As hopes are 2022 will be the end of the pandemic and a return to normality, DreamQuark has offered the five big trends WealthTechs should be following this year and the four challenges to watch out for.
The 5 big trends of 2022
The customer experience has become an increasingly important part of the fight for market share, with many people dubbing it the new battleground. It is estimated that two-thirds of marketers claim they compete on customer experiences, according to research from Gartner. While another report, which is from Dimension Data, claims 84% of companies that work to improve their customer experience report an increase in revenue.
With so much competition in the market, consumers are spoilt for choice. If they do not like how one company operates, there are many others they can go to. This has led many firms to adopt customer-centric services, as opposed to the typical product-centric approaches. The pandemic has forced more people online and wealth management firms have spent the past couple of years improving their online services.
Thanks to big tech giants like Amazon and Netflix, consumers have an idea of what an online experience should be – simple. While wealth management is a little more complicated than choosing what film to watch, or buying a book, people want everything to be streamlined and easy to understand.
Due to this, customers want deeper experiences than traditional engagement and advisory models, Nicolas Meric, CEO at DreamQuark, explained. To keep up with this, many firms have moved to digital or hybrid management models and seek services that can cater to the more personalised desires.
Meric said, “Wealth management clients want to be treated as unique individuals with specific goals and they want their wealth manager to truly understand them. At the same time, customers also want to get deeper insights on their potential investments to know what to do next and make better investment decisions, identify outliers and emerging investment themes that will give them an advantage.”
Due to this, Meric sees hyper-personalisation and solutions that recommend and provide deeper insights on investments to be a big trend this year.
Coming hand-in-hand with the improved customer experience is the release of new and enhanced digital tools. As firms look to improve their position in the market, there will be a search for new features and tools they can deck out their staff with.
Meric said, “In 2022, Customer 360°, Augmented CRM, augmented Customer lifetime management, digital marketing, digital reporting will be vivid trends. Moreover, wealth managers will invest in digital enablers such as cloud and multicloud, digital automation, APIs and low code/no code software to equip their technology teams and analysts to deliver digital transformation faster.”
While many traditional wealth managers are new to the digital world, after two years, there is a pressure to offer deeper online services. Meric explained that a website, corporate application, CRM, digital signature and PDF reporting is a great start, but customers are expecting all firms to have the same high-quality digital capabilities as the digital leaders.
As the market is moving so quickly, firms need to find solutions quickly and the best way to achieve that is through partnerships. “FinTechs have impressive valuations in comparison with wealth managers and investors are betting on technology players,” Meric added. “Wealth managers need to invest in their data and AI initiatives to provide hyper-personalization and next-best actions experiences similar to what Netflix provides, they need to equip their frontline and back-office teams with new tools to collect and analyse data in order to understand their customer behaviours and expectations better and identify new interesting assets that would not be identified without these tools.”
Data and AI
The next big trend of 2022 is the increasing importance of data and AI will play. Meric
explained that as digitalisation accelerates, wealth managers will be able to gather more data about their customers, such as behaviour, interests, goals and investment decisions throughout the customer lifecycle. On top of this, it is easier to access external data through APIs or open banking initiatives.
With all this extra information at their disposal, wealth managers can better leverage their AI technology. By feeding this extra information into the AI, a company is better placed to analyse their customer conversations and provide their customers with hyper-personalisation and tailored advice. Additionally, it can extend the capabilities of advisors so they can better assess trends and leverage actionable insights.
“In 2022, to support these initiatives, wealth managers will invest into cloud data warehouses, cloud customer data platforms and no code data science platforms. Moreover, wealth managers will look for solutions to create bridges between data teams and business teams to succeed.”
Digital assets are becoming an ever-popular form of currency and investment. Last year saw Bitcoin reach a new record high value of $68,000 and other cryptocurrencies, such as DogeCoin, surged in popularity. Non fungible tokens (NFTs) have also become more widespread, offering attractive investment opportunities for interested parties. The world also saw its first digital ETF.
Countries around the world have mixed opinions on digital assets. In the UK, the Financial Conduct Authority has often expressed its worries about the currency type. Last year, it issued a warning to consumers on the risks of investing into cryptoassets and potential scams.
While governments are uncertain on the asset type, it is easy to see why many investors have quickly accepted them. Meric added, “Several digital assets have provided in 2021 three times the return on investment of more traditional assets, even while public markets growth was extraordinary in 2021. Furthermore, digital assets represent an asset that remains uncorrelated from economic trends and current economic difficulties, which is a good alternative as inflation increases and perturbations are persistent.”
Despite some countries banning all types of cryptoassets, general sentiment is changing. Earlier this week, the UK’s parliament established the Crypto and Digital Assets Group to support innovation and regulation of digital assets.
Similarly, countries around the world are becoming more open to digital assets. There has also been a rise in central bank digital currencies (CBDC) over the past year. Nigeria, Thailand, Bhutan, South Korea and Singapore all revealed new plans for CBDC pilots or studies.
“In 2022, WealthTech will continue to invest on these new assets, to provide new ways to invest in crypto, to take better advantage of smart contracts or to leverage blockchain to power new services and decentralized applications at a more accessible cost and meet the demand. A focus on reducing the ecological impact of blockchain should be expected as it remains a hindrance for a larger democratization.”
Sustainability was a major talking point of 2021. The world came together at COP26 to discuss ways to combat climate change. FinTech companies have also stepped up to the plate to help tackle the crisis, whether it is planting trees for spending money or environment-focused investment apps.
ESG is undoubtedly going to remain a major talking point this year. With new regulations going live and the European Taxonomy on Green Finance is being adopted, Meric believes wealth managers need to “better integrate ESG into goal settings, advisory and discretionary management, propose ESG products and avoid the trap of greenwashing.”
