Banking on Robos

Bill Cassidy | Institutional Banking | 10/15/2015 4:12 PM

I hate wasting Saturdays. But last weekend I wasted another one. I was prepping the car for a long trip. Oil Change: Jiffy Lube. Tires checked, rotated and inflated: Costco. Engine tuned and all hoses checked: Pep Boys. Fluids topped off, gas tank filled and a wash - two more places. All set. But it took me all day. Why didn’t I just drop the car off at one place, go play golf and then pick it up when it was done? This whole process made me think of the Robo Advisor movement. (whoa, bet you didn’t see that coming!)

Let me take a couple steps back. I’ve always admired the executive leadership at a certain financial services company here in the US. Trust me -- if you compete with them by peddling any sort of financial services solution, you don’t want your clients walking into their offices because you’ll ultimately lose them. Why? The cross-sell. This bank wants to be involved with every piece of their customer’s financial life. You walk into a branch and if they see a nail, the hammer comes out of the bag: investments, brokerage, trust, insurance, credit, payments, deposits – doesn’t matter-- they will take a swing at it.

Now back to Robo Advisors. It’s safe to assume that this new breed of digital advisors has won a few accounts from this well-respected firm and others like it. They’ve been disruptive, yes; a recent article speculated that Robo Advisors could potentially strip $4.7 trillion in annual revenue and $470 billion in profits from traditional banks’ P&L. Wirehouses could lose a lot more. Neither will like that.

The talk is about how disruptive Robo Advisors are. I actually think they’re not being disruptive ENOUGH. To me, they seem too narrowly focused on disrupting the traditional advisor-client service delivery model/fee relationship. For now, their failure to extend the digital offering to include the linchpin of an individual’s financial picture – banking services – leaves the back door open, and more alarming, they’re leaving money on the table. No stand-alone Robo firm is offering their clients deposit services, payment services or lending services. They need to think more like the not-named bank I mentioned earlier and cross-sell as many services to their clients as they can. But starting a bank takes a long time and requires a lot of regulatory approvals. So what’s a Robo to do?

I’ve been looking at the financial impact of incorporating some elements of banking services into the Robo offering. I’ll use $50,000 as the average account size and create a new Robo advisory firm called Cassidy Advisory (CA) – hey, it’s my blog and I can call my firm what I want to. CA has an advisory fee of 41bps, so with a $50k investment account balance, each customer is worth $203 Annual Account Revenue (AAR.) If I have 75,000 accounts, then that gives me about $15.2MM AAR – a nice business.

But what if I could derive more revenue by adding some banking services to my advisory firm’s offering?

Using some “back-of-the-envelope” calculations on revenue share back to me from my banking services partner --- Let’s say that customer with the $50,000 portfolio moves his banking relationship to CA and keeps a $6,000 balance in Investment Checking - that might be worth another $18 in AAR a year for me. If that customer uses their debit card 130 times making $10,000 worth of purchases, their AAR might go to $235. Add a Non-Purpose Loan of $25,000 – AAR may jump to $315. And if the customer buys a house and the $250,000 financing is done through CA, they’re probably worth a whopping $495 a year to CA. Banking services has more than doubled their AAR. And that’s just one customer. Imagine if a reasonable percentage of customers do the same…

A fuller service offering not only gives the Robo a deeper relationship with the client, it provides a more robust revenue model. Even better, it closes the back door. The competitive advantage of having more and more of a client’s financial ecosystem under one roof saves clients money and keeps them out of banks like the one I still won’t name. And they’ll have gotten more complete service from one provider; they won’t blow their Saturdays – or any other day – as I did, running around dealing with disparate sets of expertise.

The opinions, findings, or perspectives expressed in this content are those of the author and do not reflect the official policy or position of The Bancorp, Inc., its affiliates, or its or their employees.