Fintech fad or fortune?
So many apps, chatbots and neon bank cards, such little time and money. Fintech companies have revolutionised the way we interact with our finances. They all come with promises to make or save us cash but beyond the quirky adverts and heavy use of emojis is everything as good as it seems?
Digital money management
Remember appointments with bank managers? The back and forth of setting up a current account? Cheques? Ten years ago they were the norm and now digital-first start-ups have taken the rulebook and shredded it. To the point the big banks are looking to the new kids for inspiration.
The way we deal with our money has become an increasingly digital experience. Mostly for the better, in my opinion.
Revolut implies disruption in its name and embodies it in its service. A bank that delivers an all-digital experience for maximum convenience. They do things banks don’t do, like allowing you to open a current account in minutes. They also send instant notifications about transactions direct to your phone.
Transferwise hit the headlines when they launched with a very visual mission to clean up the banking system. They saw an opportunity to call the banks out on their unfair exchange rates for sending money abroad. For those of us who rarely make international transfers the discrepancy was a nuisance but for people who sent cash around the world every day? They felt it. Transferwise changed the game by providing ‘the real’ or mid-market exchange rate for customer’s transactions. The mid-market rate sounds special but it isn’t. It’s the one banks and money transfer services use for themselves but don’t pass on to their customers.
The benefits of these money management services are numerous but they aren’t without their potential pitfalls.
Things to remember:
Banks can sometimes run into trouble. Whether it’s because of internal naughtiness or uncontrollable external influences (like an economic crash), ultimately their customers bear the brunt of any failures. To counter this, the Financial Services Compensation Scheme (FSCS) was set up in 2001. If your bank goes bust the scheme will protect you for up to £85,000.
But be warned, Revolut and Transferwise aren’t covered by the FSCS, so if anything goes wrong with these new businesses you can’t claim through the scheme.* Make sure you know exactly what happens if a bank or financial service provider goes bust by sending an email to their customer support.
Investing money used to be a pretty long and drawn out process. Usually reserved for people who had a lot of cash to invest in the first place. Face-to-face meetings would be justified considering the capital at stake but it meant the cost of this level of service was out of reach of most ordinary people. Enter the new wealth management players.
Websites like Nutmeg and Wealthify have made investing easy, convenient and accessible by automating it. It’s known as “robo-advice”, because they use computers to do some of the work investment managers used to, like collecting sign-up information from customers. The investment management lacks the personal touch but makes up for it by being cheaper and simple to use.
Both Nutmeg and Wealthify operate on a platform of convenience where you have to do very little. In fact you only have to choose how much you want to invest and how risky you want your investments to be. The riskier you go the more you may stand to gain but, as with all investing, the more you may stand to lose.
Convenience can come at a cost.
Things to remember:
You know those ‘you might like’ sections on a clothing website? They make automated recommendations based on your purchase history or info you’ve given. A great service that is accessible to all who use it. But it’s not the same as getting a personal shopper though, right?
Now imagine if a website with a ‘you might like’ section claimed its automated recommendations were substantially cheaper than a personal shopper. Technically it is true but the comparison isn’t fair because they’re offering a totally different level of service. This is effectively what some robo-advisers do.
Companies which offer automated advice like Wealthify and Nutmeg pit their fees against old school face-to-face investment managers. This comparison will always make the robo’s fees look great value — but robo’s are offering a far more basic type of wealth management. With a robo-adviser you won’t get:
- Hands-on holistic service
- Advice tailored to your specific circumstances
- A comprehensive guide through your whole investing lifetime
All of the above is part of the — understandably more expensive — service offered by a face-to-face investment manager.
A more like-for-like comparison is Vanguard’s LifeStrategy, which features premade portfolios that its customers can choose to invest in. Vanguard’s fee is 0.22%; cheaper than Nutmeg’s 0.45%. A sweet incentive for a bit more decision making.
The moral of the story is, make sure you know what kind of service you’re getting and be wary of marketing comparisons.
Most of us know a friend of a friend who made some (or a lot) of money off of the Bitcoin boom. And some of us will know that person who invested more than they could afford just as the bust hit the headlines.
Crypto is for some the most glamourous “fintech fad”, let’s face it what’s not attractive about the possibility of becoming an overnight millionaire? Everyone wants to get rich quick but there are some big things to bear in mind if your considering joining the crypto train.
Things to remember:
Cryptocurrency has made and lost people money. Even though some people say the crash was an anomaly — it could happen again and has proven that no currency is immune to changing market conditions.
If you’ve never invested before or are still newbie there are much less volatile investment products to think about before hand. Not least making use of the tax-efficient Stocks and Shares ISAs around.
Last point: you might have heard that the technology behind most cryptocurrencies is called blockchain. If you haven’t heard of it, you can think of blockchain like a very public record of every transaction ever recorded or monitored for currencies like Bitcoin. Surprisingly the current costs of transferring money with this technology is actually more expensive than banks.
Not a product or service, but sometimes used as a way of describing both. If you’ve ever come across an investment service describing their use of the ‘Markowitz Portfolio Theory’, dig deeper. Saying this strategy is ‘Nobel prize winning technology’ makes for great marketing but it is putting a creative spin on an industry standard investing model. The model means the investor tries to take the least amount of market risk to get the most return.
There are positives and negatives to all financial products and services. Companies promoting their offerings will tell you the good stuff but we’ll help you understand risks and costs to make sure you have the most informed view on how to best use your money.
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