In the beginning was Jack Ma. The Chinese visionary founder of Alibaba has been shaking up Asian financial services for more than a year now with his Yu'EBao, an online monetary fund that pays better than bank deposits (6% when it was launched in June 2013) and allows for instant liquidity. And so 100 million Chinese have stopped keeping much of their money in the bank to rush to deposit it on the Alibaba platform: at the end of April it totaled 90 billion dollars, accounting for more than a third of the total business of Chinese monetary funds (which in turn account for about 30% of the entire asset management industry). Which made Yu'EBao the fastest growing mutual fund ever. Only three US investment funds are larger (above $100 billion) but have been around for much longer: Vanguard Prime, Fidelity Cash Reserves, JpMorgan Prime.
While Jack Ma is ready to launch Yu'EBao also in Hong Kong, the construction site that is a candidate to put together bits and bills, technology and savings is now open. Google, the Financial Times revealed, already two years ago had asked a well-known consultancy firm in the financial services sector for an opinion on how to enter asset management. The intention to land in asset management is not official but the diversification of the Mountain View giant in the financial world is more than a clue: in Mountain View there are already Google Ventures which invests in technological start-ups and Google Capital which looks at high-rise companies more established techs.
GOOGLE KID AND FINANCIAL DINOSAURS
FINANCE, INFORMATION BUSINESS
“Why shouldn't Google look to an industry characterized by high levels of customer loyalty and strong margins?” Kpmg asks in the study “Investing in the future”. The advance of the high-tech giants in the world of financial services robs the financial and asset management giants of sleep. The question that torments them, or that should torment them, is: how is it possible to make inroads into the new generations under forty who don't know what a fund is but know perfectly how a social network or a search engine works? By now we don't even talk about digital natives anymore but about Google kids, as Kpmg defines them in the report, the kids who have been growing up on bread and Google since 2010. In other words, a new generation of customers is forming that is radically different from the one known up to now. Which you need to reckon with.
However, many in the world of traditional asset management have underestimated the issue of technological skills and the importance of a certain type of knowledge and interaction with customers. Which is not the same as simply having a social strategy. "The inability of asset managers to keep up with technological change will create opportunities for groups like Apple, Twitter and Amazon," the consultancy PwC said in a report. Search engines and social networks now know almost everything about us. And it would not take long thanks to their powerful technological algorithms to make us a commercial offer tailored to the millimeter on our needs. Finance is largely an information business.
The high tech giants also have a big competitive advantage in this historic moment. “The only financial organizations that appear in the top 2013 of Fortune's 8 Most Admired Companies list are Berkshire Hathaway at number 13 and American Express at number 28,” notes consultancy firm Kpmg. JpMorgan reaches number XNUMX only remotely. Beyond the methodological notes on how the ranking is constructed, the result translates into an endorsement not to be overlooked. “It will take time – explains Kpmg – to rebuild trust and to make the brands opaque by the crisis shine again. Not only. Many wonder if this is really possible, especially towards the younger generations who are indifferent to the traditional financial services sector”. And this potentially offers opportunities for those who want to enter the sector for the first time.
“The top three groups in Fortune's ranking are Apple, Google and Amazon. It may seem a bit trivial, but could they be the next poles of asset management?” asks Kpmg who lists a series of arguments in favor of this scenario: they have a ubiquitous brand in which the younger generations have more and more trust and proposals that involve and are relevant; they have business models that put them at the center of an extensive network designed to make customers' lives easier, solve problems and change habits; enjoy an enviable distribution position; they have a large customer base spread across all demographic groups and an ability to capture and leverage data to understand their customers and the infrastructure with which to deliver personalized and tailored services. The options to their arc are many. Looking ahead, they could enter the arena as an all-round asset management player, could seek partnerships with the financial world, become fund distributors.
THE MEGATRENDS RINGING THE INDUSTRY
However, there are those who point out that the internet giants must address the crux of the privacy issue if they want to break into the asset management market. On the other hand, it doesn't seem like an insurmountable obstacle for the new generations given that the encirclement of the banking fort has already begun in terms of payment services. After Google wallet, the brand new iPhone 6 that has unleashed long queues outside the shops allows users to make payments without taking out credit cards and without typing anything. And now Facebook has also obtained a license from the Irish central bank to become an electronic monetary institution to allow international money transfers online and via smartphone. Add the exploit of digital currencies created by powerful algorithms that travel on the net, from bitcoin to the brothers alphacoin, fastcoin, litecoin, etc… And the deadly cocktail is served: a universe of digital consumers happy to move more and more outside the system traditional banking, among which, among other things, many sympathizers of the Occupy Wall Street and anti-euro protest movements are also accommodating.
"The banks must challenge Amazon and Google or they will die", warned already a year ago from the pages of the Financial Times Francisco González, boss of the Spanish bank BBVA, according to whom the banks "are losing their monopoly on doing banking". Paypal and iTunes, examples of payment systems used on the net, are currently seen as a niche business. “But they could expand and seek alliances – warned González – And almost certainly some big names in the digital world, companies with strong brands and millions or billions of users, will jump into the fray”.
The advent of Google & Co in asset management would cause an epochal jolt in the industry. Because asset management is already grappling with the need to tackle some important mega trends destined to change its appearance and competitive scenario: from demographic dynamics to technological developments, from environmental issues to ethical behaviour. Against this backdrop, Kpmg points out, the rapid growth of technology and retail companies offering online and social media platforms will jeopardize the traditional structure of the investment industry leading to a halving of jobs by 2030. In other words, the industry will increasingly need online and social media skills to scale and connect with customers, making many of the current jobs superfluous.
In the face of these epochal changes, the related challenges and opportunities, it is legitimate to ask, how will the various Apples and Amazons move? “The asset management industry out there – notes Kpmg – is full of technology-based organizations that can provide the customer service, personalization and omnipresence of the brand that customers are looking for”.
In China, the technology applied to financial services is already implementing a revolution posing a serious challenge to state-owned banks. In addition to Alibaba, which has also just obtained the green light for the creation of a new private bank, Zhejiang Internet Commerce Bank, rival and internet giant Tencent has also launched a product similar to Yu'EBao: it is called Licaitong and works through a 'Messaging app (WeChat). With a 7,5% return, it raked in $130 million in deposits in just its first day in early 2014.
And in Europe the risk of "disruptive" scenarios (which cause a strong change in the industry) is all the greater if we consider that asset management is regaining importance in bank balance sheets to keep revenues afloat and revive the bottom line, i.e. the profit. While trying to cut costs, institutions also have to work on revenues. But the interest margin is dying and with the cost of borrowing on the ground it is not expected to regain strength anytime soon. So all that remains is to hope for fees and commissions, including from asset management.
“The industry cannot rely on its own history – warns Kpmg – the past is no indication for the future! We have seen many other industries that have been radically disrupted by the sudden emergence of new players from traditionally non-competing sectors. Why shouldn't this be the same for asset management?”
