Michael Mansard, Principal Director – Subscription Strategy at Zuora
For decades, large traditional banks ruled the Financial Services world. Backed by government regulations and with the resources to buy the first wave of mainframe computers when they were released, for many years these institutions were untouchable.
But, over the last decade, that competitive moat has largely eroded. Growing regulations, stricter fines and flat interest rates meant that the door opened to a new wave of digital disruptors. Then came Open API legislation – which essentially forced banks to open up their black boxes, enabling customers and other companies to access all their basic functions from payments and savings to financial advice. It was the final nail in the coffin for some.
However, it’s not all doom and gloom. Traditional banks can survive this time of transition by redefining who they are and what they do. After all, these players already own a massive captive audience – often more than a million customers – and they have the data on hand to help qualify this audience. Moreover, they are audited and scrutinised so heavily that they are often seen as the most trustworthy partners.
All traditional banks need is a little more creativity. They need to investigate new business models and find imaginative ways to differentiate themselves from the new entrants to the market.
If you can’t beat them
With new fintech and challenger banks taking the market by storm, traditional banks need to do what they can to level the playing field and elevate their offering. In a world full of Monzos and Starlings, this is becoming an increasingly difficult task. However, perhaps there are lessons to be learnt from these new, more agile digital players. In fact, according to recent research from Accenture, traditional banks could increase their annual revenues by nearly four per cent if they embrace the innovative business models used by digital-only players.
One such business model is subscription services. To gain access to a product or service through subscription models, customers are charged a recurring fee at fixed intervals, whether weekly, monthly, annually or on a pay-as-you-go basis. The key distinguishing feature between this and the recurring fees or premiums provided by most FS organisations is the emphasis on customer-centricity, whether that’s through more personalised pricing models, delivering continuous value, or allowing subscribers to be in control of their own journey.
For companies operating in the financial services industry, this could mean more opportunities to upsell and cross sell services which, in turn, will help to increase customer satisfaction, reduce churn and unlock new revenue streams. Subscriptions can also help cast a wider net to expand an organisation’s addressable market. For instance, traditional banks can make their products and services more affordable, not necessarily by reducing the overall cost, but by allowing customers to spread their payments over a longer time period. Given this ability to grow user bases, subscriptions can boost revenue growth in the long run. In fact, according to Zuora’s latest Subscription Economy Index, subscription services, alongside the unique insights provided by them, have enabled the businesses that adopt them to grow 4.6x faster than the S&P 500 over the last decade.
Some financial services organisations are already reaping the rewards of adopting new digital business models. Whether it’s flexible “Wabi” car subscriptions from Santander Consumer Finance, digital service packages for travel and entertainment from Barclays personal banking or Robo Advisor from Fidelity Go, companies across the industry are opening the door to a whole new world of possibilities. Although corporate, investment and wealth management companies have traditionally lagged behind, the time to change this is now.
Achieving partner status
Over the years, customer needs and desires have changed dramatically. If the more traditional financial services companies are going to continue to thrive, they too must adapt. A bank can no longer just be somewhere where individuals go to deposit and retrieve money. Today’s consumer wants more and if their bank isn’t offering it, they’re not afraid to look elsewhere.
In order to attract new customers and retain current ones, traditional banks need to focus on achieving that elusive partner status. This is where subscription models come into their own. Through a significant amount of usage data, they enable businesses that are using them to interact with their customer base and adapt their services to match demand. This data can be used by businesses to curate competitive pricing structures and develop strategies to entice and retain customers with customised offerings.
A fundamental success factor for subscription sellers is personalisation. A product or service which is tailored to suit a customer’s individual requirements and take personal preferences into account is a great way to earn customer loyalty and build stronger, long-term relationships. By solidifying those relationships and reducing churn, traditional banks can reimagine their business as a recurring service, rather than an accumulation of transactions.
As we enter into a new era in banking, those that fail to adapt will be left behind. It’s time to redefine the image of the ‘bank’, stand up and be counted. According to McKinsey, 80% of wealth management clients will want to access advice in a Netflix-style model – which is data-driven, hyper-personalised and continuous – by 2030. Through embracing new digital business models – such as subscription services – traditional banks can meet these expectations in a way that enables them to not only survive but thrive in one of the most competitive markets in the world.
Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study
Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute
Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.
The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.
Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.
THE RISE OF ESG
ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.
The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.
There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.
What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.
TECHNOLOGY MULTIPLIES TRUST
Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.
The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.
It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.
THE PULL OF PERSONALISATION
How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.
Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.
So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).
When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.
TRUST IN THE FUTURE
As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.
2022 ESG Investment Trends
Jay Mukhey, Senior Director, ESG at Finastra
Environmental, Social and Governance (ESG) themes have been front and center throughout the pandemic. While the framework has been surging in popularity for several years, COVID-19 served as a period of reflection causing many companies, investors and other individuals to take these factors seriously. It’s something that we can no longer afford to ignore.
We are witnessing drought, adverse weather patterns, hotter climates, and wildfires with more regularity, raising the profile of the climate crisis. Efforts were renewed at COP26 in Glasgow last November to help address the challenge, with the signing of the Glasgow Climate Pact and agreement of the Paris Rulebook. As a result, we are now seeing record net new inflows into ESG investing and impact.
Evaluating ESG criteria
Long gone are the days when ESG issues were at the periphery of a company’s operations. In just a few short years, ESG criteria have become a key metric for investors to evaluate businesses they are considering investing in.
Investor money has poured into funds that consider environmental, social and governance issues. Data from the US SIF Forum for Sustainable and Responsible Investment shows that ESG funds under management have now reached more than $16.6 trillion. It’s not just institutional investors who are embracing ESG, with Bloomberg Intelligence predicting that savers across the world will amass £30.2 trillion in ESG funds by the end of the year.
Due to the multitude of divergent factors that contribute to a company’s success on ESG, it can be tricky to pin down exactly what criteria to measure. Depending on the industry a company operates within, environmental criteria could include everything from energy usage, the disposal of waste and even the treatment of animals.
Social criteria are primarily related to how a company conducts itself in business relationships and with stakeholders. For example, does it treat suppliers fairly? Is the local community considered when the business makes decisions that would impact them? Do they have a statement and policy around modern slavery?
While governance criteria have traditionally been an afterthought, this may be changing. Everything from executive pay to shareholder rights and internal controls are relevant to investors within these criteria.
Tracking ESG for competitive advantage
Many experts within the financial services industry point to the power of ESG as a major competitive advantage, if used correctly. It has been noted that increasingly corporations, from big Fortune 500 companies down to small scale-ups, will communicate on their sustainability metrics to grow their business and to attract talent. However, it’s no longer enough to just pay lip service to ESG issues, with abstract commitments increasingly being seen as insufficient. Companies must now quickly progress to concrete objectives that can be measured and tracked.
A wide range of data providers now offer detailed information and tools that can measure ESG performance and effectiveness. Yet major challenges remain around bringing together what is often extremely fragmented data and transforming it into actionable insights.
Focus areas for 2022
The ESG criteria that investors measure is by no means stagnant. Complex societal challenges regularly emerge that require the attention of companies. Contributors recognize several topics that demand a sophisticated approach, including the COVID pandemic, diversity challenges and powerful social movements.
Companies operating within the financial services sector face several specific challenges related to ESG, with contributors believing that fintech will also continue to play a central role in finding answers to them.
For example, industry experts expect customers to be more demanding of firms in SME lending when it comes to understanding exactly what impact they are having on the climate. For many financial services firms, 2022 will be the year that they will try to reduce the time it takes to bring ESG products and services to market, such as green loans and mortgages, as well as checking accounts with sustainability and carbon tracking capabilities.
When selecting a service provider, customers are increasingly interested in the ESG credentials of their bank or financial institution. Research from PwC finds that 80% of consumers are more likely to buy from a company that stands up for environmental and governance issues. Consumers are one of the main drivers of ESG and many are putting their money where their mouth is. It’s a trend that’s not going away; financial institutions need to start implementing their strategy for ESG now.
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