Banking on the bots: High street banks back automation to plug advice gap

Three years ago we saw high street banks largely withdraw from the provision of investment advice, but they are now racing back into the advice market armed with a not-so-secret weapon: robo-advice.

Retail banks have huge networks of both customers and local branches which they can use as a strong foundation for the advice business. However, access is a big problem in the advice market, where many consumers are priced out of professional advice and, as such, do not seek it out when making major financial decisions.

Although improving access could be a real win for consumers who need financial guidance, the advice services that many banks are planning to offer are restricted in nature. Santander, for example, will only be offering investment advice to customers with more than £50,000 to invest and will only recommend its own products to customers. According to Mintel’s Consumers and Financial Advice UK 2015 report, over half of people who have used professional financial advice say they would only use a financial adviser that describes their services as independent.

At the start of 2016, it was revealed that Barclays, RBS, Lloyds and Santander are on the brink of launching so-called robo-advice sites to their customers. These purely online services provide personalised advice and recommendations to customers by making calculations based on their financial information. The bank can then process the investment on the customer’s behalf in exchange for a fee. Robo-advice has been touted as a low-cost solution for people with smaller savings pots who need help with their finances, but are priced out of the market for professional advice at present.

Not only does robo-advice reduce costs, it should also enable customers to engage more with the investment process and come to their own decision in their own time.

Again, many of these services will only recommend the bank’s own products, raising further concerns about perceptions of bank-based advice. With professional advisers only likely to be available to those with more than £50,000 to invest, those with smaller pots will have to choose between their bank’s robo-advice service and other, similar services offered by third parties.

While the bank offerings are unlikely to be markedly superior to those already on the market, the strength of their customer base gives them a huge advantage.

Whether it’s mortgages, credit cards, savings accounts or investments, a sizeable proportion of the population will tend to approach their existing bank, even if they then go on to check the rest of the market. On this basis alone, banks are going to pick up a significant amount of advice business.

The quality and ease with which robo-advice can deliver personalised guidance, however, will be critical to the long-term success of banks’ participation in this market. Although banks do have a huge advantage when it comes to cross-selling, people are becoming more willing to look beyond their bank. And at the same time, there are multiple FinTech companies who are looking to disrupt the industry by concentrating on doing one thing as well and as efficiently as they possibly can. Banks still have a strongly defensible position when it comes to mass-market savings and investments, but there’s still a very real risk that more nimble competitors will be able to carve out their own profitable niche in the market.

Whilst online advice does provide something for those with smaller pots where there was nothing before, it won’t be for everyone and may leave some customers frustrated. The service does not yet address two of the main requirements of mass-market consumers: fully independent advice and face-to-face guidance. Expectation will need to be managed carefully. It’s a potentially useful service that can help cut through the bewildering range of options that are open to investors, but for many people, robo-advice won’t seem like ‘advice’ at all.

Patrick Ross is Financial Services Analyst at Mintel, writing reports and analyst insights for Mintel’s UK Financial Services team. Prior to joining Mintel in 2015, Patrick worked in both the payments and insurance industries, as well as working as an analyst for a market research company.