Meddling With The Middleman

THE middleman’s role in today’s business environment is that of a tightrope walker balancing on a kite string coated with dangerous glass.

Chinese e-commerce giant Alibaba Group can now book space directly with container shipping liner Maersk for cargo space. Lazada and Zalora have struck a blow on brick-and-mortar retail shops in Singapore with their online shopping platforms. More financial products are being sold online as banks and other financial institutions increase their efforts to digitally engage their customers. Uber is making taxi drivers out of ordinary people. Airbnb is helping house owners monetise their investment properties as rental markets remain weak. Social media is getting news out to the public domain faster than ever before.

A common theme underpinning these developments is that the role of intermediaries is changing across industries.

We have all dealt with intermediaries at some stage of their lives.

If you are selling your house, you typically seek the help of a property agent instead of finding a buyer yourself. Technology is making it easier for house sellers to connect with buyers directly.

Many people used to go to travel agents to plan their holidays. Now, they go online to buy their airline tickets, book hotel rooms and hire a car in a foreign city.

In the container shipping industry, freight forwarders have traditionally booked cargo space on behalf of the likes of Alibaba. Direct online booking will certainly weigh on their businesses.

Dribbling Around Disruptions

Digital disruption is present in all sectors, and incumbents have to find ways to negotiate it. For some, it could be a matter of long-term survival. Digital disruption is making traditional industries less traditional.

Many new trends are being driven by tech companies that do not have experience or track records in the industries they seek to penetrate.

As an example, five of the six biggest companies in the US in terms of market capitalisation as at the end of January were tech companies — Apple, Alphabet (the parent company of Google), Microsoft, Amazon.com and Facebook. Having fortified their positions in their core businesses, all these companies are looking for opportunities outside their “traditional” industries, through acquisitions, partnerships, technology sharing and joint venture arrangements, or via the venture capital and seed funding routes. Their influence continues to spread.

Thus, the message for intermediaries in any sector is that they cannot afford to stand still. They have to climb on the bandwagon dragged forward by digital disruption. Some may not be able to afford to do so and may fall by the wayside, soon to be forgotten. But many others are in a position to embrace technological change.

Banks, in particular, are investing heavily in financial technology, or fintech. It has been observed that attendance and participation in fintech conferences are often more bank-heavy than fintech company-heavy, an indication of banks’ concerns.

The Robo Crop

A case study on how banks are responding to digital disruption can be found in the automated investment management services, or robo-advisory services space.

Robo-advisors allocate retail investors’ money to assets, largely exchange-traded funds, on the basis of a few know-your-customer questions and can also automatically rebalance portfolios as market conditions change.

This has enticed some retail investors who otherwise would not have access to such portfolio management tools to invest via robo-advisory platforms. They are growing in popularity in the US and Europe, but are still relatively unknown in Asia.

Initially, it was the pure technology firms that were offering robo-advisory services. It was thought that they would pose a threat to banks and financial advisory firms. But most of the talk now is about robo-advisory firms playing a complementary role, as pure robo-advisory firms do not have access to a wide base of customers that banks have.

Private banks using robo-advisory tools to run satellite portfolio holdings for their clients that complement their core portfolio holdings. This points to their clients having a hybrid of human- and robo-advised portfolio management.

The Hybrid Middle

The world’s largest fund managers are buying robo-advisory companies, perhaps because they feel that they will miss the boat if they do not. What the boat is remains uncertain and it may be a moving target.

The robo-advisory products and services we see today may not be the same a year down the road. By buying into such technological capabilities, asset managers will be clued into what’s happening in the robo-advisory space before their rivals. This will help position them for any new opportunities that may emerge as technologies develop further. Intermediaries in other sectors may do well to adopt a similar strategy in the face of digital disruption.