Propelled for progress
We listen to music by downloading tracks from the cloud. If we need new memory sticks, new trainers or inflatable paddling pools, we go online and get them from Amazon. And if we need to change a standing order, we log into our bank account with an app and manage everything through a smartphone. Digital technology now dictates many aspects of everyday life. It is quite logical that the providers of financial solutions also want to get their foot in the door of this virtual world.
Until now, however, only few fund initiators have walked the path of digital selling. This is bound to change.Digital transformation will change the property investment markets in a variety of ways,” predicts Dr Günter Vornholz, who is a real estate economics professor at EBZ Business School. He believes this will have an impact on business processes as well the new business models that will challenge conventional market players. “Digitalisation will result in new sales channels, with web-based transaction platforms for investments that allow sellers and buyers to get in touch with each other,” says Vornholz. However, both sales options will be add-ons, he believes — not substitutes.
There could also be new business models from fintech companies. The word ‘fintech’ is a portmanteau derived from the terms ‘financial services’ and ‘technology’. It is used to refer to companies and applications that use digital networks to offer financial services. Originally, most fintechs were start-ups that dreamt up innovative services offered through things like smartphone apps — for example mobile, web-based payment systems or apps for managing bank accounts. Their technology enables new kinds of solutions through application systems that are new territory for the financial services industry, or at least a new development. These firms also have an influence on property and investment markets.
Sign on the line online
Alexander Betz, board member at eFonds, currently has the ideal overview of digital plans in the investment industry. At the beginning of this year, the company launched a service on its website at www.eFonds.de — click on Jetzt kaufen [buy now] and a list of brokers will come up for private customers to sign up online to closed alternative investment funds (AIFs). Private investors are then forwarded to the website of each sales partner and given clear guidance. The process also involves identity checks and submitting a qualified signature via video chat. All parts of the process, information and documentation are digital — everything is paperless. Users can pull their investments together into a personal material assets portfolio in ways they will already be familiar with from deposit statements.
Quick and easy
The choice of banks and independent financial services providers is still comparatively small, but Betz is confident that the list will expand significantly in the near future: “We reckon it’ll be 100 banks and Sparkassen [savings banks] by the end of the year, plus 50 independent financial services providers.” He can point to a good 140 contracts that eFonds have issued after requests from sales partners. Betz describes how year-to-date, private subscribers to mutual funds have used digital technology to channel around one million euros into an AIF. That may just be a fraction of the 150 million euros that eFonds have dealt with in closed investments since the beginning of the year, but it’s a good start. When it comes to digital selling, the eFonds man-agement board is mainly focusing on banking: “Online subscriptions are the only way for banks and the members of Sparkasse to sell shares in a closed AIF without having to advise their clients.” This basically allows banks to sidestep the problem that they might by held liable by investors if a closed AIF performs worse than anticipated — something that was not a rare occurrence in the past.
But even well-informed private investors have every reason to forgo the consultation process. It’s time-consuming and arduous, so it no longer feels right in a world dictated by digital solutions, especially for the up-and-coming generation of banking customers and capital investors. When it comes to traditional business, bank branches found they had digital competition some time ago. A good 70 per cent of contacts with German customers now take place through electronic channels — and this number is rising, as is the importance of such points of contact. This was the finding of the PACE Report, which has now been issued for the third time by the fintech firm FIS. The provider of software and services to the banking industry surveyed customer satisfaction for banks throughout the world. In Germany, 1000 customers submitted scores for bank services based on 18 criteria.
The drivers with a particular influence on online trends are Generation Y – banking customers aged between 15 and 25, or so-called millennials. This group’s use of mobile end devices — for things like managing their account with an app — is becoming more and more important. For example, millennials have an average 4.5 monthly contacts via mobile end devices. Generation X users (37- to 51-year-olds) have 2.7 contacts per month and for the average Baby Boomer (52 – 70 years old) they have just one contact per month. So the challenge for the German Volksbank institutions (cooperative banks) and the Sparkassen is to make good use of their strong starting position among the younger generation of customers. Roughly 44 per cent of the millennials who were surveyed have a Sparkasse account and 28 per cent have a Volksbank account.
It is therefore not surprising that until now, it has mainly been the cooperative banks — the Volksbanken and Raiffeisenbanken — that are open to digital sales channels, also for closed AIFs. But selling investments on-line through a bank intermediary and independent financial services providers is just one type of digital selling. The other works directly through investment providers. But in this area, many companies are still quite hesitant. One pioneer in this respect is PATRIZIA Immobilien AG, which offers private investors the possibility to subscribe to investments online by going to the company website and signing up for its closed-end property funds. “In an era of online solutions, being able to subscribe to a fund using eDirektzeichnung adds value for the investor. Customers can simply sign up from the comfort of their home and invest in a material asset 24/7. The process is certified, so it offers complete transparency regarding all key informa-tion,” says Andreas Heibrock, Managing Director of PATRIZIA GrundInvest. Heibrock does however emphasise that subscribing directly online through the company website is mainly considered a way to support sales partners. “Very few investors come to our website if they want to place a financial investment. As a rule they would actually expect to find something on their bank’s website to cater to their capital investment requirements.” As a result, Heibrock says it is almost exclusively “family and friends” who are subscribing to AIF investments through the PATRIZIA website.
Where will this digital voyage take us? The writing is on the wall, and again, consulting and liability play a pivotal role in this. Absolutely no advice for end customers? Sounds like a robo-advisor — a system whereby invest-ors pose questions online and are automatically provid-ed with a slew of offers. Dirk Fischer, managing director of Patriarch Multi-Manager, sees the future of selling in this area: “The advantages are obvious: robo-advisors are quick, you don’t need to set up an appointment and there’s no red-tape paperwork.” Fischer has counted 13 different robo-advisors in Germany to date, albeit with a minimal impact on the market. Given the overall value of the market investment in mutual funds — 2.8 trillion euros — with a value of 700 million euros, this means they have a share of 0.025 per cent. But this seems to be an irreversible trend. “Hundreds of thousands of investors already use robo-advisors in the United States, involving transactions worth several billion dollars,” reports Fischer. Another thing that is clear is that robo-advisors are not suitable for all kinds of customer. They also tend to rely on the services of a start-up that has no history as a company and has been funded through private equity. There is every possibility that there will be market shakeout, resulting in just a handful of providers.
Age does not matter
Incidentally, customer age is not really an effective gauge for working out if people have an affinity with the internet. This is something readily pointed out by Rudolf Geyer, Spokesman of the Managing Board at the European Bank for Financial Services, a wholly owned subsidiary of Comdirect Bank and provider of one of the leading investment fund platforms in Germany: “Our oldest online user is 85.”
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