UBS partners with FinChat so bank R.M.s can use messaging apps
UBS Wealth Management is piloting a PoC to enable monitoring of chat messages between relationship managers and clients.
UBS Wealth Management is embarking on a proof-of-concept project with Singapore-based FinChat meant to bring relationship managers’ communications with customers over messaging apps into compliance.
Regulation, particularly Europe’s MIFID 2, which goes live in January 2018, makes it difficult for bank employees to have any kind of external or official communication that can’t be recorded and reviewed by compliance officers.
MIFID 2 will make explicit the need that any communication with a customer via messaging apps such as WhatsApp or WeChat must be subject to recording and compliance checks, the same as emails and phone calls already are.
Right now, when a rich customer requests a relationship manager to take a conversation onto a messaging app, the RM must explain why they can’t, says Ketan Samani, chief digital officer for Asia-Pacific at UBS. It’s awkward having to decline a customer’s request.
This lead the firm in late 2017 to look for ways to enable the recording of communications via third-party messaging platforms, and the means for compliance teams to keep an eye on them, he says.
“The established vendors didn’t have a solution,” Samani told DigFin, hence the search for fintech startups. There weren’t many choices in the market. “We found two, did an assessment, and grew confident that we could work with FinChat for a full-scale PoC.”
Making the selection
Bill Eng, co-founder of FinChat (along with CTO Arjun Singh), showed DigFin a demo of how the service works. It’s straightforward. FinChat records a WeChat, WhatsApp, Line or other message on a R.M.’s phone and downloads it to a bank’s server, where compliance officers can monitor it.
Samani says UBS decided to engage FinChat for a PoC because it believes the technology can scale to multiple markets, starting with test markets in Asia before expanding across both Asia Pacific and Europe.
It also liked the startup’s flexibility, eagerness to design a solution with UBS’s input, and its agility and speed. The PoC will occur within UBS’s sandbox and should take no more than two or three months to confirm it is ready to be deployed – or it isn’t actually going to work.
But why work with a fintech at all? Why not reach out directly to the message platforms themselves, such as Facebook and Tencent, the owners of WhatsApp and WeChat?
Samani says the platform owners vary in how much they are willing to adapt their products for the likes of a bank. WeChat comes with open APIs, allowing some degree of customization, but not enough; and WhatsApp doesn’t do this at all.
Is UBS working with these platform providers, though? Samani declined to comment.
Everybody’s doing it
Two trends are driving the need to put cell phone use into compliance, Eng says.
First, bad apples at financial institutions commit fraud on their phones exactly because they haven’t been monitored like voice and email. Many companies prefer to let their employees use personal devices for official communication. Misconduct in relation to high-profile cases of LIBOR and foreign-exchange market manipulation was done via messages, not over office emails or phones, Eng says.
Second, clients want to use their messaging apps. That’s why they are requesting R.M.s to move conversations that way. Financial institutions try to get dialogue onto proprietary apps, but customers aren’t interested: rich people in Asia tend to have five or six private banks, not to mention relations with insurers or fund managers.
And culturally, in Asia’s emerging markets, people went digital on their smartphones, not on desktops: email is what people in the West use, Eng says.
Samani, not commenting directly on issues of fraud, acknowledges that on-boarding a solution such as FinChat’s is about reducing risk. It’s not a cost-cutting measure.
But there’s potentially a revenue-growth side to the deal as well.
Eng says few banks are prepared to meet MIFID 2’s requirements on time. Once the law kicks in, private banks cannot use messaging apps in Europe if they aren’t in compliance. (UBS says its R.M.s now decline customer requests to communicate via such apps, but it is likely that some financial institutions look the other way: the legality of the practice varies by jurisdiction, and most countries’ laws haven’t kept pace with technological developments.)
“Come January, only one or two banks will be compliant-ready with our solution,” Eng said. “Imagine the impact on those banks that are left out, as their rivals are free to reach out to millennials,” those customers most likely to prefer app-based communications.
