Retail Banking

Retail Banking

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Are you banking on your bank?

It’s the last Friday of the month and you recall receiving a friendly email that your payslip is available. You quickly check your bank account and see that your salary has been paid. ‘Great, time to celebrate!’ – isn’t that the first thing that comes to your mind?

Well, let’s look beyond that one happy Friday.

Once your rent (or mortgage if you are lucky) and bills are paid, you are hopefully left with an amount that you wish to set aside. Maybe for a holiday? A house? Or just for the rainy days? Regardless of what you are saving for or how big the pot may be, have you ever thought about whether you are doing in the right way?

With the interest rates being at their record low, perhaps keeping your money in a traditional savings account isn’t enough. The Bank of England has set the bank rate at 0.25%, which gives very little incentive to commercial banks to pay you higher (or any) interest on your savings.

On top of that, the UK inflation has been climbing persistently, reaching 2.90% (13 Jun 2017). This in layman terms means that what you can buy for £100 today will cost you £102.90 next year. And how exactly will you be able to afford that if by then for a deposit of £100 you only earned £0.25 in interests?

This very simplified example depicts what the risks are of just leaving your savings in a bank account. However, it also makes you think – are there any other options? And the answer is yes!

Lately, the attention has been drawn towards the FinTech industry, where the traditional financial institutions are challenged by new players who leverage technology to lower their costs and to enhance customer experience. This naturally attracts a lot of people – who doesn’t like having their finances at fingertips?

Robo-advisory 101

In the savings industry there are robo-Advisors and they are here to offer you a digital low-cost, low-effort alternative. What it really means is that you open an online investment account and a profiling questionnaire will determine your risk tolerance as well as the suitable investment mix. If you are happy with the results, you can get started. That simple! Do note that the term ‘robo’ is somewhat misleading. Rather than a robot being in charge of all this, there is a full house of people who work hard to provide you with this service.

The great thing is that anyone can get started, be it a young ‘straight-out-of-uni’ graduate, ‘meet-me-on-a-golf-course’ manager or a night-shifts worker who prefers sleep over market research. Provided that they have Internet and a little bit of money aside, they can invest tomorrow.

What happens on the other side is that there is a team of financial professionals, who monitor the markets and manage the portfolio on your behalf. Moreover, you will not be required to have millions and you will be able to cash out at any time. Thus, you are fully in control of when and how much you put in and you can withdraw for some last minute Christmas shopping if needed.

The reason this investment option is considered to be an alternative to a savings account is because the portfolio managers employ a ‘passive strategy’. This is believed to yield superior results, especially if you are looking to grow your savings over long term, in a stable manner. Of course, like with any investment, the value can go up and down depending how the markets are performing. Nevertheless, the value would usually be expected to significantly exceed that 0.25% p.a. interest that your high street bank is offering for your savings account.

And finally – fees. However, there is no such thing as a free lunch, and neither is there a free portfolio manager. This is where the technology comes in play and perhaps where the ‘robo’ comes from. Traditional wealth manager is likely to apply various fees on various ends. Therefore, even if your investment was to perform exceptionally well, you might easily end up with just a fraction by the time you untangle from that web of fees. Robo-advisors can leverage technology to lower their costs and ultimately reduce the fee structure. This is when a seamless online platform becomes a threat to traditional asset management.

What does the UK have to offer?

The pioneer and the market leader of this industry remains the US based Betterment with its AuM of $6.7 billion (as of December 2016). In the UK there are three traditional low-cost robo-advisors, namely, Moneyfarm, Nutmeg or Wealthify. To some extent these providers are fairly similar – they will require low to none minimum investment, offer a competitive pricing structure and have an app for an easy access. There is also Scalable Capital, a German competitor, which seems to target more sophisticated investors with at least £10,000 to invest. On the other hand there is Moneybox, which took a completely opposite approach. It links to your debit card, rounds up every payment you make and puts the few pennies into an investment portfolio. In summary, there are solid saving options for us customers to really consider.

Where does this leave us?

There are plenty of options to choose from and by no means am I here to tell you this is the right way. If you don’t dare to roll the dice, you are truly better off leaving your savings in a bank account. There are also traditional wealth management houses that have a well-known brand, long track record and a substantial AuM figure, which can be very enticing (and convincing). However, I believe the robo-advisory offering is equally interesting. At the end of the day, it’s just about being smart about your money.

All in all, there is definitely a notable shift in this industry, which people are aware of. They are more cautious of where they are putting their hard-earned money and this digital era has made it rather easy for them to make that choice. In addition, the FCA has identified an ‘Advise Gap’, which says consumers are unable to get a financial advice or guidance at an affordable price. This has created a great challenge for robo-advisors to tackle. Consequently, the big players will have to adapt quickly in order to maintain their clientele.

So, what you are left with is a simple question: To bank or not to bank?


About the author

Ngoc Nguyen
Ngoc Nguyen
Ngoc has joined the Operational Excellence team at Capgemini Consulting, with focus on Performance Improvement. Prior to this she worked in FinTech and e-commerce. Ngoc graduated with a Master's Degree from CASS Business School.

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