Opti: Robots attacking the profitability of Swedish banks
When it comes to making money the financial sector is the undefeated winner. Making money for others, especially people who already have a lot of money, is a very lucrative business. The sector has relished in high regulatory barriers-to-entry and opaqueness. That is all changing.
An increasingly deregulated sector has enabled entrepreneurs across the globe to attack the banks most profitable parts - from mortgages to asset management. The result: improved, transparent customer experiences with more choice and less cost.
The first company in Sweden to disrupt asset management at scale with technology is the robo-advisor Opti. Its mobile-first solution enables the user to create what used to be reserved for a wealthy few, a bespoke investment portfolio.
Opti’s algorithm analyses +4,000 financial instruments, the user’s risk and financial profile to suggest a portfolio with investments spread over several asset classes (shares, commodities and various bonds). The suggestion is then approved by a human. A Nobel prize-winning method to maximise returns whilst minimising risk. Opti is 100% transparent and independent, its management fees are comparatively low and it, crucially, receive no commission from investment funds and banks.
The founders decided to not raise any external capital when founding Opti in 2014, as to not compromise a long-term customer-focus for short-term profitability pressure. They raised 20 million SEK (£1.7 million) in 2017.
Opti got its asset management license mid-2016 and today have over 5 billion SEK (£425 million) under management and +20k app downloads.
(According to LinkedIn.)
The five-strong founding team combines essential financial and technological talent and consist of:
- Two successful serial tech entrepreneurs with +10 years experience of building and scaling technological products with millions of users.
- One Chartered Financial Analyst with +11 years experience (5 years at a leading firm and 6 years as an independent advisor).
- One front-end developer with +7 years experience building applications for financial institutions as lead developer at a top Swedish design agency.
- One asset manager with +25 years investment experience (Senior Partner at GP Bullhound and CIO at SEB — a leading Scandinavian bank).
In addition to the founding team, Opti employs at least one experienced software engineer and one investment manager with +20 years of experience from leading financial institutions. The team needs at least one senior growth marketing professional.
Opti is disrupting the Swedish household savings market with a particular focus on savings in shares and bonds.
- Total Available Market: 5 trillion SEK (£425 billion).
- Served Addressable Market: 981 billion SEK (£83 billion).
The Swedish robo-advisor sector is expected to grow with a 50% CAGR until 2022. Opti’s goal is to increase its market share to 2% over the next 10 years (to 100 billion SEK (£8.5 billion) under management).
There are several new and traditional actors that compete for the savings of the common man. Opti faces both direct and indirect competition, including:
- Direct competition from startup and bank’s robo-advisors, e.g Better Wealth, Fundler, Lysa, Nora (traditional bank), Robosave (challenger bank).
- Banks and asset managers, e.g. Avanza, Carnegie, SEB,
- Alternative investment solutions, e.g. Lendify (peer-to-peer lending), Tessin (property development finance).
The financial services sector have high legislative barriers-to-entry. It has not stopped a few experienced FinTech entrepreneurs to enter the market. Opti also faces increasing competition from large incumbents, although they are often slowed down by their technological legacy.
Opti recently launched a service for High-Net-Worth Individuals (HNWI) with +5 million SEK (£420,000) to invest. The service combines its technology with a personal investment manager and a significant rebate on its 0.5% management fee. It is the first on the market to offer a hybrid service.
Defensibility. Robo-advisors largely compete on price and need large volumes to be profitable. Opti was the first company to be granted a license to digitally provide advice on securities (robo-advising) from Finansinspektionen (the Swedish FCA). It is still the market leader but other actors are fast increasing their market share.
Lysa has grown from 200 million SEK under management to 1 billion SEK (£85 million) in just over 8 months with its slightly cheaper service. The challenger bank Nordnet started to offer a robo-advisor to its +650,000 customers in August 2017.
The four largest banking groups in Sweden has 84% of the TAM (4.2 trillion SEK) and Nordea, the largest actor, also launched a robo-advisor in October 2017. The remaining four are bound to follow. Internationally, banks have launched hybrid models similar to Opti, enabling a cost-efficient alternative for smaller accounts whilst combining it with a human manager for the lucrative HNWI segment.
Opti has to continue to innovate and prove that its model is superior to the competition to deliver on its 10-year goal.
Mindset/conversion. Moving from self-management/human savings advice to a robo-advisor is a big step for most households. Consumers need (and are asking for) more transparency and knowledge on robo-advising. Trust in banks are still on a global low-point and the self-interest of financial advisors that receive large kickbacks has been widely publicised.
Opti benefit from being the only robo-advisor that has been trading for two years. It needs to better capitalise on its performance by, for example, comparing its performance across various Value at risk (VaR) levels or its maximum drawdowns. Actual past performance makes it easier to convey the benefits of a non-human advisor and enables Opti to further highlight its independence and superior technology.
Security. Customers are increasingly concerned about their online interactions. Opti use the same security features as all major banks in Sweden (BankID), client funds are deposited on custodian accounts, any fund investments are separate from Opti and its clients are covered by financial compensation scheme. As a relatively new player, the safety features need to be communicated clearer with more transparency. Who is Opti’s custodian and how it works on its system resilience?
Robo-advising is still a fairly novel innovation on the Swedish financial market but its investment algorithms are here to stay and will drive consumer value. The cost-sensitive average household is probable to increase its adoption by virtue of:
- A generational change from non-digital to digital natives.
- Increased robo-advisor knowledge and proven performance.
- Mistrust with traditional banks and advisors.
Sophisticated investors and HNWIs are likely to continue to expect a personal contact that a robo-advisor cannot supply. They will, however, also benefit from the robot revolution as it will enable investment managers to become more efficient and give better-optimised advice.
Opti has already expanded to wealth management and there are several other verticals it could target in the future, e.g. organisations and payroll savings. The team is exceptional but could benefit from an experienced growth marketer — mindshare before market share to quote a GE mantra. Opti is likely to continue to lead market innovation and I am confident it will be able to reach its ambitious 10-year goal.