Samani says the bank has also been liaising with regulators about the PoC. Regulators are keen to see effective compliance take hold. “If we can crack it, other banks will follow,” he said.
FinChat past and future
FinChat is a young company, with only 10 employees. Eng has a military background. He served in communications for the Singaporean air force, and then joined the defense ministry’s research labs to work on information security. That experience provided the basic workings for what would become FinChat.
Eng left the military and made some money shorting stocks in 2008. “I thought I was a financial genius with that one bet,” he said, but then couldn’t repeat the success and decided he wasn’t a financial genius after all. But the money from trading funded FinChat, which he and Singh set up in 2015 and registered in Singapore in December 2016.
He would not detail revenue details but says the typical software-as-a-service model charges customers $20 to $50 per month per user. For FinChat, getting scale with some big banks is important to survive, before larger, traditional tech vendors replicate the product. (Although down the road these could also acquire the company.)
Eng says the next step could be using artificial intelligence to assist compliance departments with monitoring all of the messages being piped into the bank’s server. FinChat doesn’t see any of these messages. But it could develop simple, open-source A.I. tools to provide alerts, such as if a bank or customer suggests taking a conversation offline, or other red flags. Or a bank could develop such a service itself.
Lu Global reverses the Lufax story
Lufax began as a P2P and became a wealth manager – in Singapore, it’s adding secondary trading.
Lu Global, a wealth-management fintech in Singapore, has just launched a marketplace to enable its customers to trade the same products they bought on the company’s website.
Kit Wong, CEO at Lu Global, says the company has developed its consumer-facing business and is now selling both funds and structured products.
But it believes some clients want to get out of these positions, particularly structured notes. Instead of having to hold them to maturity, they can now see if other users in the Lu system are willing to buy them (at a discount).
Wong says the firm, which has a capital markets services (CMS) license in Singapore, serves about 300,000 customers. Some are resident in Singapore (where the business can only market to accredited investors), others are from outside, who can be either professional investors or retail.
The biggest segment of investors are mainland Chinese, who already know the Lufax brand, but there are also a lot of Taiwanese and Hongkongers, and a growing number of Southeast Asian users, Wong says.
The electronic marketplace has just gone live, so it has no volumes to speak of. Lu Global does not take positions in this secondary trading environment – it merely matches its existing customer base in case users want to make trades among themselves.
Lu Global declined to state its assets under management. Wong says the largest number of products are mutual funds, issued by the likes of BlackRock and Pimco – but the biggest volumes are in structured products.
He believes this may have to do with economic and political uncertainty in the region, which is spurring demand for products with known outcomes and terms.
But such products only pay out upon maturity – and the same destabilizing factors may be leading more investors to want to cash out early, even if they do so at a loss. But providing a marketplace not only gives them access to liquidity (assuming there’s a buyer on the other side) but also lets them sell at a better rate.
The launch of this product is a strange parallel to parent Lufax’s journey. Shanghai-based Lufax began in 2011 as a peer-to-peer marketplace for transactions, financing, and investment management. It exited the transactions and financing aspects to focus just on wealth management.
Lu Global built itself first as a marketplace for wealth products – but now it’s expanding into secondary trading, creating a marketplace for customers to exchange financial products before they reach maturity among themselves – a different kind of P2P than lending, which mainland authorities are clamping down on.
Half of Invesco’s China sales now via digital
But as the PRC joint venture learns how to distribute digitally, Invesco remains unsure of robo’s role in Asia.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. See also strategies from AllianceBernstein and BEA Union Investments. Go here for more insights into digital asset and wealth management.
Invesco is using its joint venture in mainland China, Invesco Great Wall, to figure out digital distribution.
The business now manages about $50 billion of assets, of which about 80% is retail, making it the fourth-largest Sino-foreign fund house in China. Over the past two years, half of retail inflows have come from new digital channels, as opposed to the traditional reliance upon banks, says Andrew Lo, senior managing director and Asia-Pacific CEO of Invesco in Hong Kong.
