February 21, 2017

Human Capital in the Age of Fintech

Anton Gorodniuk
Financials Sector Analyst, SASB

Do diversity and incentive-based pay matter in the age of robo-advisers?

As Fintech grows more prominent as a force within the Financials sector, rising cyber-security concerns due to the industry’s heavy reliance on cloud servers and technology will rise to the fore. But data security is not the only Fintech-driven sustainability issue relevant to financial institutions.

Human capital is one of the most important assets of a financial institution. Commercial and investment banks, asset managers, and insurers often list attraction and retention of qualified workforce as a key business challenge in their annual SEC filings. But could emergence of Fintech change this landscape? McKinsey Global Institute estimates that 110 million to 140 million workers may be displaced by 2025. Attracting talent may still be a critical business issue for financial institutions, but the skill-set required is likely to see a significant shift from retail bankers and financial advisers to data analysts and web developers.

Bankers and financial advisers are becoming obsolete

In fact, as companies see the growth opportunities of online and mobile banking, commercial banks have been aggressive in closing physical branches. JPMorgan Chase, Bank of America, and Wells Fargo closed the doors at hundreds of branches nationwide, and the closures are expected to accelerate. As consumers continue to use banking services through interaction with touchscreens instead of tellers, Bank of America’s workforce decreased by almost 40% since 2009.

The asset management industry is also cutting financial adviser jobs, with Royal Bank of Scotland reducing staff by 550 employees as clients switch to robo-advisers (which tend to be a lower cost service).

Replacing humans with algorithms

In their SEC filings, customer-facing businesses recognise the importance of workforce diversity as a success factor in appealing to a broader consumer base. But using a banking app or receiving financial advice from an algorithm removes that interaction piece. Does it mean that a diverse workforce is of less importance for companies that deliver services through technology?

Surveys show that women use online banking more than men, while higher percentage of men invest their money. The two genders also approach these activities differently, which is supported by multiple studies that show differences in behaviours, such as risk-taking and shopping for services.

To be successful in capturing growth opportunities in online banking and robo-advice, banks need to consider these differences when developing their products. And to understand and appeal to a diverse customer base you need to have a diverse base of programmers and web-developers behind the stage.

You may have conflicted interests with your app

What about the so-called “human factor” as it pertains to conflict of interest and incentives (a wide-spread issue in finance)? Improper incentive-based compensation structure was the reason behind the recent scandal involving Wells Fargo opening over two million unauthorised accounts. Unlike a human being with emotions, a banking app is not going to offer you products that may not be in your best interest, right? Well, the apps are created by software developers under the guidance of banks’ product managers and further used as a tool by marketing departments. Therefore, human biases on each stage of the app development and implementation may be transferred into the app itself.

Just like a retail banker or a mortgage originator offering you an account or a loan which may not necessarily be in your best interests, a banking app or a robo-adviser might be marketing products with higher margins but not necessarily suitable to individuals.

What companies tell us about these important sustainability topics

To discern winners from losers in this competitive space, investors need decision-useful disclosure on these topics from banks and asset managers. Unfortunately, according to the SASB’s 2016 State of Disclosure Report, the majority of banks and asset managers do not discuss workforce diversity in their annual filings, while the disclosure related to selling practices, providing transparent information to customers, and conflicts of interests tends to be boilerplate in format.

Technology will continue to shape the face of the financial services industry. While robots do not have emotions, feelings, or genders, the people behind their creation do. The “human factor” is not going to be completely eliminated as Fintech takes over various segments of finance. Diversity, incentives, and conflict of interest will continue to play an important role in the long-term success of new financial products and services.

Anton Gorodniuk is SASB’s Financials sector analyst.