This will require firms to have better solutions that can help advisors navigate the changing regulatory landscape as well as cater to the new green investing desires.
“In 2022, WealthTech will invest to provide more granular data, extend to private companies and SMEs ESG data and the less covered asset classes as well as services to help wealth managers meet their new regulatory requirements and guide advisors with gamification or artificial intelligence.”
The 4 Challenges
The past two years have been a period of adaptation and transition for many, but it has left some clients with excess savings. Meric explained, “thanks to the various government measures globally, the increase in liquidities and the reduction in expenses by the wealthier clients who have amassed $5.4trn in excess savings, the two past years have also been incredible for the wealth management and the wealth tech industry in particular for B2C WealthTech, digital asset providers and companies enabling the digital workplace.”
It is no secret that WealthTech companies have had a strong couple of years, despite the pandemic. In just the first three quarters of 2021, global WealthTech companies had raised a combined total of $20.9bn in investment funding, according to data from FinTech Global. Making this even more impressive is that its more than double the total investment volume for the whole of 2020.
While the sector is booming, Meric fears a key challenge WealthTech companies will face in 2022 will be difficulty in recruiting senior executives and technical roles. People with specific expertise are in high demand, particularly with cloud, data and digital assets. Traditional wealth management firms are also at risk or losing their talent. “We see a trend of senior executives from banks moving to WealthTech players. it may become a challenge for traditional players to retain their executives that may leave to join the most promising and ambitious WealthTech companies.”
Another big challenge for companies in 2022 will be the rise in regulations. “In the same register we see that regulators globally are tightening regulations and their watch on digital players and digital assets. Also, as inflation is rising and becomes a concern, central banks and regulators may impose new rules to protect consumers. While revenues of B2C WealthTech are low in comparison to their valuations, it may become more difficult to attract new customers and generate sufficient revenue streams to justify valuations.”
In that same vein, as regulators around the world continue to release new legislation, which often differ between countries, it makes it hard for companies to keep on top of all requirements. A challenge will be to implement regulations more properly. Meric added, “I expect it may be a more difficult challenge for digital assets players that will have to recruit senior executives with the experience to manage these constraints and that will have to continue to deliver a stellar customer experience, a distinctive advantage while meeting their compliance duties.”
Finally, Meric is expecting cybersecurity to be another major challenge for companies this year. Cyber threats continue to pose huge risks for companies and many criminals took the pandemic as a way to target employees working remotely and away from their company’s strict security measures. Research from Check Point Research claims that cyberattacks reached a new all-time high in 2021, with 50% more attacks recorded than the previous year. It also estimates that 1 in 61 organisations are impacted by ransomware each week.
“Data leaks may be a fatal issue for these digital players. WealthTech companies will have to invest more significantly in people, process, and technology to have a lasting advantage over cyber-criminals who are having increasing means to enter into digital systems which have become more complex to secure.”
Keeping market share
As mentioned, the WealthTech market is rife with competition. While this is great for consumers and encouraging innovation, it means companies are fighting for market share. Each type of company has its own unique challenges to overcome to come out on top.
Wealth managers have four main challenges to tackle, Meric explained. The first three are to deliver a modern customer experience, align their product offering to meet their customer expectations and integrate the new ESG regulations. The fourth challenge is a little harder to overcome, which is their digital transformation execution and giving staff the digital tools to overcome the first three challenges.
“Without clarity on their target operating model and customers (including future customers) they will not be able to align their digital transformation and prioritize their initiatives to deliver the right customer experience, the right pricing model and align their product offering to what their customers expect,” Meric said.
As for B2C WealthTech companies, there are three areas to focus on. The first is to address their trust and credibility deficit and increase the breadth of their offering to become the primary and long-term provider of wealth advice for users. Currently, they are largely used as a side provider or to offer specific needs missed by traditional players.
The next hurdle is to be able to operate at the level expected by their clients across a wider offering and give the same performance level of traditional players.
Their third and final challenge will be to integrate compliance better, particularly with anti-money laundering. Meric added, “We see that, for players such as N26 for example, the lack of proper compliance processes can quickly become a significant hindrance and it should be a warning for all players.”
B2B WealthTech companies have four main challenges ahead of them for market share. The first is to adopt the right positioning and become the partners that help wealth managers best execute their transformation plans. “They need to focus their resources on their unique selling point and align it with their clients’ key priorities to create a more distinctive value proposition,” Meric said. “Obviously, they need to stay at the cutting edge of cloud, APIs, data, ESG and customer experience which are the foundational capabilities for further transformation.”
Next, they need to improve their ability to execute. Meric explained that wealth managers will judge partners more on their capacity to quickly implement transformation plans and deliver wins fast, rather than their capacity to innovate. With the challenge of finding technical experts, companies will need to rely on technology partners or train internal staff.
Thirdly, B2B WealthTech companies will need to continue their innovation efforts rather than focusing on meeting promises made to clients. Meric added, “it is important for them to continue to be a vector of innovation and transformation to help traditional players understand, prioritize and adapt to the trends that are impacting their core and future business the most.”
Their final challenge will be to bolster their security postures. As wealth managers move their more critical loads to solutions of WealthTech providers, these companies will need to have the same level of security the wealth manager would have, otherwise they will be a weak link and easy target.
Meric concluded, “Even with all the challenges for 2022 ahead, technology is a driver of growth across all sectors. There is no reason to be pessimistic as wealth managers need to accelerate their technological transformation with solid and expert partners as clients are looking for digital alternatives or access to new asset classes that only WealthTech providers propose currently.”
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