Will Robo-Advisors Kill Personal Service?

Personal service has been the cornerstone of community banking for decades — the ultimate defense against banking’s behemoths. But cracks are starting to show in the bedrock of community banking. No collapsing walls or shattered glass yet, but if you look closely, you’ll see ominous signs suggesting a service megaquake may be on hand.

Customer service is no longer the differentiator it once was. Years ago, a massive service gap existed between community institutions and national institutions. Consumers were able to choose between personal attention at small banks and credit unions vs. the technological superiority and ubiquitous distribution networks of megabanks. As time has passed however, things have changed. Big banks have ramped up their game, fewer consumers are visiting branches, and differences in service are getting harder and harder to identify.

Big banks aren’t the only ones focusing on service. Financial firms of all types and sizes have long viewed personalization as Holy Grail to consumer relationships. But some personalized services that were once the domain of frontline bankers and loan officers are being replicated and automated by scrappy, number-crunching fintech disruptors. These innovative startups are rocking the industry with slick algorithms that seduce consumers away from traditional banking providers. Robo-advising has started to replace old-fashioned, face-to-face conversation.

Digit and SmartyPig are free apps that help individuals save by analyzing a consumer’s cash flow, then throws any surplus funds into an FDIC-insured savings account. Their PFM algorithms weigh bills coming due, expected income, and spending habits. The same kind of technology is being used to reshaped how consumers craft their financial plans and investment strategies.

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Two researchers at Oxford University, Carl Benedikt Frey and Michael Osborne, found that nearly half of all jobs in the United States could be lost to automation within the next 20 years. Among the most vulnerable positions they named? Loan officers. And it’s easy to see why. After digitizing the loan application process, what’s left? The yes/no decision — a situation ideal for algorithms. In fact, Wonga.com, a short-term lending website, claims their algorithm does a better job of making loan decisions than humans. The site pours through seven thousand pieces of information before deciding whether to grant a loan. Company representatives brag about the algorithm’s accuracy and low default rate. Add the speed and convenience of an internet-based service, and it’s easy to see why Wonga.com is gobbling up market share.

Schwab recently took robo-advising to a whole new level with the launch of Intelligent Portfolios, an automated investment service with no advisory, commission or account service fees. Algorithm-managed funds allow Schwab to recreate a digital facsimile of personal service for the mass market, a group that has normally been excluded. Investors from across Middle America have responded warmly, pouring more than $1.9 billion of their savings into the program… in just the first two months.

Banks are generalists; they sell a highly-commoditized service with high legacy costs. They will always be vulnerable to the guerilla tactics of nimble, lower-priced specialists and smaller startups. Their best defense may be to follow the example of high-end car dealers: double-down on personal service and make branch visits an exceptional experience. Service with a smile is an old concept but one algorithms will always struggle to duplicate.