Fintechs to lead in driving financial inclusion

THE Covid-19 pandemic has underscored the role of technology in driving financial access, paving the way for fintech players to disrupt the traditional ways by becoming more than just alternatives to bigger names in finance.

Boosting digital infrastructure and enhancing access to financial services have moved up the agendas of governments globally amid the virus outbreak.

Against a regulatory backdrop that is highly supportive of digitalisation and innovation within the financial sector, new technologies, fintech innovations and digital finance will be the main driving forces behind lifting financial inclusion.

According to Gregory Van, chief executive officer of fintech company Endowus, it is only a matter of time before money and wealth management goes fully digital.

He believes that with the help of technology, expert financial advice and best-in-class products can be delivered at scale and be made accessible to everyone at lower and fairer fees than before.

Evolving digital landscape

The number of people using robo-advisory services in Asia-Pacific is projected to grow from around 110 million in 2019 to over 400 million in 2024, data from consulting firm McKinsey shows.

The industry has also made significant headway when it comes to narrowing the trust gap between users and digital finance solutions providers.

A survey conducted by EY across 5,000 consumers found that some 37 per cent of consumers now say that a fintech firm is their most-trusted financial services brand, compared with 33 per cent who name a bank as their most-trusted brand, and 12 per cent who say they trust a wealth management firm the most.

Meanwhile, 51 per cent of Gen Z and 49 per cent of millennials named fintechs as their most-trusted financial brand.

"As more wealth moves online, we must make the same judgments as we would if a financial adviser were to meet us physically. Trusting the technology platform must be coupled with trusting the people designing the advice," says Van.

Transparency vs deceit

That said, technology is a double-edged sword when it comes to serving the financial sector. It can systematically make financial services more transparent or deceptive, says Van.

With more fintech players looking to capture a slice of the growing digitally- and investment-savvy consumer base, commissions are hovering at an all-time low.

"But the new crop of zero-fee brokers, for example, are zero fee because they operate on kickbacks by receiving payment for order flow, which may lead to less optimal prices for clients," says Van.

He cautions that the entire fund industry, from low cost online fund platforms to offline distributors, is fraught with misalignment.

Trailer fee kickbacks cause fund managers to compete against each other to pay high fees to fund platforms, financial advisers, brokers and private banks so that their funds can be sold.

Trailer fees are the portion of funds' annual management fees that are paid to distributors. For equity funds this may be as high as 60 per cent.

Distributors could therefore end up focusing on selling funds that pay a higher kickback and with short-term performances in a bid to churn accounts and earn more sales fees.

Commissions that are not clearly disclosed to clients are deeply deceptive, according to Van, adding that it is critical for industry players to think creatively about making funds available at low cost without any bias from hidden incentives.

A trustworthy partner

Endowus charges a wrap fee - a single fee charged for advisory and the costs of maintaining an account - which varies across products.

The fintech firm curates best-in-class top-rated funds and helps build optimal investment portfolios for its clients. It also rebates 100 per cent of trailer fees to investors.

"Where there is a trailer fee kickback from a fund manager, we rebate all the trailer fee to the client. This means you keep more of the returns you deserve, and we remain independent to recommend the solutions that best suit your goals, rather than line our pockets in the short-term," says Van.

"Our belief is that if we are paid to give our clients suitable advice, and clients have a clear understanding of what and why they are paying us, they will stay with us because it will lead to better outcomes," says Van.

"This will be profitable for us in the long-term. This is technology with a point of view: to create a better and more sustainable future for financial services," he adds.

Deepening relationships

Thanks to platforms like robo-advisors and online brokers, investing has become more accessible to everyone. According to business intelligence firm Market Data Forecast, fintechs are expected to reach a market value of roughly US$324 billion by 2026.

With abundance of opportunity for growth, fintech players can further tap their technological foundations to address the needs and pain points of customers. Adopting such a client-first approach will help build rapport and establish deeper relations with customers.

Artificial intelligence, for instance, can predict and offer solutions in order to meet a user's investment or saving goals.

"Compliance with regulation, and ensuring financial products are suitable for the client's goals can be better verified online than in a one-on-one chat at a coffee shop," says Van.

The future of wealth management will also increasingly be enabled by technology to provide expert advice.

This includes giving customers exclusive access to financial insights from articles and white papers through digital platforms as well as conducting webinars co-hosted by senior executives from top global fund managers in the world.

Such offerings can help boost trust in fintech platforms that manage client wealth, even if they do not have as strong a physical presence as traditional financial institutions, says Samuel Rhee, chairman and chief investment officer at Endowus.

Enabled by technology

Despite a wider range of investment offerings to choose from than before, many options may come at a high cost, which translates to lower returns, says Van.

"Many of the older generation, for instance, have been poorly served by the financial sector. As such, they have opted for the intuitive investment choice - residential property - with their wealth not diversified sufficiently," he says.

Tech-enabled platforms, however, could give investors greater convenience and control in constructing customised portfolios at a low, transparent and fair cost.

These platforms could slash annual investment costs by some 50 per cent, especially with a 100 per cent trailer fee rebate on their investments.

"There is an increasing opportunity for retail investors to do as well or even better than institutional investors, and that is what we are trying to solve for," says Rhee.

"By enabling that same access to retail investors, and being able to extend that accessibility at scale with technology - we are able to meaningfully lower the cost of investing, which positively influences investment outcomes," he adds.

Endowus' digital cash management product, Cash Smart, for instance is aimed at Singapore investors looking to grow their cash without any lock-ups, daily accrual on interest, and withdrawals at any time, at their own risk tolerance.

Investors can earn a projected return of up to 2.1 per cent per annum - several times that of bank-deposit rates.

"This is the magnitude of impact we strive to have on our clients and the industry, enabled by technology," says Van.