Avec son numéro d’avril 2017, le journal suisse «Bilan» a récemment publié un supplément sur Fintech en Suisse. J’étais ravi de constater que l’éditeur a cité ma définition de Fintech, précédemment publiée dans le Journal of Innovation Management. Comme la publication originale était en anglais, la traduction française publiée par Bilan est la suivante:
«Fintech est une nouvelle industrie financière qui déploie la technologie pour améliorer les activités financières.»
(Patrick Schueffel tel que cité par Comment la suisse se profile comme un centre Fintech compétitif, Bilan 4/2017, supplément Fintech – Construire la finance de demain, p.6)
The number and diversity of Fintech offerings is soaring. As banking clients increasingly often enjoy not only a better user experience, but also cheaper rates at Fintech firms, their willingness to be locked-in with one or two universal banks diminishes. Henceforth clients will gradually assemble their own individual “banks”, comprising a range of offerings from different Fintech companies. Those firms which will be able to provide an overarching structure to seamlessly wrap the multitude of Fintech offerings will experience their heydays.
Modern production technology allows what would have been inconceivable only a few decades ago. If we want, we can have products of mass production tailored to our needs nowadays. Dell made only the beginning when first assembling PCs to our requests on a large scale. Today we order our tailored sneakers at Nike ID, wear a unique t-shirt from Spreadshirt and eat M&M’s sporting our very own initials. Yet, the trend of mass customization did stop in the manufacturing sector. We can already observe its ramifications in the financial services industry where Robo-Advisors offer retail customers to tailor their client portfolios. But this is not the end point of the evolution. It is the mere beginning which will eventually lead to tailored banks.
The personal balance sheet
Like it or not, every single one of us carries his or her own very personal balance sheet: On the asset side, we have liquid asset positions such as the cash that we have in our wallets, the money on our current accounts, our savings accounts or money market instruments. Our personal investments may comprise medium term notes, bonds, stocks, mutual funds, pension savings and/or alternative Investments. Finally, we may possess highly illiquid real estate investments such as our primary residences, vacation homes or even property that we rent out.
On the liability side we may also have a variety of items. Current liabilities may include unpaid bills, credit card balances, taxes due, installment loans due in the short run, consumer loans, car loans, student loans, mortgages due within one year etc. Non-current liabilities may include any consumer, car or student loan that is due after one year. Last but not least, we may have mortgage debt for our primary residence and/or vacation homes and/or rental property.
Hence, as individual as we are as human beings, as individual are our personal balance sheets. Yet, what we do have in common is that we willingly or unwillingly manage these balance sheets. We carry out treasury functions on our personal balance sheets by paying bills and installments, transferring money from one account to another, by investing in shares or by redeeming mutual funds etc.
The Fintech Alternative
So far many consumers in the western world have ties to one or two banks, oftentimes universal banks, that cater to all of the needs resulting from these treasury transactions. Yet, the service offerings of universal banks are increasingly rivaled by Fintech firms that offer a narrow, yet highly specialized service or product.
In order to transfer money from one provider or account to another the consumer can chose among dozens of payment providers such as TransferWise, LiquidPay, Paypal and the likes. For trading purposes the client may want to turn to eToro or Robinhood. Even donating money becomes easier and less burdensome with Fintech providers such as Elefunds.
These new type of financial services providers that found their niches on specific links of the value chains of universal banks typically not only promise their clients a better user experience, but also lower costs. What is thus foreseeable for the near future is that clients will no longer accept to be locked-in with one or two banks, but that they will make use of a range of financial service providers. Eventually every user will assemble his or her very own bank, the IBank* as I call it.
Assembling the IBank
The IBank will comprise a selection of services provided by specific Fintech companies handpicked by the individual client. This can happen dynamically and on an ad-hoc basis or on a more permanent base. The client – or an overlaying algorithm for that matter – may decide on a case-by-case basis which payment service would be optimal for a specific transfer. On a more longer term basis one mortgage provider may be chosen until the renewal of the mortgage is due.
What is important to note, however, is that clients will make use of tailored “banks” which may be as personal as their individual balance sheet. The challenge and opportunity in this future banking world will be to provide the glue that seamlessly keeps together these services provided by different providers. Those providers who manage to assemble and maintain an overarching structure that smoothly integrates the multitude of service offering of Fintech providers will have a bright future in finance services world which is being ever more atomized.
*IBank like “I bank” – not to be mistaken with the iBank offerings by Barclays, The Bank of Georgia, Fransabank, BCU and so on.
Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg, email@example.com, www.heg-fr.ch
There is a popular misconception about Lemmings. It is said that they commit mass suicide by jumping off cliffs when their population becomes too dense. However, this is quite far from the truth. Instead of committing suicide Lemmings will seek pastures new when their environment no longer serves their biological urges. As Lemmings can swim, they then may choose to cross a body of water in search of a new habitat. However, when doing so, many may drown as the fjords or rivers are too wide, thus stretching the Lemmings’ physical capabilities beyond their limits.
Financial markets and Lemmings
What is true, however, is that large populations of Lemmings move in one group, and it is this group migration that influences the moves of the individual Lemming. Once a significant share of the group has entered the water, the other Lemmings are likely to follow suit, inconsiderate of the potential fatality of their choice. Financial markets are not so different. Benchmarks are extensively being used and research in the field of behavioral Finance has yielded strong indications that herding behavior is rather pronounced. The broadly hailed Robo-Advisors of the Fintech age are likely to amplify this problem.
Robo-Advisors are sprawling across the globe. A Robo-Advisor can be defined as a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums employing portfolio management algorithms. Clearly, while there are exceptions, Robo-Advisors typically build client portfolios from ETFs, more specifically from equity ETFs. This model has worked fairly well as long as the stock markets were going up.
However, what will happen when the markets turn south? Most Robo-Advisors are not older than five years. Over the past five years the Euro Stoxx 50 went up 32%, the Dow Jones soared by 68%, and the S&P 500 grew by 78%. Against the backdrop of these well performing indices it requires no magic to put together a well performing client portfolio. Yet, in declining markets, the index-pegged Robos will just perform as poorly as their benchmarks.
No hedging functionalities
Evidently, the heyday of hedge funds are over. Clients are no longer willing to accept a 2/20 fee structure no matter the performance of their investment. Yet, as soon as markets move down for a prolonged period, many investors will start to liquidate ETF positions. These divestments will fuel another round of decline in indices. In this situation Robo-Advisors will be rather useless as they typically have no built-in hedge functionality. The herd of Lemming-Robos will just follow the rest of the market into deep waters.
Robo-Advisors must evolve
Not all is lost yet. Robo-Advisors need to make the next evolutionary step and get prepared for wider market downturns. Consequently, they should consider incorporating hedging functionalities into their offerings. Gambling on ever increasing stock markets is just too risky of a gamble. However, if the supply side, does not act, then the demand side should swing into action and diversify their ETF portfolios. Clients may therefore want to invest part of their assets into hedged investment structures of different provenance.
No matter the cause of the next financial market downturn, it is safe to say that it will happen. Lemming Robos which will not have enhanced their offerings by then, will not serve their clients well. A broad decline of equity indices may then lead to a true renaissance of the hedge fund industry. Human driven alpha generating strategies will then take back the lead from beta generating Robo-Advisors.
Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg, firstname.lastname@example.org,www.heg-fr.ch