independent advice in the next few years. Millennials, who today are between 23 and 38 years old, and the even younger generation Z will exclusively conduct their financial businesses with ultramodern digital tools. This clientele will exclusively use mobile apps and hybrid models (client advisor combined with algorithm/machine), providing geographic independence and 24 hours a day, seven days a week access.
Changing life situations and customer behaviour deliver the criteria for switching accounts from a bank to an independent asset manager. When selecting a new advisor, a personalised, digital, and cost-transparent client experience that is free of conflicts of interest is becoming increasingly important. Experts expect the industry of independent asset managers to grow by up to 20 percent in the next three years but only if those firms go digital. With an effective digitalisation strategy, the intergenerational wealth transfer offers business opportunities.
Leaders must approach the challenges they are facing in the digital age. They must evaluate the use of data and explore the potential benefits of data monetisation. The information-based value creation process supports a service-oriented approach characterised by the central role of the customer who determines which services he/she wants to buy in line with his/her current life situation. Those who are committed to actively approach digitalisation will have the chance to transform their business models in a way they can inspire the next generation of clients.
This article was first published in German on September 12, 2019 as part of the NZZ Special Supplement on Asset Management (NZZ Sonderbeilage Vermögensverwaltung) titled “Die Chancen der neuen Technologien nutzen”.