Derek van der Plaat, CFA, is a Toronto-based investment banker and entrepreneur. He was co-founder of Moontaxi Media Inc., a company focused on digital media streaming and downloads.
Those who remember the 1980s might recall that the first music video shown on MTV was the Buggles' Video Killed the Radio Star – an ominous debut for the new medium. For a time, it looked as if the song title would be prophetic, but radio is actually doing just fine today. In a recent news release, the Canadian Radio-television and Telecommunications Commission noted that Canadian radio revenue was stable at $1.6-billion and profit before interest and taxes increased to almost 19 per cent of revenue – pretty healthy. However, that is not to say the landscape hasn't changed. Radio continues to be assaulted by new, more personalized alternatives, including podcasts, satellite radio and streaming music services.
I was at two separate financial technology conferences on the same day the other week. It reminded me of those early days in the music business. There are many areas of the financial services industry that are under attack right now, in both consumer and business services. Some financial technology companies (fintechs) compete directly with bank products and services while others, such as Borrowell, Mogo and Do Your Own Mortgage, increase the competitive landscape by offering online access, comparison and referral services.
Fintechs are chipping away at both core, profitable lines of business, such as lending and foreign exchange, as well as underserved markets in which technology can undercut traditional cost structures. For example, branchless banks are offering savings accounts earning up to 3 per cent and BitGold can facilitate foreign exchange for less than half the rates banks charge. On the business side, FundThrough is chipping away at receivable financing, and IOU Financial is focused on small businesses.
Some fintechs have developed proprietary algorithms and are using big data to analyze not just credit scores, but online presence and behaviour, to differentiate good credit risks from bad. Others are online platforms that eliminate middlemen, which has some predicting the demise of the adviser/broker.
Will fintechs kill the financial adviser? They're already doing it. Discount brokerage services started eroding the retail brokerage business before the term fintech was even invented. The move toward disintermediation is driven by value for money. In the information age, high-quality information is almost free.
More recently, robo-advisers in portfolio management and crowdfunding in the area of startup financing are gaining traction. Wealthsimple charges a management fee of up to 0.5 per cent, much lower than portfolio managers, and you don't need a million-dollar account to qualify. The National Crowdfunding Association of Canada counts more than 100 active Canadian crowdfunding platforms, alternative finance funding portals and service providers.
But what about the sale of a critical asset, such as a private business, that typically represents most of a person's wealth? Will we see that being sold by a robo-adviser any time soon? The challenge with a private business is that it is a complex, illiquid asset that's worth different amounts to different buyers. A business is not a commodity with a list price.
Strategic acquirers will pay a premium for a business if strategic objectives can be achieved. These objectives can include entering a new market, acquiring technology, acquiring new customers, keeping existing customers and more. In some cases, an acquisition can both increase revenue by creating a stronger value proposition or result in redundant costs that can be eliminated to improve profitability. These synergies and cost savings are different for any combination of two companies, hence different values to different buyers. If the potential strategic acquirer is a private company, these objectives and potential cost savings are not necessarily transparent. Illiquidity and lack of transparency result in inefficient markets and make it difficult for robo-advisers to thrive.
Like music videos' impact on radio, fintechs will change the financial services landscape. In some cases, the impact will be immediate while other services will endure for some time. Maybe it will play out the same way for the financial sector as it did for radio – with an ominous beginning, but specialized services expanding the market over time, rather than cannibalizing it. One thing is for sure, the consumer will ultimately be the winner.