Last year proved to be big for the WealthTech sector, but what will the growth drivers be in 2022?
The WealthTech sector has grown rapidly over the past two years. Funding in 2021 smashed past the $20bn mark, doing so in just the first three quarters of the year, FinTech Global’s data shows.
Personal finance and challenger banking received the most interest during those quarters, each representing 33% of deal activity. With the pandemic forcing people to stay home and replace in-person visits to bank branches with virtual interactions, the appeal for digital banking and personal money management over the past couple of years is easy to understand.
This doesn’t mean the WealthTech sector has been dominated by these types of services during the pandemic. Retail investment platforms have attracted a lot of attention. The biggest FinTech funding round of 2021 was raised by retail investing giant Robinhood, which bagged $2.4bn. This colossal investment followed more than $3bn raised in the previous six years
As we get comfortable in 2022, the question is what will be the biggest trends this year?
Alexander Barr, head of business development Currencycloud, believes the retail investment sector will continue to be a big driver for WealthTech, but environmental, social and governance investing will be a bigger focus. Barr said, “Digital investment services have already made it easier for people to enter the investment world. It’s something younger investors have embraced, but this same group also cares about where they put their money, and what impact it has on the world around them. They want their investments to have a purpose. Which is why we’ve seen the rise of companies like Tulipshare, CIRCA5000 and Clim8.”
Clim8 Invest is a UK-based sustainable investing app. The platform helps people invest into companies focused on the climate crisis through a stocks and shares ISA, and general investment accounts. In 2021, the company smashed its targets in a crowdfunding campaign, which managed to attract £2.85m from over 1,800 investors. The company managed to raise £1.26m in just 24 hours.
Tulipshare is another ESG-focused investment platform. The company, which recently closed a $10.8m funding round, leverages shareholder rights to encourage changes in some of the biggest companies in the world. For example, it has campaigns getting Coca-Cola to move to 100% recycled bottles and get Apple to change its repair services protocols. To do this it gets its customers to leverage shareholder powers and launch a shareholder proposal.
These types of apps are becoming more popular and ESG is becoming a vital trend financial institutions need to follow. A report from Bloomberg claimed global ESG assets are expected to exceed $53trn by 2025, which would represent over a third of total assets under management.
While there is strong interest in the fight for ESG, that will not dampen the rise of digital assets and NFTs. These have both been under fire for using masses of energy and having a negative impact on the environment. Last year, Tesla halted its acceptance of bitcoin payments due to their harmful effects on the environment. Elon Musk spoke on Twitter outlining the pause was driven by the heavy consumption of fossil fuels in mining. This tweet impacted the price of the token, which hit a three-month low of $30,066.
However, the fears for the environment have not impacted the demand for the cryptocurrency and NFT market. Bitcoin recorded a record-high value in November, reaching $68,000. Some governments around the world are supporting the adoption of the asset type. The UK’s parliament recently launched the Crypto and Digital Assets Group to support innovation and regulation of digital assets.
“Investors will look outside traditional asset classes and look into cryptocurrency and non-fungible tokens, NFTs,” Barr said. “These are gaining a lot of momentum and will become even more popular in the coming months. We can already see this in the rise in the number of players that enable investors to buy, hold and sell these assets.”
The final big trend of the year will be further consolidation of the WealthTech market. Barr added, “Traditional players are realising the opportunity and are moving quickly to take their share; JP Morgan’s acquisition of Nutmeg is a good example of this. They tried to build something similar in-house and that didn’t work so they acquired Nutmeg. Another example is AJ Bell launching the low-cost investment app Dodl, targeting the new generation of investors so they can compete with the likes of Freetrade.
“Additionally, a wealth proposition in embedded finance will become table stakes for neo-banks like Monzo and Starling to remain competitive: the question is will they build or will they buy?”
As mentioned earlier, 2021 was a record year of funding for WealthTech companies and competition is rife. With so much competition in the market, companies might need to do more to stand out of the crowd and show investors they can get traction.
Kidbrooke CEO Fredrik Davéus said, “Many of the “wealth platform” providers will struggle to add unique selling points over and above a more generic “we help you digitalise” offering. We already hear potential customers talk about how they can differentiate their offering if they are on one of these platforms. One such key differentiating factor is sophisticated analytics such as provided in our API-only OutRank service.”
More than just digitalisation
One of the ways companies have tried to differentiate themselves over the past few years is with their digitalisation. However, the pandemic has forced most players in the wealth management space to accelerate their digitalisation strategies, making digital tools a common sight. This leaves many players needing to go beyond the basics.
Davéus added, “Moving from open banking to open finance (and making open banking work properly in many markets where it is still undeveloped) and resolving secure digital ID’s in markets such as the UK which lacks national ID systems. Last but not least, implementing digital capabilities to truly enhance and increase supply of financial guidance and advice. This has to be done with care though to avoid creating “islands of functionality” not really building toward the holistic capabilities that will be standard in a few years.”
Echoing a similar sentiment, Barr explained digitalisation will remain a big trend this year, with many traditional firms still playing catch up. While there is a need to still implement the basics, there is a need for more unique features. Barr said, “But there will also be a need for more niche/unique value propositions and to build communities of investors. For example, the rise of social trading with platforms like eToro and Shares.io – where people can invest in groups and follow other investors, is indicative of this need in the WealthTech ecosystem.”
How to stay on top
With so many companies battling it out for market share, there are bound to be losers. According to Davéus, this might be most B2C ventures in the space. “I think most B2C ventures will fail in the end since acquisition costs for FI retail customers are very high once you get outside of the early adopters. Also, most B2C services don’t really provide any true value over and above what the incumbent FIs do. In light of this I think B2B offerings should get more attention but maybe the VC space is rarely if ever rational in this respect.”
This was not a sentiment Barr had. Instead, Barr believes WealthTech companies can strive for greater market share by focusing on hyper personalisation. The internet has changed what customers expect of their digital services, with the consensus being for streamlined and easy experiences.
“Millennials and younger generations represent a growing share of clients in wealth, they are a tech-savvy generation that grew up in the era of Amazon’s personalised recommendations and reminders to reorder certain products,” Barr said. “Therefore this is a generation that demands the same level of service and personalization when it comes to managing financial assets.”
WealthTech companies should be sending their customers highly contextualised messages, access to real-time information and enabling them to track performances of investments from any device. This will help give them the most value.
Barr concluded, “WealthTech will continue to be a hot topic this year. There’s a new breed of investors out there, mostly younger, and there’s the new technology and startups that are able to come up with innovative solutions to serve them. Traditional players will be trying to reinvent themselves to continue to stay relevant and crypto will come into the mainstream.
“I think we are yet to see the most exciting developments in the sector. I’m really excited to be at the forefront working with the industry’s most creative founders, helping them bring their propositions to life.”
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