This is in keeping with a broader trend in the global mutual funds industry, which is shifting from one based on products to one focused more on investment solutions. “There’s an emphasis on designing outcomes for clients, such as through asset allocation or structuring,” to combine types of risk and asset classes.
That’s driven both by client demand as well as market volatility and challenges to active fund houses to deliver alpha (outperformance) on a net-free basis, compared to ultra-affordable passive investments tracking a benchmark.
That’s been an emerging story for the funds industry over the past decade. But on top of that is a new wrinkle: the ability to use technology to speed up operations and to reach more people.
“Technology is now changing the distribution landscape,” Lo said. “In China, it’s having quite an impact on reaching retail investors.”
For now this has been a story unique to mainland China, where existing bank channels (which dominate funds distribution in most Asian markets) are not well developed, and where regulation favors digital disrupters like Ant Financial.
The power of digital was evident in Ant’s success with money-market funds (under an affiliated fund house, Tianhong Asset Management), but it has now extended to equity and quant products onshore – products that Invesco’s J.V. now sells through fintech channels, including Ant, East Money Information, JD.com (Jingdong) and Snowball Finance (Xueqiu).
This has not been straightforward, however. Fund management companies are designed to cater to bank distributors, and are built on old-fashioned tech.
“We learned how to do digital marketing,” Lo said. “It’s very different to traditional distribution. It’s iterative, it changes fast, and you have to listen to customer feedback.” Partnering with digital channels has also required a different sense of product design, and to rebuild the company’s operational process to support round-the-clock digital sales and support.
Lo says the experience will be increasingly relevant as other markets digitalize, although they may need to be tweaked, depending on local regulation, client behavior and distributor demands. “Some things we can learn and apply elsewhere as the world goes digital,” Lo said.
The onshore funds market manages about Rmb14 trillion (almost $2 trillion) in total assets among 135 asset managers authorized to sell to retail clients, of which are 44 Sino-foreign JVs.
But most of these JVs are run by the local partner, with foreign shareholders having less influence. They are limited to stakes no greater than 49%, and local partners are often banks or other powerful institutions. One analyst told DigFin that local fund houses are not particularly bold when it comes to digital channels; and even if they are, the lessons don’t flow to the foreign partner.
But Invesco Great Wall’s case is different. Both Invesco and Great Wall Securities own 49%, with two other shareholders holding another 1% each. Given that Great Wall Securities has its own in-house funds business, it has been willing to let Invesco drive the business. (Beijing has recently permitted J.P. Morgan Asset Management to take a 51% stake in its funds J.V.) Invesco Great Wall is also among the oldest funds JVs in China. It is today led by Shenzhen-based CEO Ken Kang Le.
In China, Invesco is leading the way in digital opportunities. Elsewhere it seems to be running with the rest of the herd. In the U.S. and the U.K., it has made digital acquisitions: Jemstep, a B2B robo-advisor that services U.S. bank distributors, and Inteliflo, a British platform to support financial advisors.
“We haven’t found the right use case in Asia,” Lo said. Onboarding a digital B2B (of B2B2C) platform needs scale, but Asia is fragmented, with each market requiring its own business and compliance needs.
“Digital transformation is still evolving,” Lo said. “My guess is it can be like it is in China, where it’s a real thing that has become a major part of the industry.” But what that looks like elsewhere remains hard to know – or at least hard for justifying a business case.
New China distribution not just for money-market funds
Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.
Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.
China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.
Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.
It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.
But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.
MMFs: less big
Lo thinks this is changing, however.
The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.
Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.
Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.
“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”
In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.
Accessing the mainland market
BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.
This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).
Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.
Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.
“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”
The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.
New ways of doing business
Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”
Marketing was not the only part of business that had to adjust.
“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.
There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.
Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.
BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.
It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).
This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.