As 2022 draws to a close, it a good time to look back over these last 12 months. FinTech Global has spoken to a number of WealthTech companies to see what the biggest developments from the year were.
Coming out of the pandemic, 2022 looked like it could be a year for bouncing back. Unfortunately, this proved to be another tough time for businesses and consumers. With war and the prospect of a major recession, companies are once again preparing themselves for survival.
The WealthTech sector has felt the effects of the disruption, and many companies are adapting to the new market. Samuel Afolabi, Business Development Executive at Currencycloud said, “More conscious spending from consumers has meant that the appetite to invest has significantly decreased. This means that business growth for players in the space slowed down due to subsequent lower trading volumes. Businesses have had to add new products and ways of generating revenue as opposed to relying on their core proposition to deliver what they need.”
Many areas of FinTech are seeing a drop in investment, with WealthTech among them. Based on the first nine months of deal activity, research from FinTech Global predicts the total investment will drop by 49% compared to 2021’s record levels. However, it is not all doom and gloom. While the amount of capital invested is reducing, there are more deals than ever. In the first three quarters of the year, there were 681 WealthTech funding rounds – the 12 months of 2021 saw 642 deals.
While it has been a tough year, WealthTech looks like it is soldiering on.
What were the biggest trends in WealthTech this year?
New service types and digital assets
One of the biggest trends to hit the market is the democratisation of wealth management and investing services. Stefan Willebrand, founder and co-CEO at cloud financial services software Bricknode explained that neobanks, FinTech startups and traditional wealth management firms are all leveraging investing-as-a-service solutions so they can quickly innovate new services.
“In 2022, we’ve seen new social investing apps geared towards younger audiences, ESG-focused investment propositions, and even a service aiming to replicate the family office experience for a wider audience through AI.”
For Afolabi, the most prominent trend of 2022 was the emergence of digital assets. He said, “The transition from legacy technology to a more modernised stack is one of the most prominent trends in the space over the past year. Legacy technology in traditional banks is still a problem which needs to be addressed in order to stay competitive within the wealthtech market. The dilemma then becomes how to handle it whilst keeping up with the market’s competition and demands. A lot of the technology available today is modular, cloud-based, and API focused, which makes the ease of access much easier and simpler. These solutions can integrate with existing back-end systems, whilst enabling front end innovation and modernization of the backend in parallel.”
There was a lot of activity in the digital asset space this year which saw regulatory action from the White House when it launched a framework for the development of digital assets, the first of its kind in the US. The UK Parliament also took an interest in the market, with a cross party group launching an inquiry into the cryptocurrency and digital assets sector.
Aside from the regulatory developments, there were countless companies raising funds. While FTX collapsed, other giants grew. One of these was FalconX, which soared to $8bn valuation after closing its Series D round on $150m.
While digital assets have been an exciting area this year, the most surprising development of 2022 was the drop in investor excitement in general. Afolabi notes, “The retail investment space continues to grow rapidly, with the investor category accounting for 52% of the global assets under management according to the Institutional Investor. This is expected to increase to over 60% by 2030, and is as a result of technological advances and the increased access to the financial markets. Although there has been rapid growth in the space over the past 5 – 10 years, we are beginning to see a slow down due to a worsening economic outlook and rising interest rates. We have seen the knock-on effect of this within the Wealthtech space, with lots of consolidation of players within the space in the past year.”
Hybrid approaches and emerging markets
Karen Oakland, VP of industry marketing for financial services at customer conversation management software developer Smart Communications, argued that a major trend this year was hybrid systems. While the market rushed to digitise their operations in the wake of the pandemic, many are now seeing the benefit of humans and computers working together.
She said “While COVID forced many firms to accelerate the shift to digital engagement, in 2022 many spoke to us about taking a hybrid approach to delivering client services. Not digital only, not in person only, but thinking about client experience in a way that takes advantage of both digital channels for easier self-service interactions, while maintaining the value of in-person service, even if offered over a video call or meeting in a secure virtual room.”
On a similar note, Oakland has seen many IT leaders and wealth managers continue to modernise their infrastructure and software this year. Increasingly, they are moving away from homegrown and on-premise platforms, and towards cloud systems to boost efficiency and flexibility.
“Another reason is the ability to improve integration and use of data,” she added. “Smart Communications continues to see growing interest from wealth firms in integrating our platform with CRM solutions like Salesforce and advisor platforms like Orion, automating the push and pull of data to speed up and personalize onboarding and servicing interactions. This also makes work easier for relationship managers and advisors – also high on the priority list for 2023.”
One of the market developments to take Oakland by surprise was the intensity of regulators. While regulators have always been happy to issue fines, 2022 showed they are not easing their financial penalties. Oakland pointed to the SEC which recently announced a record $1.8bn in fines against 11 investment banks and their affiliates. These fines were issued due to failures to monitor messages of employees on unauthorised messaging platforms like WhatsApp.
A knock-on effect of the pandemic was the increased usage of messaging and digital communication tools. Unfortunately, many firms have struggled to keep pace with compliance, as shown by the major fine. In fact, a report from SteelEye claimed that just 15% of financial firms are monitoring WhatsApp at all, despite rising levels of fines for communication monitoring failings. While this regulation is seeing many notable fines, firms are receiving significant penalties for many other regulations.
