The application of digital technology is shaking up the investment management industry, and incumbents need to rethink their business models.
Digitalisation is re-defining the product offering and processes of financial institutions. The challengers, who tend not to be tied to legacy technology and unimpeded by excessive regulation, are introducing highly accessible services that remove many of the barriers and costs traditionally associated with investing.
Established institutions, however, do have some notable advantages over these newcomers, namely their brand strength and reputations. This could give these organisations a competitive edge over the Fintech start-ups that are entering the market.
So what do the dominant financial institutions need to do if they are to co-exist alongside the digital disruptors?
Effectively managing data will be a huge determinant behind any financial institution’s success over the next few years. In a recent State Street Survey, industry leaders stated that they are putting data integration, intelligence and integrity at the core of what they do.
Data integration simplifies the aggregation process
Streamlining data management internally at any organisation can be highly effective. At present, numerous companies simply transfer their information into a data warehouse pending analysis, which can be cumbersome as the data needs to be cleansed and converted into a standardised format.
The same State Street research found that 52% of digital leaders were building an integrated, omni-channel approach, something which will simplify their operating model. The larger financial institutions tend to host a significant amount of data, and simplifying the aggregation process will be an important factor in them gaining a competitive edge over the Fintech disruptors.
Furthermore, new data warehousing technology is making it possible to analyse data in near real-time, irrespective of whether it is structured or unstructured. This can allow firms to verify the accuracy, integrity and timeliness of any data as it is being produced. If there is an issue with data, it can be addressed immediately in this environment.
Digital repositories enable investment firms to integrate third-party data, such as external benchmark data, with their own. Other unstructured data feeds such as social media posts, video/audio files and email text will eventually be incorporated into the process. Firms will then be able to leverage artificial intelligence to produce quality analysis of their data pools, which will allow them to identify trends or behavioural traits, enabling a superior product or service to be delivered.
Data intelligence is more than just a risk management tool
Having sophisticated data intelligence can help firms improve their performance and reduce risk. Many firms have bought into this concept, with 63% of digital leaders surveyed for State Street’s report stating that they were fully harnessing data and analytics to improve their decision-making processes. Using industry-leading technology to mitigate risk is supported by investors, with 39% of respondents expecting their investment firms to use the latest technology to provide sophisticated data analytics. Firms have recognised this, and many are deploying data analytics to identify risk and gain a real-time view of how shifting market conditions are impacting portfolios.
Data intelligence – or advanced data analytics as it is often known – is not just a risk management tool. It can also be used in predictive analysis for scoping out future investor trends, understanding client needs and finding new ways to benchmark performance. In addition, predictive analysis can be used to better align investment firms’ agendas with client needs.
Data intelligence can also be applied to expanding market share in new market segments, or targeting individuals through a highly-customised approach. Advanced data analytics can enable firms to segment their client base more clearly, and this is an approach already being adopted by 63% of digital leaders surveyed by State Street.
For example, many organisations only use net worth to categorise clients whereas predictive analysis can dig deeper into client behaviour, allowing firms to better segment their stakeholders.
Established market participants naturally have a brand and reputation advantage over the relative newcomers to the market. This is apparent in the State Street study, which found that 53% of investors acknowledged they trusted established wealth service brands more than new entrants. This is a huge advantage, and organisations should leverage that to their advantage. Sixty percent of respondents said reputation, brand and experience would be among the most important qualities investors look for in firms during the next five years.
Complacency is not an option
There is no denying that digital disruption is coming to the finance industry, and no firm can afford to be complacent. As the research in the State Street report illustrates, some investment firms are already at risk of being left behind.
However, for those institutions that are bold enough to rethink their business models around digital from the bottom-up, and are always looking to improve their client service, the future looks bright.
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