APIs, algorithms, and big data – a new experience in wealth management?

APIs, algorithms, and big data – a new experience in wealth management?

Chris Truce

Head of Fintech, Saxo Bank

Like many other sectors of the banking and finance industry, wealth management is facing a stiff challenge from fintech start–ups that are embedding new technology innovations into their services in the hope of usurping incumbents.

These new entrants – some of which are “robo–advisors” moving up the value chain from their roots in retail financial advisory services – offer a number of potential benefits. The APIs, algorithms and big data analytics that are integral to fintech firms’ highly automated value propositions can offer greater scale and improved customisation at lower cost than traditional wealth management models.

The question is do these companies represent a great leap forward to a new digital experience paradigm that could sweep away the old order? Or are they just bringing more commoditisation to an industry that is already suffering from compressed margins and profitability in the digital age?

If it is the latter and robo–advice brings about more commoditisation then incumbents can make defensive but strategic acquisitions and let the competition die out. If it is the former, the incumbents have an entirely different battle to face – which is the stacked versus platform business model dichotomy.

The full stack business is where the complete supply chain is owned from R&D to marketing, with a proprietary distribution system, as well as a complete sales vertical – these businesses are highly profitable but expensive to maintain and hard to scale. On the other hand, the platform business sits on top of a vast supply system, with its own digital relationship with the user. They can offer an exponential upside by avoiding vast supply costs and finding new ways to monetise their users’ attention. If we use examples from other industries as leading indicators to the future we believe the platform business model will win out in the end.

For some, it may be surprising that tech–savvy start–ups are targeting the high–touch, gilt–edged world of wealth management, where human relationships and highly personalised service levels have evolved over generations. But the digital revolution has impacted the daily lives – and customer service expectations – of high net worth individuals just as much as less affluent retail banking clients. Whether buying the week’s shopping or booking a night at the opera, digital technologies can be integral to the efficient delivery of high–touch experiences.

Across many industries, a key feature of this digital revolution has been the growth of business models that rely on service aggregation to build a superior user experience, rather than wringing more value from owned assets by offering an ever widening range of products and services. In short an enormous amount of value has been generated by companies that build the layer (i.e. the user experience or digital relationship) that sits on top of a vast system of suppliers (the products and services of others). This shift from owning assets to leveraging them has transformed large swathes of the entertainment, hotel and transport sectors; and is now finding an echo in banking.

The digitisation of banking is being driven by several technology innovations. In particular, the open banking architecture that is being developed through the increasing deployment of APIs enabling service providers – both incumbents and new entrants – to create “best of breed” value propositions that draw on the services of multiple third parties. APIs enable this to be done, creating better cost–effectiveness, greater agility and more flexibly than under previous forms of interoperability; equally important is that the end result is more seamless, personable and user–friendly from the user’s perspective.

How might open banking change wealth management? Like other financial services providers, wealth managers already augment their own expertise and skills with those of other firms, for example, performance analytics specialists, execution brokers and custodian banks. These supplementary services are typically subject to complex agreements that may take time to upgrade or replace, or may involve multiple suppliers across geographies and client segments.

Because APIs enable third parties to access each others’ systems and platforms more easily, wealth managers have new opportunities to select and regularly review the value derived from the various supporting building blocks on which they construct their own proposition to customers. This increasingly important form of unbundling and re–bundling is a critical differentiator between simply iteratively “improving” a product/service or fundamentally “changing” the establishment for the better with a completely new re–bundled proposition.

Smart use of APIs is a big part of the fintech challenge to incumbents, but is it enough to see wealth management clients shift their assets? Not yet it seems; there is little evidence to suggest a significant movement away from traditional providers. As such, wealth managers are not scrambling to defend their turf by bringing out new user–friendly apps, backed by a select roster of market–leading partners.

But technology–enabled competition from nimble fintechs is not the only factor encouraging wealth managers to adopt open banking. New regulations such as MiFID II are demanding greater levels of transparency in the interests of investor protection and value. Over time, inducements, cross–subsidisation and bundling will have to be replaced by clearly costed services that add value on a standalone basis.

In parallel, the margin compression being experienced by all service providers in a low–rate, low–return, low–growth environment requires an unrelenting focus on the bottom line, with banks pursuing cost reductions wherever possible. Both regulatory and macroeconomic drivers will force wealth managers and private banks to be more rigorous in how they select partners; APIs will enable them to bring together the best overall package to their end–users, delivered digitally for the best possible, highly personalised user experience.

Fintechs might have shown a glimpse of the future with their flexible, low–cost, customer–focused apps, but are they a real threat to the well–heeled, well established world of wealth management? Time will tell, but there are good arguments for suggesting that fast–moving incumbents could be better placed to wield the power of technology innovation to grab greater market share.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992