Hargreaves Lansdown wakes up to fintech’s digital disruption

OpinionAlternative loansDigital bankSavings and investment

The UK’s largest direct-to-consumer investment house may still thrive in the digital age, but nascent competition from once-disjointed startups is now a real threat to its business.

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Hargreaves Lansdown CEO Chris Hill once said that the Bristol-based retail investment firm was in many ways “the original fintech company”.

It’s true that the company helped revolutionize the way investors access stocks and funds by harnessing the power of the internet in the early 2000s and becoming the UK’s best-known ‘funds supermarket’.

However, it now faces a new threat of digital disruption and competition from fast-growing fintech startups and its own shareholders appear to be getting nervous.

Admittedly, the company announced yesterday that it held £141.2 billion in assets (at the end of 2021), a 4% increase in six months and far more than its fintech rivals in absolute terms. It gained 48,000 net new customers during the same period, bringing its total customer base to 1.7 million with a retention rate of 92.7%. It also holds an incredible 43.3% share of the UK direct-to-consumer wealth market as a whole.

But when news broke yesterday that it would cut its dividend until at least 2024 in favor of a £175m cash injection into its digital strategy, it made investors jittery. Its stock price fell nearly 20% at one point in the day before closing down 15.53%.

Hargreaves, like many incumbents in the financial industry, increasingly sees a nascent threat from nimble competitors who have embraced digital innovation early on.

At the heart of a five-year strategy unveiled by Hill is investing in more “digital capabilities,” nicely paraphrased to “automate the hell of it all.”

This will include a major move of customer data to the cloud, as many big banks are also doing, following in the footsteps of neobanks and legacy platforms such as Monzo and Starling.

Hill says this plan will reduce service costs, increase innovation, reduce errors and the risk of downtime while increasing efficiency and customer retention.

“HL does not stand still. It’s just not in our nature, as growing quickly is essential for any leading company in a market that is also rapidly changing,” Hill said in his statement accompanying his results.

I confess to actually being a reasonably satisfied customer of HL. I have both an ISA account and a SIPP account, the latter meaning that’s where most of my investment assets go. It offers an unrivaled selection of funds, ETFs, investment trusts and stocks, as well as good customer service in case you need someone to talk to.

But the overall digital interface, as well as the broader customer experience, leaves a lot to be desired. The fees also seem less and less competitive when compared to Freetrade, Bitpanda, Revolut or Lightyear. I was also recently informed – by letter – that unless I opted out, new pension contributions would automatically go to an internally managed fund, which didn’t seem to be innovative or a way to win clients.

The “digital wealth” category of fintech – the first iteration of which was robo-advisors such as Nutmeg and Scalable Capital – was initially derided by an established wealth management industry as interesting but ultimately unsustainable. The cost of acquiring customers was too high and ultimately never scaled.

In 2022, however, it looks increasingly confident, cash-generating, and faster to onboard new digital services and expectations than incumbents.

It has never been easier for another incumbent, a different category fintech such as a neobank or a new startup, to launch investment services thanks to a multitude of disruptions in the infrastructure space. B2B.

Five years from now, Hargreaves Lansdown’s digital plan could well benefit shareholders and help it retain its dominance. But it will be a tough road to keep competitors at bay. We are certainly at an inflection point.

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