UK households hold over £800bn in ultra-low interest savings products. Many savers and the FCA are dissatisfied with the savings market. Robo-investors, the tech and marketing savvy FinTech disruptors, are aggressively trying to capture these customers. Savers' reluctance to switch from banks will be a challenge. The economics of Robo-investors also looks questionable unless they can achieve very large scale. However, strong progress is likely to make them acquisition targets for larger financial services incumbents. The opportunity for investors and consolidators is explored in this blog.
The outlook for savers is bleak. A recent cut in UK interest rates points to a ‘lower for longer’ scenario and the strong probability of higher inflation on the back of a weaker pound would make ‘real’ interest rates even worse. More than half of savers are unhappy and the FCA’s view is that competition is not working effectively in the cash savings market*.
Robo-investors are open about being in head-to head competition with banks as they try to attract Assets Under Management from cash savings deposits. On the home page of Nutmeg, the UK’s first & largest robo-investing platform, is a comparison between a high street bank cash ISA and a Nutmeg Stocks and Shares ISA. “Helping you to save and invest” is the language used in their promotional video. Wealthify, one of the newer startups in the sector is even more direct, declaring their mission to be “to persuade 1 million savers within a decade that they can expect more from their money”.
The distinction between targeting 'savers' and 'investors' is an important one. The two markets are both large but have completely different characteristics.
Split in UK household 'Financial Wealth' (excluding pension, property & physical wealth)
The key question is whether savers can be convinced to move in substantial numbers. Opposing forces are at work. Many savers are not prepared to consider an unfamiliar provider and they value the convenience of having their savings accounts with their current account provider*. They are however, very motivated by financial returns with interest rate related reasons dominating the reasons for switching*. Robo-investors are also not alone in trying to switch cash savers as another fintech segment, P2P lenders, are also active in this space.
FinTech Challengers - can they convince savers to go for higher risk - higher reward?
Attracting savers will be one part of the challenge. Doing it whilst delivering attractive business model economics will be even more challenging.
If they target savers, robo-investors are highly dependent on scale to drive unit costs down because of particularly tight economics at a per customer level. If a typical fixed term Cash ISA or Notice Savings client were to switch to a robo-investor (the average balances on these products are in the £12k - £14k range*), they would only produce an annual revenue of £80 - £130 at current fee levels. Acquiring and servicing a customer for less than that will be difficult. Revenue per customer will be even more miniscule at minimum account size levels which are only a few hundred pounds on some platforms. Number of customers and starting account size per customer will be the important early stage metrics. Customer retention period and the ability grow account sizes over time will become increasingly important.
It is far too early to judge if they will be successful in the UK. Market leader Nutmeg showed a turnover of just £635k in 2014 with a loss of £5.3m***. It has however secured substantial funding ($50m**) from an impressive list of shareholders including Schroders, the asset management company as well as from VC and private investors so it does appear to have some ‘runway’. It is also interesting to note Nutmeg’s announcement of a move into ‘robo-advice’ as well as ‘robo-investment’, no doubt aiming to boost average account size and revenue per customer from advisory services.
Strong progress from robo-investors could provide early and attractive exit opportunities. The size of their target markets certainly make IPO scale possible but more likely is an acquisition by a larger financial services incumbent seeking their technology, IP and customer bases. Potential aquirers vary:
What is without doubt is that this segment of the FinTech space will be a highly dynamic market over the next few years and which is likely to see significant activity from investors and consolidators.
Should you wish to access further details of this research or commission a bespoke project such as an industry primer, competitive landscape analysis with investment or acquisition prospects, an individual company analysis or wish to discuss any other services, please contact us here.
* FCA Cash savings market study report, 2015.
** Nutmeg website
*** Companies house filings
The views expressed in this article are those of the author at the date of publication. The contents of this article are not intended as investment advice and will not be updated after publication unless otherwise stated.