Why ‘boring’ financial innovation matters

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. 

Accelerated plans

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.