We have written a lot recently about trends – in retail, in banking and in employment. But what about the trends we will see over the coming years in personal finance and investing? In this article, we take a look at some of the changes you can expect to see, and the impact they will have on your personal finances.
‘Fintech’ is short for financial technology – and it is a phrase that we will all become familiar with. A lot of fintech will be applied in areas that the vast majority of us will never come across – currency trading, financial derivatives and risk management. But fintech also means the apps on our phones, the management of our pensions, savings and investments and our increasing use of cryptocurrencies such as Bitcoin.
Small wonder that investment in financial technology grew from $930m (£687m) in 2009 to more than $22bn (£16.25bn) in 2015.
This investment is only going to go on increasing – like other industries such as publishing, financial services is an industry made up of information and financial transactions, not concrete goods. So there is huge potential for new financial technology companies to ‘disrupt’ the old way of doing things – and change our lives in the process.
Goodbye to insurance salesmen
That heading is perhaps a little harsh – but the traditional savings and investment adviser is going to come under huge pressure. The millennial generation is already deserting the high street banks and banking on their phones. Fintech will see us all enjoying access to investment and savings expertise that will make the idea of your IFA or insurance rep calling round to tell you how your pension is doing – and trying to sell you some life cover at the same time – as distant as driving into town to rent a video.
To some extent sites like Nutmeg are already delivering this, but in the coming years will all be using investment advisers and financial planners on our mobile devices.
‘We’re going to have a baby,’ you will say to the virtual adviser (or three advisers, as you compare different sites) on your phone. ‘How will this impact our financial planning?’
The changing face of investing
The rise of online ‘advisers’ means that we are all much more likely to use ‘passive’ investment management. In my days as an IFA, I would recommend Fund A over Fund B: I would try and put together an investment portfolio that matched a client’s risk profile – cautious, balanced or aggressive.
Another thing I would do with that balanced portfolio (it was the conventional wisdom at the time) was ‘spread the risk’ geographically. But clients always seemed to end up with around 50% of their money invested in the UK – a ridiculous situation given what a small market the UK is in world terms. More online investing in an increasingly interconnected world will see people in the UK as comfortable investing in major world markets like China and Japan as they are investing in the UK – but almost certainly simply ‘tracking’ the overall performance of say, the Chinese stock market. Overall market performance will become far more important than the performance of individual companies or different investment funds within that market.
More socially responsible investing
As people become more informed about investment and savings decisions – and have more control over where they invest – so factors like diversity, environmental and governance issues will be more and more important. When traditional investment managers are making the decisions with your pensions and investments then you are far more likely to end up with your money invested in companies you might not necessarily be happy with.
Make the decisions yourself and refusing to invest in certain companies, funds or markets becomes much easier – and a million investors acting together is a powerful voice for change.
More money in our pensions
As we reported recently, April saw the minimum contributions for employees in workplace pensions increase to 3% (from the previous 1% of earnings). Despite this, the fact remains that people in the UK generally do not contribute enough to their pensions, and it is likely that compulsory contributions will continue to rise.
This may be simple common sense as opposed to cutting-edge fintech – and, yes, it will effectively decrease take-home pay. But with fintech allowing people to be more engaged with their overall financial planning – and able to see the steady increase in the pension funds – this will make them more ready to pay these increased pension contributions, which will ultimately lead to a better pension in retirement.
Raising capital for business
We wrote last week about the way in which blockchain technology will change retail banking, as the security it offers cuts out the banker – the traditional middleman between the depositor and the borrower. This increase in trust and crowd-sourcing is going to spawn a wealth of opportunities for new businesses. Small businesses will be able to raise finance, not because the owners have a ‘track record and bricks and mortar security’ – but because thousands of people believe in the business idea and are willing to back it. That is going to be especially true of businesses that offer a social or environmental benefit.
But what about security?
Last year we wrote about the WannaCry and NotPetya viruses and the devastating effect those ransomware attacks had on businesses around the world and organisations like the NHS. Last week we had the news of TSB’s spectacular IT own goal and Australia’s Commonwealth Bank losing the data of 20m customers.
Clearly, ransomware attacks are going to be with us for the foreseeable future. Fintech will be a constant battle between the providers’ security teams and the hackers – with blockchain technology hopefully guaranteeing victory for the good guys.
But whatever the security problems, fintech is here to stay. There will be downsides – it will undoubtedly lead to job losses in the financial services sector – but for the majority of us, there will be significant advantages. We will sit in the café that was once a bank and check our savings and investments on our phone, far better informed than we previously were. And we will be entertained by apps and businesses that simply would never have been viable with a traditional banking model.
Welcome to the new world – and enjoy the Bank Holiday sunshine…