In his vigorous debunking of the Whig orthodoxy, Thomas Kuhn could not have foreseen how broadly his assertions on paradigm change would be hijacked. For Kuhn, a ‘paradigm’ represented an intellectual framework which supports growth in the body scientific. Today ‘paradigm change’ is a term which can be used in a much more siloed way. Sector and company-specific R&D teams have acquired the term in order to generalise their development activity. Marketing teams operate in close coordination, leveraging new approaches such as thought leadership to disseminate these breakthroughs. Ultimately the goal is inherently capitalist in nature; to meet the emerging demand for innovative products and services with cutting-edge technologies and methods.
We can now only speculate if Kuhn would be pleased with this land grab. Most likely not…though perhaps he would have made an exception for the emerged paradigm of automated financial advice or ‘robo-advice’. High-quality financial advice empowers optimal decision-making with respect to savings, investments, retirement planning and lifetime capital expenditure, such as buying your house. In the UK, the Retail Distribution Review (RDR), which came into force in 2013, catalysed the emergence of robo-advice 1.0. The RDR aimed to create higher professional standards, re-aligned the monetisation model and has also re-structured the market for financial advice. Accepting that RDR would push human advisors higher up the client wealth stack, the regulator foresaw and deliberately fostered the environment for the creation of a new suite of digital advice solutions.
The period since 2013 has seen no shortage of innovation and market entry to support the development of robo-advice 1.0. In the pure wealth space firms such as Nutmeg have aimed at disrupting the traditional discretionary wealth management product with a purely, or mainly, digitised alternative. There has been a strong generation play too: Micro-investment platforms, which aim to encourage saving and investment in an incremental and highly engaging way, have abounded in the past couple of years. Their clear goal has been to try and lower the initial age of engagement with wealth management, which has traditionally been the near or at-retirement demographic. New, or neo-banks have also made a strong debut. In Brazil, Nubank has radically shaken up a staid retail financial services market in which consumer satisfaction has been historically very low. The inherent client-centricity, innovation and inclusion which they create are likely to be drivers for the future of banking and associated wealth services around the world.
Robo-advisory 1.0 has based itself on some worthy underlying principles: To democratise access to financial services and to increase engagement. In both respects, one could say that it has been successful. Under-served segments can now access new products aimed at improving financial decision-making and younger generations are being enticed by new products designed specifically for them. However, as we’ve established above, new paradigms are designed with capitalist rather than purely altruistic intent and so far, the ROI generated from the industry has been very limited. With a few notable exceptions, none of the firms in the wealth disruption, micro-investment or neo-banking spaces are as yet making money. Incumbent financial services (FS) firms have been warily looking over their shoulders at these upstarts and monitoring the extent to which their market share is being eroded. So far, they don’t seem to be too worried.
Paradigm change can be driven by a multitude of factors. Technological innovation, improved methods and changes in demand are all common instigators of change. While all the latter means would be described as evolutionary, the impact of Covid-19 is revolutionising how we live and interact. Out of necessity, we are now deeply engaged with digital services that we hadn’t even heard of a few weeks ago. Some of this change will be temporary, certainly we hope that social interaction will not be intermediated for much longer. Much of it, however, will not. In the UK general medical practitioners (GPs) are hailing the impact of digital appointments during the pandemic. Acknowledging that some critical service provision can only ever be face-face, they equally claim some patients will ‘never go back’ for certain treatment pathways.
This digital awakening creates highly fertile ground for the next paradigm in wealth and financial advice. Whilst the first wave of robo-advisory solutions aimed at promoting greater inclusion, the next wave will focus on digitally transforming the products serving traditional channels. Much of the intransigence to innovate in these verticals has owed to a failure to rationalise the role of the human advisor versus the role of the ‘robot’. This debate has always been far too mutually exclusive in nature – the financial consumer will always welcome innovation where tangible value is added. Hybrid financial advice models, which integrate the optimal technological tools to enhance traditional services will capitalise on the step change in digital adoption. Far from diminishing the emotional connection between advisors and their clients, technology will free them to focus on building deeper relationships therein.
Open banking has a vital role to play in this revolution. Momentum in this sector has been building for over a year and the post Coronavirus FS landscape will be driven by innovation in this space. The inherent beauty of open banking is that it has created a platform for collaboration between incumbents and disruptors in financial services in a way that doesn’t exist in other sectors. PSD2 and GDPR compliance may have necessitated the relationship, but the future of open-banking will be to deliver new products and services on purely commercial grounds. In the meantime, the limitless creativity displayed by companies such as Snoop will awaken all consumers to a new range of products and services which can enhance their financial services experience.
Kuhn may not have intended it as such, but in the modern lexicon paradigms can be created, changed and rendered obsolete in a variety of ways. A global healthcare pandemic is an extreme event and as such life-changing in an immeasurable number of ways. The pace of change in financial service provision will accelerate as we exit the crisis and be aimed in a much more holistic way than before. Collaboration will be the key to optimal solution development and outcomes for customers.