Imagine the following. You are an excellent employee that just received a big bonus from work. When you got promoted and started to earn serious money a few years ago, you approached your bank to seek assistance with your wealth management. Together with your bank, you set some financial goals for the future. After the deposit of the bonus is made, you receive a message from your bank through WhatsApp advising to forward the money into the college fund for your three kids. With a simple approving response, the bank transfers the money automatically within a matter of seconds.
This is one of many examples where technology and design of new products and services get more complex, performance gets increasingly better, faster, and more efficient. The developments into the field of robo-advisors for financial services, such as a personal payment advice, are no exception. A first virtual banking revolution has convinced banking customers that they do not need to visit their banks anymore to consume financial services. Think about the introduction of the first ATM by Barclays Bank in London in 1969 or the start of online banking in the United States in the 1980s that has resulted in online banking environments offered by every modern bank.
With an increasing amount of Fintechs and innovations in the financial sector, a second revolution in banking, led by robo-advisors, begun. Robo-advisors challenge the way banks think about the design of their frontline services and reshape the customer journey for financial advice, while simultaneously offering major benefits for the banks and their customers. To unleash the full potential of advancements in robotics and technology for financial advisory services, the challenge is now to build a virtual and personalized form of self-service for financial advice that is beneficial for both banks and customers. But how will this solution affect the role of the human advisor? And how can banks make sure that their customers also benefit from this new way of service provision?
Robo-Advice: Where Did It All Start and Where Is It Going?
In today’s world, technological innovations are a critical component of customer-firm interactions. The evolution and implementation of self-service technologies in frontline service encounters is a new paradigm that radically changes the way firms interact with their customers. This paradigm is also emergent in the financial sector, where a global survey of Accenture has shown that customers increasingly demand transparency of financial possibilities, low-cost accessibility to financial services, and web-based experiences. Robo-advisors are a great example of self-service technology that can meet these changing customer needs in the financial sector. Thereby, they can be implemented to manage a wide variety of financial advisory services, ranging from a simple payment advice to automated investment services. Thereby, robo-advisors compete with financial advisors by claiming to offer equally good (if not better) advice and service at a lower price.
The concept of robo-advice is rooted in wealth management and has resulted in the development of several robotic solutions. In 2008, Betterment launched the first robo-advisor ever for automated portfolio allocation. Over the years, a more sophisticated generation of robo-advisors have emerged. This generation is mainly focused on rebalancing investor assets with target-date funds using an online interface. The pioneer of this generation is the Portfolio Manager of Jemstep, allowing customers to lock in more money for retirement by advising customers on what to buy and sell across accounts. After this, market competition increased with the introduction of more alternatives, like Vanguard’s Personal Advisor, which currently has over €3.5 trillion assets under management (AUM). Figure 1 gives an indication of the current robo-advisory landscape in the financial sector including the most important players, categorizing for two types of robo-advice. In the next section, this categorization will be elaborated upon.
So, where are we going from here? The robo-advisory market became more hostile with the emergence of start-ups and Fintechs. For instance, in the United Kingdom, 39 firms applied for a robo-license in 2016 due to the development of a ‘sandbox’ for innovation in finance. On the other hand, the Dutch landscape involves a strategy of banks actively pursuing collaborations with Fintechs and other players. To stimulate investments in and adoption of robo-advice in the Netherlands, the Dutch National Bank has vouched for the development of a similar ‘sandbox’ concept as in the UK. This resulted in an announcement in February 2017 by the Dutch bank ABN AMRO of a partnership with InvoiceSharing, a bookkeeping start-up targeted towards small- and medium-sized enterprises. Subsequently, in March 2017 it was announced that the Dutch bank BinckBank purchased asset management start-up Pritle for €12.5 million.
Today, robo-advisors are expert systems built on machine- and deep learning, natural language processing, and data mining- and planning techniques. These techniques enable the use of customer data for personalized advice and the addition of other services, like tax-loss harvesting, cash flow management, college savings, and automated investment- and retirement advice. Robo-advisors manage €53.5 billion worth of assets worldwide, which is expected to grow to over €6.2 trillion in 2027.
