After 10 years in the fixed income markets with Merrill Lynch in London, I joined three experienced fellow London-based bankers to start a new banking group in 2009. The aftermath of the banking crisis seemed to us the ideal time to launch a new bank with a focus on simplicity and transparency.

In contrast to a traditional (FinTech) start-up, a new bank requires substantial capital before it can be launched and thus we sought backing from a specialized private equity house, AnaCap Financial Partners, who provided the capital to start the venture.

Our initial focus was on simple balance sheet strategies to get the bank into profitability within months from start. As the bank grew, we shifted from wholesale funding to retail deposit funding and realized that our deposit clients were also interested in solutions to earn higher returns on their savings. We set out to build an online investment and wealth management platform within our challenger bank. The investments to build this platform came – and still come – from retained earnings.

Our strategy is based on partial rebundling. We built a WealthTech within a bank to offer a one-stop shop for savers and investors. From the WealthTech point of view, the rationale of this model is twofold: we achieve lower client acquisition cost and we self-fund the build-up of the business from retained earnings of the bank. In addition, from the savings and lending business point of view, offering investment products increases client loyalty and retention.

Over the past eight years, our approach to building the group has been quite atypical, yet many of the lessons we have learnt along the way are relevant to other WealthTechs. Especially over the past three years, we have established MeDirect Bank in Belgium as:

• the pioneer in online wealth management;
• the first open architecture platform for model portfolios and online wealth management;
• the most transparent platform for investing in mutual funds;
• the first platform to obtain a full banking licence since the 2008 crisis.

A Good Product and Service at a Competitive Price

Compared with most other B2C FinTechs, WealthTechs have an additional challenge to overcome when building a business: success requires convincing people to entrust their hard-earned life savings to a website or an app. This requires a lot more trust from a consumer than for them to, say, pay a restaurant bill with a payment app.

What do we mean by “a good product”? WealthTechs compete among each other but also with the incumbents. So it is interesting to look at why clients leave their wealth manager. According to a JP Morgan and Oliver Wyman survey, the top three reasons are dissatisfaction with service, poor investment advice and poor investment performance. Simplified, the three main reasons boil down to the client losing money or earning lower relative returns in comparison with their peers.

A good product for a WealthTech is one that generates good (relative) returns over the long term. Building trust and a solid reputation takes a long time, especially for unknown start-ups. At MeDirect Bank, our growth hack consisted of teaming up with Morningstar, one of the world's largest and most reputable independent investment analysis and advice companies. While such a partnership comes at a cost, it gave us instant credibility in terms of quality of product and independence of advice and product selection. Morningstar allowed us to offer a trusted high-quality product to attract clients and be confident that clients would stay for the long run. That is essential for enterprise value creation and to recoup your client acquisition cost over time.

We applied the same philosophy to many parts of the business. For example, for our equity trading platform we teamed up with Instinet to reliably offer best execution to our clients. When we found solid partners, we chose to integrate with their systems and infrastructure rather than build our own. In addition to building trust, it got us to market faster. Thanks to our digital distribution model, we are able to offer these quality products and services at a lower cost than incumbents, which plays a role in attracting potential clients.

The user experience (UX) and user interface (UI) of the platform are also important, and we strive to improve both to get and maintain an edge over our competitors. But they come third for a WealthTech in our opinion. Offering a good-quality and trustworthy product at a competitive price is essential to offering a great customer experience. I have seen many greatly designed WealthTech platforms, but usually wondered whether I could be an early adopter and trust my life savings to them. Good UX/UI is not enough.

Partial (Re-)Bundling

When we launched MeDirect Bank in September 2013, the idea of combining online savings and online wealth management was at odds with the FinTech trend of extreme unbundling: the tendency of FinTechs to focus on just one narrowly defined product or service.

Most B2C FinTech success stories to date are indeed mono-product businesses. Their narrow focus on a simple product is a key ingredient for exponential growth. They are low cost and have great UX/UI to onboard clients easily. They typically operate in less strictly regulated environments and trust is less relevant, given the small transaction amounts involved. Wealthfront and Betterment have achieved fast growth, but they remain exceptions and account for only a fraction of their wealth management market.

Today, the concept of “partial rebundling” for WealthTechs is widely accepted and adopted. We have seen many WealthTechs team up with established partners, which can offer instant access to a sizeable client base and/or can add the element of trust to an unknown start-up. Such partners for WealthTechs can be established banks and fund managers, and even fast-growing and well-known mono-product FinTechs.

Such alliances are not revolutionary. It makes good business sense for both parties when a WealthTech with a high client acquisition cost plugs into an established client base.

For MeDirect, our attractive savings products allow us to grow a client base of potential clients for the WealthTech part of the business. Growing a deposit client base can be done at a lower cost of acquisition and at greater velocity than attracting online wealth management clients. Selling wealth management products to a client who already trusts us with their savings represents a materially lower barrier. The bank licence of MeDirect and implicit stringent regulation and oversight also helps create trust with potential clients.

At MeDirect, we took the (re-)bundling one step further. With our client-centric focused online wealth management, an e-brokerage platform, online savings, etc. essentially all answer the same client need for a return on their savings. We decided to offer a one-stop shop that encompasses these various interpretations clients may have of “wealth management and investments”.

Testing and Pivoting

The co-founder of LinkedIn famously said, “if you are not embarrassed by the first version of your product, you've launched too late”. The first version of the MeDirect online platform, launched in September 2013, offered good-quality products, but too many of them and with basic UX and UI. Importantly, the launch enabled us to get the first clients through the door, measure their behaviour on the platform, and start improving the site based on real client feedback.

