Financial solutions are great when they are delivered on the click of a button
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Financial solutions are great when they are delivered on the click of a button

Financial products can be easily delivered to customers as they just require a platform for delivery. But financial solutions are a lot more complex. It is essential to understand the customer needs, design the solution, back-test the solution, implement the solution and finally monitor the solution.

  • April 17, 2018  
  • |  
  • UPDATED   15:04 IST
Financial solutions are great if they are delivered on the click of a button

How are financial solutions different from financial products? Take a simple example! If a person asks for a life insurance policy you give them a term policy from the shelf. These are called 'off-the-shelf' products because they are just products. They do not have any customization element. The way customization is approached and works is something like this...

  • Does the customer know the amount of insurance required
  • What are the best options to cover that risk
  • How to productively utilize the funds saved by a term insurance
  • How to monitor the insurance need at each stage of life
  • What are the other investment and insurance needs of the individual
  • How are taxes going to be managed

Financial products can be easily delivered to customers as they just require a platform for delivery. But financial solutions are a lot more complex. It is essential to understand the customer needs, design the solution, back-test the solution, implement the solution and finally monitor the solution. Let us look at how each of these steps can be managed at the click of a button.

Understanding customer needs

Before you offer the financial solution you first need to understand the customer requirements. There are four points in this matrix. There is the returns perspective, the risk perspective, the tax perspective and the liquidity perspective. Any financial solution is only complete if it delivers these four points. Making the understanding of the customer possible at the click of a button involves a mix of primary data collection from the customer and use of secondary market intelligence through the use of algorithms. In case of risk, the customer can give a ballpark idea but it is for the algorithm to evaluate if the risk perception is correct and whether the risk profiling of the customer is done basis his risk taking appetite.

Designing the solution

Once you understand the customer needs, the best products have to be identified and shortlisted for the customer. Finally, an evaluation of these products has to be done on parameters like return, risk, brand, past track record etc. Interestingly, when you combine the database of financial product intelligence at one end and the power of a financial solution at the other end, the process can be easily automated. Of course, this is not something that can be done manually, but higher-end machines using machine intelligence and machine learning can easily handle these mountains of data to deliver the most optimum solution.

Back-testing the financial solution

What do we understand by back-testing the financial solution? Hypothetically you assume that the solution was designed 20 years back and then you back test it to the present using live and real data. If the financial solution is delivering the expected results over the last 20 years then there is a high probability of the solution working in the next 20 years too. This is a highly processing-intensive program and hence it cannot be done manually. It has to be done programmatically and you can actually get the back-tested results at the click of a button. Effectively, you have not only profiled the customer but also designed the solution. Above all, the back-testing when done under difference levels of confidence and stringency will give you results that are as close to the actual market scenarios as possible.

Implementing the solution

The proof of the pudding lies in the eating and the proof of the financial solution lies in its implementation. Once the solution is designed and the entire results are back-tested, the next step is to actually implement the same. This involves various steps. It entails completing the entire Electronic Know Your Client (E-KYC) norms online so that the customer is compliant before investing. The system needs to facilitate complete paperless E-KYC. Secondly, the buying of investments and insurance must be entirely at the click of a button. That means, manual involvement is almost nil and the entire process including the execution of the trade, interfacing with the payment gateway and the custody of investments and insurance is all done in a seamless manner. The value addition can come in the form of seamless toggling between research and actual execution of transactions.

Monitoring the financial solution

Monitoring the financial solutions has two steps to it. First is generating the performance report and the second is the follow up action which could be in the form of rebalancing of the portfolio (if required). The monitoring module must include various reports on portfolio mix, compare it with the original plan, actual returns on the financial solution, risk adjusted returns etc. Once the reports are generated the solution should enable automatic rebalancing of the portfolio. The future of financial solutions is that it has to be delivered at the click of a button. The simpler it is the more powerful and effective it is likely to be!

The author is head of research and ARQ at Angel Broking