Why ‘boring’ financial innovation matters
For all the industry’s talk of future technological leaps, some of its recent innovations, while seemingly prosaic by comparison, are proving vital to many customers in need right now
Lofty predictions about technologies such as artificial intelligence, blockchain and big data analytics have been echoing around conference halls worldwide in recent years. Futurologists have had a field day telling us how advances in these fields will transform how we – or, more realistically, our children – will engage with financial services.
But how about some of the less sexy innovations in the industry that are already streamlining processes, cutting costs and cementing customer relationships?
One of the UK’s original challenger banks, Metro Bank, boldly ended the status quo back in 2010 by opening on Sundays. At the time, it also introduced the novel idea of photographing new customers when they visited a branch to open an account. Whenever they came to a counter thereafter, their photos would be uploaded to the clerk’s screen for ID verification purposes, helping to protect against fraud.
Such innovations, while seemingly mundane compared with the promise of AI, have benefited both institution and customer in equal measure. In his keynote speech at the UK FinTech Week event in April, the chancellor, Rishi Sunak, shared his “vision for a more open, greener and more technologically advanced financial services sector”, yet we must beware of innovation for its own sake.
Many digital advances made in financial services during the pandemic have not been earth-shattering ideas. Rather, they have been necessary solutions at a time of crisis. In putting human need before technological ambition, several businesses accepted any ensuing loss of profitability because it was the right thing to do from an ethical standpoint.
At TSB, plans already in place for a partnership with software giant Adobe were accelerated by the pandemic, reports Jason Wilkinson Brown, the bank’s head of digital propositions, partnerships and open banking.
TSB made 18 application forms available online through this partnership. These have supported many new pandemic-related services, such as emergency repayment holidays on mortgages and bounce-back loans for struggling businesses. In the first two months of the initial lockdown alone, the bank handled 80,000 interactions based on these forms.
“More crucially, we saved about 15,000 customers from endangering their health, because they didn’t need to visit a branch to apply,” Wilkinson Brown says. “The pressure of a situation such as the one we’ve all been experiencing naturally coerces everyone to solve problems.”
The pandemic has accentuated the UK’s stark economic divide. A report published in June by research charity Centre for Cities identified that urban households in the south of England had tended to make “Covid savings” during the pandemic, whereas their equivalents in the rest of the country were more likely to have been pushed into debt.
Wilkinson Brown says that TSB’s new, if admittedly simple, solutions were designed to help all customers, whether the Covid crisis has proved a financial blessing or a curse to them. The bank’s partnership with investment platform Wealthify has handled more than £10m of funds since it started in November 2020, for instance, whereas its bill-switching service, launched in conjunction with ApTap, has helped each customer to save £150 on average since April 2021.
Navigating newfound freedoms
Not all recent innovations have been inspired by the pandemic, of course. The so-called pension freedoms that the then chancellor, George Osborne, enacted in 2015 have proved a particularly significant development over the past six years, for instance. These have granted savers greater access to their pension pots, without the prohibitive taxes that had previously been imposed.
Yet such freedoms have served to complicate the situation for many defined-contribution scheme members with life-defining choices to make. According to a research report published by the Pension and Lifetime Savings Association in 2019, more than three-quarters (77%) of savers do not know how much money they will need to last them in retirement.
Unclear about the optimum rates of withdrawal, the tax implications and how to counter inflation, many pension savers would benefit from comprehensive financial advice. But, at an average hourly cost of £150, such guidance is often out of reach.
Ian McKenna, the founder and director of the Financial Technology Research Centre, offers some context to this situation.
“The Man from the Pru was the archetypal person who ensured that everyone made the modest level of savings that they could afford,” he says, referring to the army of agents that the Prudential insurance company once employed to visit customers’ homes nationwide and collect premiums. “In reality, that was an incredibly expensive way to serve consumers.”
Years of consumer lobbying, tighter regulation and improved professional standards – all good things, McKenna stresses – have since pushed up the cost of financial advice, making it a luxury that only about 3% of the population can afford regularly.
Where human meets machine
One of the industry’s responses to this trend in recent years has been the development of robo-advisers. These automated systems, designed to address what the Finance Conduct Authority refers to as the advice gap, guide consumers towards the options that best match their stated financial goals. Yet doubts about their quality, trustworthiness and commercial viability have proved barriers to their success in many cases to date.
Perhaps representing the natural evolution from the Man from the Pru, M&G Wealth is starting a hybrid financial advice business that enables clients with modest wealth or simpler financial needs to access a service that combines digital processes with the knowledge of a qualified professional.
The deputy CEO of this new operation, Richard Caldicott, explains that many consumers are willing to do some of the work themselves but would also like to have a financial adviser on hand as a sounding board.
Similarly, many people wouldn’t necessarily want that person sitting in their living room two or three times a year, he says. Under the hybrid model, they can compile and input the relevant information themselves, which is then digitised, automating client recommendations and reporting, eradicating the onerous re-keying of data.
The approach is designed to break through the wall of confusing jargon that’s endemic in financial services. The uninitiated are unlikely to know exactly what their ‘capacity for loss’ might be, for instance.
“We’ve built different games into the system to make it more engaging to users than having to answer fairly obtuse questions – for instance: ‘Would you rather have £25 today or £28 tomorrow?’” Caldicott says.
Sexy? Not really? Meeting a desperately dull, yet hugely important financial need? Absolutely.