We launched the online platform to the public with a broad spectrum of products and services that had not been offered online in Belgium (and Europe to our knowledge) before: innovative savings products; online wealth management in three options – a managed pension plan, a “monitor and advice” service and a full discretionary management service; an execution-only platform for funds, ETFs, stocks and bonds; and execution-only thematic model portfolios of funds.

We monitored and measured client activity and evolved the platform accordingly. The online “investment advice” service profiled a client, recommended a portfolio of funds and could make alterations to that portfolio, including changing the weights of individual funds and switching individual funds. The client could even replace an equity fund with the individual underlying equities and then change these equities. The platform would monitor such portfolios and regularly make recommendations to the client based on their profile, and show a gap analysis between the recommended portfolio composition and the one chosen by the client. Technically very advanced, and offering great flexibility to clients. But such flexibility created several UI and regulatory challenges. Too many options created “choice-stress” for clients, with negative consequences for conversion rates. Client appetite remained very low, despite several iterations, and we decided to remove the product to simplify the platform and focus our scarce resources elsewhere. The MeDirect “pension planner” followed a similar faith.

In contrast, we observed a fair and growing level of activity from our clients on our execution-only open architecture fund platform. The MeDirect “fund supermarket” clearly appealed to the retail and mass affluent audience we were targeting. The breadth of our offering, together with the low and transparent costs, earned us accolades in the press as best and most transparent platform for mutual funds. Client centricity was a key factor in this. For example, we started offering 250 mutual funds on the platform. Within a few months we were distributing three times as many, mainly as a result of client requests to add new funds and fund managers. Requests which we were able to meet within a few days thanks to our efficient operational setup. We clearly had identified a need in the market and had a platform that met that demand better than most (the observant reader will have noticed that adding and settling funds in a few days gave us an edge over competitors; clearly there is much more innovation possible in this space, but that is beyond the scope of this topic…).

In parallel with our growing fund supermarket, we also saw encouraging interest by clients in our execution-only model portfolios and discretionary wealth management service, both of which built on the basis of our open architecture mutual fund supermarket.

Clients like the execution-only model portfolios for their convenience, combining a number of funds in a handy shopping basket according to an investment theme. The ability to contribute monthly amounts to that basket of funds, and the fact that we do not charge any transaction costs, make this a popular product. The partnerships with several recognized and trusted partners, such as Morningstar, to construct these thematic baskets effectively created the first open architecture platform for model portfolios of funds.

The straightforward discretionary management service also appealed to clients because of its simplicity, transparency and convenience – in addition to its strong performance. The online profiling questionnaire, including MiFID questions, makes for a longer conversion funnel than the execution-only model portfolios. But clients understand that this additional step provides them with a personalized portfolio which is managed for them. They are willing to pay the additional management cost for this service (0.3–0.6% depending on the amount invested). We charge no other fees (no entry fees, no exit fees, no transaction costs, etc.), and thus the cost of our discretionary wealth management is well below that of traditional wealth managers (and online players). The entry threshold of minimum €5000 also makes this service available to a population that cannot or will not invest the minimum €300,000–500,000 that incumbents require to open an account. So in the months following our first launch, we took a number of decisions that shaped the platform as it stands today, following the adage that “less is more”:

• We drastically simplified the wealth management offering from three products to just one.
• We followed our clients and allocated most of our resources to further improving the products, services, UX/UI and operations associated with our open architecture fund platform.
• We set out to redesign the platform to drastically improve UX/UI and reflect the evolved product and service offering.

Growth!

During our first year of activity in 2014, we spent half of our time learning from client feedback and A/B testing. We tested many product, design and UX/UI features with an eye on client engagement and conversion rates. This provided valuable inputs in the parallel work that was ongoing to launch a completely revamped online platform in the last quarter of 2014.

The following year (2015) was one large test. We had just launched the new version of the platform with a refocused business strategy. Client activity grew noticeably and trends in that activity became clearer with increasing assets under custody/assets under management. Our decisions from 2014 were confirmed and we persevered in establishing MeDirect as the main platform for investments in mutual funds in Belgium with a fund supermarket, execution-only model portfolios and online discretionary wealth management.

During 2015 we launched several marketing campaigns. We realized that the energy, time, creativity and money invested in product and service innovation had to be met with equal investments in clever marketing. We tested various messages, channels and incentives to attract investment clients directly and to convert depositors to investing part of their savings.

Here we also tried growth hacks to stretch our budget. For example, we rented a tram plus conductor in one of the major cities and made it free for everyone to use during the Christmas shopping month. We wrapped it in our logo with the slogan “On this tram you don't pay entry or exit costs, just like in the MeDirect fund supermarket”. The originality meant that everyone was interested and had an opinion about it. Five national newspapers covered the story and we shot a TV commercial on the tram to reinforce the message.

Client Centricity

We pride ourselves on being extremely client centric in terms of transparency and service. For us this means doing a few things well. Not doing everything for everyone.

Client centricity is an important differentiator. For example, even though we distribute our products and services digitally for scalability, we also make a contact centre available for our clients. They take phone calls and email messages. For some of our clients, having the option to speak to a person is important. Our contact centre staff fully subscribe to client centricity and we are convinced that they contribute significantly to the 96% client satisfaction rate at MeDirect.

We are about to launch the next version of the platform. Again, this will incorporate new functionalities based on client feedback. They really appreciate it when they talk to us or meet us at a seminar and see that their feedback makes it onto the platform. We are also having more conversations with potential new partners to continue to improve our client offering with new products and functionalities. Very much like a post-Payment Services Directive 2 (PSD2) platform that will distribute many banking services, we have built an open architecture platform to distribute a variety of savings, investment products and services.