Robots and humans successfully hand in hand: 3 advantages of hybrid robo-advice
Based on extensive literature in the field of robotics in services, academics agree that humans should monitor robots, because they can better manage cases of unusual events. So-called hybrid robo-advisors are robo-advisory solutions that incorporate a human relationship layer on top of their automated processes. Utilizing this relationship layer, firms can leverage significant opportunities to take advantages of customers by increasing transactions and sales, customer value of the interaction, customer loyalty, and customer satisfaction. Imagine a proactive robo-advisor that covers all banking services with real-time personalization and human-like conversational support for customers based on their intent. Such a hybrid robo-advisor knows three main advantages with respect to the traditional way of human financial advice.
1. Taking Financial Advice to Its Next Level
The utilization of hybrid robo-advice promotes a new kind of holistic financial advice, going beyond traditional human advice. This way of using hybrid robo-advice is called amplified robo-advice. It adds value to financial service provision, because of human-robot collaboration in decision making, increasing diversification, and risk management capabilities. The extra value is the combination of real-time, easily accessible, and more reliable financial advice by robots with the personalized touch of humans when needed. Additionally, the human aspect of hybrid robo-advice can adapt to changing customer needs by being flexible in managing customer relationships.
2. Providing Tailored Experiences for Every Consumer’s Individual Needs
Studies show that hybrid robo-advisors can decrease the costs of financial services with about 70%, because of efficiency gains and 24/7 availability. Additionally, hybrid robo-advisors can lead to an increased productivity, extended and homogeneous service environment, and better management of varying demand. Consequently, hybrid robo-advisors improve customer service through better canalizing customer requests, handling simple customer demands quickly and efficiently, and allowing human advisors to spend more attention on specific customer problems.
3. Real-Time Personalized Financial Advice
From a customer’s point of view, hybrid robo-advisors can lead to an increased flexibility, more control over the service process, time savings, and the avoidance of interactions with frontline service employees when desired. Utilizing hybrid robo-advisors, customers determine their own journey instead of being forced to a predefined one, exert more control over the financial advisory process, and can determine the degree of personal advice themselves. Eventually, hybrid robo-advisors should be able to take over all financial advisory services by changing the customer journey and reshaping the role of human advisor into a supervisory and intervention role.
The Importance of Customers in Hybrid Robo-Advice
Hybrid robo-advice goes beyond advantages that are a result of improved technology. The psychological part might be just as important. Academic studies have shown that customers tend to express a more positive attitude towards a bank if they can choose between two service channels instead of being forced to one. These academic insights are confirmed by a study of Accenture, showing that firms that provide an automated platform with access to a human advisor score higher on customer loyalty and customer satisfaction among investors than firms that provide just human advisors. Therefore, banks are recommended to use customer preferences in design and development to customize their robo-advisory offerings.
Allow us to illustrate this statement. Up to 70 percent of the Generation X’ers and Millennials prefer hybrid robo-advisors over human advisors. Additionally, industry studies and -prognoses show that these generations are less likely to use human advisors. They generally do not invest their money due to a loss of confidence in the financial sector after the financial crises and they have an increased understanding and confidence that technology can manage their money cheaper and with more accuracy.
The Best Is Yet to Come
The year 2018 will be the tenth anniversary of robo-advisors for financial advice. However, there is still an unaddressed potential for hybrid robo-advisors. Where virtual banking led to the first a revolution in banking, an increase in the development of hybrid robo-advisors is leading to a second revolution. By automating routine services and providing online round-the-clock service with hybrid robo-advisors, banks can significantly reduce inbound calls while simultaneously boosting customer satisfaction by delivering real-time personalization. As smartphones and tablets grow in popularity, digitalization and online access increase, and virtual banking becomes a channel on its own. Excellent customer service will be the crucial differentiator. These emerging methods offer a chance to get closer to the customer and boost sales. Ease-of-use, rapid accessibility, and fulltime availability are what banks must focus on to develop the all-round Virtual Banking Assistant solution.