It is some years now since The Exchange was under industry ownership and the online services landscape for IFAs has changed significantly.
It was always going to be only a matter of time before real competition to The Exchange emerged, industry-owned or not, bearing in mind that the sale to the management was preceded by a monopoly challenge to the European Commission.
There have been some changes which have helped enable the online services market to change so rapidly and perhaps the main driver has been the emergence of the internet and the proliferation of websites.
This has created a relatively low-cost mechanism for providing services which were previously out of the reach of most small businesses and which were regarded as high cost by many bigger organisations, specifically transfer of electronic data interchange messages between organisations.
The internet has also attracted many new parties to the concept of providing aggregation services to IFAs.
Perhaps the second and arguably the most important factor is the potential for new entrants to generate income from this business, fuelled largely by the known costs to providers of existing services from The Exchange.
Who can blame them? Millions of pounds have been put into The Exchange over the years, admittedly within a tariff framework based on quotations, so why should other organisations not aspire to take a slice of the same pie?
However, The Exchange model for charging is inherently outdated, based on both a different technology model from over 10 years ago and a monopoly situation where the main criterion was to at least cover cost. The fact that the model exists does not make it right and should not be a reason to replicate it.
The emergence of these IFA portals raises many questions for the market:
Is it a good thing?
What are short-term and long-term costs?
What are the support issues for providers?
Who ultimately benefits?
It is worth stating at the outset that providers welcome competition between portals. The Exchange would not have been sold if this had not been the majority view and it is important that IFAs have a choice across a range of service providers.
Portals also have a major role in driving up the usage of online services, which is a key factor in providing an environment in which providers can re-engineer or restructure their organisations.
In terms of how portals are remunerated, it would be stretching things to say that there is a consensus. However, as you would expect of any peer group, there has been considerable debate and it is fair to say that there are some common strands emerging.
Broadly speaking, portal remuneration should be fair, act as an incentive to both parties to drive usage and clearly represent the value of the service performed, not the potential savings.
On the last point, it is useful to look outside this industry to other similar models. The airline ticket booking process has for years been dominated by three worldwide systems which are now seen as overpriced at $5 per transaction (note dollars not pounds) and are being redeveloped.
In the motor insurance market, transaction fees are at similar levels. The volumes in these industries have reached critical mass but there is no reason why these value benchmarks cannot apply to our own processes.
On a more general note, a number of guidelines are being applied by some providers in their discussions with portals:
Up-front fees to fund development are seen as unnecessary and are probably a throwback to past industry initiatives funded by providers. Portals are commercial ventures which must be financially viable on their own.
The taking of equity stakes in portals is a matter for each individual provider based solely on investment returns rather than support of the service.
Transaction charges are linked to business written rather than quotations performed.
It is clearly IFAs who determine the success or failure of portals. If business is not transacted online and portal services are not used, then no income will be generated from providers.
This is where the competition concept falls down as this is one of the few, if not only, business models where organisations pay for a service they do not receive.
“True” competition would be based around an “IFA pays” model. However, the provider says the current desired position for the industry and it has to be made to work.
One area that should not be ignored in the context of competition is provider extranets. This is the lowest-cost option for many of the transactions required by IFAs although, significantly, they do not presently offer aggregation facilities, an important function for IFAs which helps considerably to compare products and prices.
That said, extranets are certainly part of the e-commerce big picture and will have an important role in some of the policy servicing functions. They are low-cost because they do not require interaction with a third party.
They pass the user straight through to the provider's own IT infrastructure, which has many benefits.
Portals must remember that these services are real and are competing with their own. If IFAs choose to use provider extranets rather than portals, it is for the simple reason that they provide a better overall service. Competition is tough, isn't it?
There are some concerns, though, among providers and the most common is the fear of being locked into long-term arrangements. They are concerned particularly with portals that have significant aligned distribution.
The overriding fear is that they are being drawn into participating in the short term on unreasonable business terms to get things off the ground.
In the longer term, they fear cost increases and finding themselves caught between wanting to support the IFA user base but at unreasonable levels of fees.
Clearly, IFA relationships have to come first and providers would never want to jeopardise this by withdrawing from services unless a better alternative for the IFA was offered.
The ability to leverage price in this way cannot be in the consumers' overall interest, let alone the industry's, and it is not surprising that it is a major issue to most providers.
The situation is further compounded by a few providers which quickly agree terms at the asking price although lessons have been learned from the funding of initiatives in the past, which now make little sense, nor have demonstrated any real value.
As discussed earlier, providers have a key objective to drive down processing costs in order to do business in the new 1 per cent world.
One of the arguments used by portals when trying to convince providers to participate in a service is that the costs will be more than recovered fr
om the savings we will make.
It is true that cost savings are the end goal but it is fallacy to think that, in the short to medium term, each time a quote is performed or a case submitted electronically, money clinks conveniently into providers' coffers.
In fact, in the short term, e-business is at best at no additional cost and at worst actually increases provider cost by having to deploy two separate mechanisms.
The real prize from e-commerce will be when the industry reaches critical mass in terms of usage. At this point, providers can make real costsaving decisions based on the shape and structure of their organisations moving from paper-handling operations into something quite fundamentally different.
Why, therefore, should this be prepaid by excessive charges to portals when the savings in the long term are unclear?
Most providers possess what are regarded as significant brands, recognisable both within the financial services industry and, in some cases, outside. To providers, it is fundamentally important that these brands remain strong.
Many see the emergence of portals as a threat to these brands, in much the same way as supermarkets have diluted many consumer brands by development of ownlabel products.
In an online world, it is the portal brand that is most visible, with product provider brands sitting behind this.
Is it in the interests of the IFA or the provider to see power shift towards the portal or infomediary? At what point does the portal become involved in product design and pricing to create an own label?
There has been significant progress by portals in a range of areas. The industry standards built by Origo Services are now almost universally accepted as the framework within which portals will operate.
This generates a huge benefit to providers in terms of avoiding duplicated effort in a multiple portal environment. However, rigorous testing of applications by providers is still required to ensure that products and prices are correctly represented and this effort should not be underestimated.
Sadly, consumers are often ignored in this equation. The potential for consumers to benefit as a result of the introduction of e-commerce is widely underplayed, with the emphasis being placed on the “huge” savings likely to be made by providers and how little of this goes back to IFAs.
In the near future, product propositions will start to reflect the benefits of e-commerce through differentiated terms for non-traditional processing.
Indeed, this has been heralded for years as the reason for IFAs to use electronic services. The difference is that the climate is now right to allow these propositions to flourish on a large scale. It would be catastrophic if excessive portal fees negated these developments.
The emergence of IFA portals puts the industry on the verge of a major breakthrough in the way it conducts business. It is certainly long overdue.
Providers are more than keen to see progress but not at any price and one of the possible outcomes could be increased investment in extranets, including aggregation services, to offer an alternative to IFAs.
What we need is common understanding and agreement on these issues between all the relevant parties – portals, providers and IFAs – win, win, win. Only then can we ensure success.