Why innovation in financial services is so tough

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Today I will be discussing with my team at AgeWage innovation. We are submitting an application for an innovation grant to Innovate UK and we have to determine whether we deserve tax-payers money to take our business forward.

To make that determination we have to work out what is innovative about what we do. I’ve spent the weekend puzzling over why we find it tough to provide people with the information they need to work out if they are getting value for money from their savings and do something about getting themselves a financial plan- an AgeWage for their later life.

The answer lies not in what we are doing, but in what we are not doing. We are not taking a charge on other people’s money and that is what is both innovative and tough to achieve.


Charging other people’s money powers financial services.

At whatever level of the financial services value chain, we see “ad valorem” fees. Ad Valorem is Latin for “to the value” and this phrase has been cruelly distorted so that “value” refers not to the value of service offered but to the value of money on offer. So a 1% fee on £1m is valued at 100 times a 1% fee on £10,000 though the value of the service to the owner of the money may be the same.

So businesses in financial services are valued on the assets under management or advice, rather than on the ongoing value being delivered to customers. This cruel inversion of “value and money” means that it is universally accepted that the wealthier the client , the more valuable he or she is. Meanwhile the vulnerable client – vulnerable because every penny counts, is considered unvaluable (I have just looked up “unvaluable”- it is not invaluable – it is a rarely used word most often associated with obsolescence.

Unvaluable is good

In my – and AgeWage’s world, unvaluable is good. You may not be able to make money out the non-existent wealth of the mass of people who do not hold value to the financial services industry, but we had better not ignore them. The 10.5m new savers brought to the party over the past seven years are unvaluable right now but they represent a powerful lobby in the future and will need help. It is hard to see them wanting to pay the fees levied on the wealthy, that would imply charges on their assets of 10% + pa.

To find a way to treat these customers fairly, to find them ways to find their pension pots, bring their pots together and help them spend their pots as a wage for life, we are going to have to get a whole lot smarter. We are going to have to innovate.


How do you innovate to include the unvaluable?

If you follow my logic , you can understand why financial services in this country is focussed on serving the wealthy 20% and ignoring the 80% unvaluable.

Indeed this is how you run a wealth management adviser,  a SIPP, a  funds platform, a discretionary fund – it’s also how you organise the distribution of institutional funds, you focus on wealth and supply to it and you leave the rest to NEST.

NEST ought to be innovative as it services the unvaluable but it does so with the help of Government money by way of a loan till it has sufficient money to be profitable on the assets it takes a charge over. So NEST – despite looking innovative, is actually reinforcing the classic model, taking money from one big pot and being supported in the mean time from the public purse.

There is an argument that says that NEST’s revenue model is presenting a cross subsidy from rich to poor, the big pots generate fees to subsidise the small pots. To some extent I buy this argument, a flat AMC – which is what NEST will move to once it has paid back its debt some time around 2040 will allow it to ditch the contribution charge. But NEST needs the public leg up it is getting till it gets to this happy position and that is why it has to have recourse to over £1bn of public money in the meantime.

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Which brings me on to why AgeWage needs such recourse too!

I am not looking for a substantial grant but I do need money to build AgeWage. That money has so far come from my pocket and from the pockets of our 500 investors. We will need to raise more money from the market and if we do not raise money from Innovate UK, we will accelerate slower.

Time is of the essence, the decisions being taken by people retiring today do not fill me with happiness. We know that many people are needlessly cashing out their pensions and drawing down on their bank accounts, others are reinvesting in the wrong kind of funds – many of which will fail. We can see these investments by looking at the numbers published by the ONS and FCA. It is important that we get good quality information to people so they understand value for money, take better decisions and live richer more fulfilled retirements on the back of greater financial securities.

We are five years into pension freedom and we still have not found a way to properly help people – other than the wealthy – with their at retirement decision making.

Data management not money management

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AgeWage is a genuinely different financial services company because it works to a different model. It sells information into the financial services eco-system and is rewarded for the use it makes of data – not of other people’s money.

Data processing is what AgeWage does, it is at the heart of its manufacturing capability and it gets paid for the results of that data processing. We are paid for the fruits of our algorithm , our ingenuity and our understanding of what the market wants and needs.

But we are very far from being successful, we are only just taking our first revenues and we will not be profitable for some time to come. We need the financial support of the taxpayer every bit as much as NEST and we need the support of organisations such as NEST as well.

If we are ever to move away from the traditional “ad valorem” model that takes a charge on wealth, we are going to have consider data as a commodity as valuable as money. This is accepted in other parts of the fintech world but not yet in the part I serve. I will need to go through the tough task of getting data processing valued, a process that I know my friend Will Lovegrove has trod.

Will’s PensionSync has done much to make auto-enrolment work and he should be applauded. He is currently enjoying some respite from his work as an entrepreneur , thought leader and data scientist.  I willingly sit at his feet and learn.

Tough on our customers too

Just how hard it is to run a data processing business in a world dominated by money managers is evidenced by the time it takes AgeWage to get the data from the insurers, SIPP managers and occupational pension schemes which hold both our data and our money.

This is the challenge for the pensions dashboard too.

But people demand to know who has their money, how it has done and they want to know how they can have their money back under their control so ultimately they can spend it on themselves and their families.

It it really tough on savers reaching retirement today that they find it so hard to get the data they want processed, into our hands so we can convert it into AgeWage scores.

Showing how hard it is , is part of the proof of our concept. Things will only change when we find ways to move information around the pensions eco system using the dashboard functionality to kick this off but developing a world of open pension data standards subsequently. These standards should start with a simple data request that is universally accepted under an e-signature.

We apologise to our customers for the time it is taking to assemble their AgeWage dashboards – but it should be the providers who should really be apologising!

With one or two notable exceptions the financial services industry, the pensions savings industry especially, is not ready to move to a data rather than an asset management model. Data is static, unavailable and still considered the property of pension administration teams.

Changing that will be the start of breaking down the hegemony of wealth and democratising financial services for the masses who have little or no control of their savings and little or no access to the guidance and advice they need to manage their finances in later life.

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About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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