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Automatic For the People : Fintech Gets Personal


Fintech investment is booming, but what’s fuelling it – and is it sustainable?

Paolo Sironi explains why the future lies in robo-advisers and game playing.

After the financial crisis of 2008, you’d often hear Winston Churchill’s words invoked: never let a good crisis go to waste.

Fintech entrepreneurs clearly took note. In the past few years, fintech has emerged as one of the strongest examples of what the WEF’s Klaus Schwab calls the Fourth Industrial Revolution, where technologies fuse with the ‘real’ world to impact economies and industries, “even challenging what it means to be human.” Investors and multinationals have been pouring money into fintech start-ups – more than $50bn into 2,500 companies since 2010, according to figures from Accenture, the consultancy. In the first quarter of this year, global investment in fintech start-ups hit $5.3bn, a 67 per cent rise on last year. In Europe and Asia Pacific, investment nearly doubled.

While some talk about bubbles – citing the implosion of ‘unicorns’ such as the UK’s Powa – Accenture maintains the industry is levelling out and becoming more mainstream. In the past the set-up was one where new, digital Davids took on financial Goliaths, but fintech advocates now see scope for incumbents to align with disruptors and emerge with better ways of serving customers. “Disruption is already underway, though it might take the form of transforming existing firms more than putting them out of business,” is how Paolo Sironi puts it. An expert on quantitative financial analysis and digital technology for IBM, Sironi’s latest book, “FinTech Innovation”, offers a detailed, behind-the-scenes look at where fintech is going next. It charts the evolution of ‘robo-advisers’, and how goal-based investing and gamification will transform how we manage and invest our money in future.

“We’re seeing personalisation converging with planning and advice” among digital, or robo-, advisers, which attempt to standardise that personalisation via technology, as Sironi explains. He sees customer demand as a major force for transformation: “Banks have become too complex. Trust has eroded. There is a need for change in order to help people manage money differently. Financial advice needs to become more transparent and truly independent, rather than pushing products.”

Regulation is the main impetus for change. That has forced existing institutions to “think differently. Banks won’t continue to make money in the same way,” he says: “Greater transparency [of pricing] and a recognition of the need to put clients at the centre of their services is forcing banks to shift from distributors of products to the packaging and distribution of advice.”

Fintech is exploiting this position by offering simpler, cheaper ways for customers to invest, engaging them more and disintermediating the banks. In the last few years, that had led to a boom in ‘wealth-tech’ and robo-advisers (such as Nutmeg), but also peer-to-peer lending: “anywhere where disintermediation is possible.” Banks may be big tech spenders, but they are often outdated, he adds. “If you’re a newcomer, you can build technology around need, so you can be more agile.”

Robo advisers can offer a buffet of service levels, instead of using a standard questionnaire as their best guess of what a customer wants.

As a result, they are increasingly targeting affluent customers. Now provision is based on the needs and the tech literacy of clients. “It doesn’t necessarily mean they appeal only to digital natives.”

But it’s not just a question of throwing technology at the sector. “What you sell to customers, the way you engage, must be different.” This is at the centre of what Sironi calls ‘goal-based’ investing, a philosophy that puts the individual investor at the heart of decision-making. Goal-based investing draws on behavioural psychology – what individuals want from their investments, how they hope to use their money, and when. “The true risk that individuals face is not market volatility but the probability of falling short of personal goals,” according to Sironi. Addressing this is the true game-changer, because it more accurately matches the advice to personal goals and ambitions over time.

But human beings are notoriously bad at identifying what will make them happy in future, as we’ve learned from psychologists such as Daniel Kahneman and Daniel Gilbert. What suits us today won’t always be a priority tomorrow. Sironi sees gamification as the third big trend to address this. Gamification, he says, is a way for institutions and investors to understand their own attitudes to risk. “If you don’t understand markets, you’ll be seduced by latest headlines. Simulated games can help you feel pain and gain in a ‘safe’ environment. You can learn from how you behave in the game, and shape your portfolio based on this,” he says. Banks already use war games for that purpose with corporate clients. Digital engagement of human planners will also help them improve profiling, and there could be more start-ups emerging to offer educational opportunities for institutions. AI capabilities allow the technology to ‘learn’ and teach individuals about their own tolerance for risk. The potential effect of these refinements? There could be less exuberance, as people learn to stay the course and seek out longer-term opportunities, rather than just following the market. It will be start-ups that can combine the ‘fin’ and the ‘tech’ to create something new that will stand out. “Disruption cannot last unless there’s a way of sustaining innovation,” says Sironi, citing how Apple morphed from a hardware producer into services and branding. Financial incumbents that survive will do so by creating alliances with new ventures that transform them from the inside. But the most disruptive quality of fintech is, ultimately, not that it’s automated. It’s not the digital element that makes start-ups transformational. It’s how they can enhance the personal.


This post was created on February 9 2017 by Oliver Woolley