Oakland added, “While it’s challenging to keep up with the pace of change, what’s surprising is that firms didn’t see this coming and didn’t put the necessary controls in place to manage communications across the digital channels clients and advisors want to use.”
One of the biggest trends Fredrik Davéus – founder and CEO financial analytics API developer Kidbrooke – was the rising interest from WealthTech vendors to work with financial planning solutions. But some of the more surprising developments of the year were the depths of the new Consumer Duty regulation and the demand for WealthTech in the Middle East.
The FinTech sector as a whole is booming in the Middle East. Recent research from FinTech Global found that over 600 unique FinTech investors have backed companies in the first three quarters of 2022. The total number of FinTech investors in the region increased 7.5% from the same period in 2021.
As for Consumer Duty, the regulation aims to ensure customers receive communications from financial services firms that they understand. It also ensures they are offered products that meet their needs. It has proved to be a tough regulation to understand. According to Moneyhub’s new report over a third (38%) of firms have limited knowledge of Consumer Duty, with many turning to technology and data to solve their woes.
Were the predictions correct?
FinTech Global spoke to many WealthTech companies at the start of the year to see their predictions for the major trends. Two of those to stand out were customer experience and ESG. But was it a good year for them?
Putting it bluntly, Davéus said, “It was hyped, but the reality is that the solutions available isn’t really engaging the customer and many “sustainable” investment products turned out to be green washing not improving things either.”
However, Willebrand and Afolabi were not as critical. Willebrand said, “The pandemic threw customer experience into the spotlight across many industries, including banking and wealth management.
“As we’ve emerged from the peak of Covid-19, the desire among financial institutions to use digital technologies to meet permanent shifts in consumer behaviours has been clear. Firms are moving away from legacy technology and towards cloud-based component banking in order to operate with greater flexibility in meeting consumer demand.”
Willebrand was also optimistic about ESG. He explained that 2022 was a tough period for equities across several market sectors. Among these were with ESG and sustainable investments. In spite of this, sustainable finance continues to be a priority across the industry.
“ESG analysis has become an increasingly important part of the investment process for WealthTech firms and, according to PwC, ESG product demand outstrips supply. There is a clear opportunity for investment firms to tap into ESG products and our own research conducted in March this year indicated that one quarter of European neobanks provided such an offering, with more in the works.
Afolabi has a similar sentiment about ESG. He said, “ESG investing was a big trend this year. It’s a huge selling point for conscientious investors, in particular. The positive impact that ESG focused investing brings to the world is substantial and I believe this is a trend that will continue to grow. ESG compliant businesses can also benefit from this, as they can gain higher market valuations which is in their interest.”
How was it for these WealthTechs?
To get some insights on how some personal insights on WealthTech in 2022 FinTech Global asked each of them how 2022 was for them.
Willebrand was very positive about the past 12 months. It has been a busy year for the company, with notable highlights being a partnership with Tuum, the launch of a portfolio management software application and a $470,000 loan to support its establishment of a licenced brokerage subsidiary.
He said, “The Covid-19 pandemic has placed digital transformation back at the top of the agenda for banks and investment management firms. We have received a lot of interest from traditional and startup wealth management firms that want to digitalise their operations, launch innovative investment products, and reduce back-office costs.
“Fortunately, we can help with all three and we’ve just announced the latest wealth management firm that will use our platform to manage its digital investment operations. Consumer demand for investing also increased during the pandemic and there is still a huge opportunity for innovation and new product offerings in this space.”
Oakland also pointed to a very successful year of growth. But there was one particular development the team was proud of – extending a partnership with one of the biggest global investment banks.
“Smart Communications expanded our partnership with one of the largest global investment banks in the area of personalized client reporting. This customer started working with us many years ago to simplify the management of highly regulated documents, such as derivatives trade agreements, and in 2019 began working with us to shift that solution to the cloud.
“In 2022, the bank chose Smart Communications to help the team shift from a homegrown document generation system for client reporting to a modern customer communications management (CCM) platform. This will enable the bank’s team to produce personalized reports with data-rich charts and tables across a variety output channels.”
Afolabi was grateful for Currencycloud’s growth over this year. With so many global crises, it has been tough on many, and growth during these periods is extremely challenging. “Despite the challenges, we have been very fortunate to retain staff and make some positive progress. We are meeting our growth expectations and are moving at full speed as the world hopefully exits the tough period.”
Currencycloud has had a busy year, particularly in the partnerships department. To name just a few, Currencycloud has teamed up with Quid Global, Paysend, Future FinTech Labs, Clausematch and Bano. It was also one of the 11 UK FinTechs to take part in a special UK Government trade mission with Australia and joined Integrated Finance’s new Fintech Foundation incubator, along with Mastercard.
Of all these major developments, there was one aspect Afolabi found the most pride in. “I’d say the number of new partnerships we’ve struck this year as a whole is a massive success. To be a trusted provider for a business’ international payments infrastructure is no small achievement and we’ve been able to be a trusted provider for numerous players this year.”
Finally, Davéus explained that Kidbrooke has had a good year. He said, “Steady pipeline growth and many valuable learnings during the year. Good complementary capabilities added to our OutRank® solution. A lot of partner interest as well as our first Middle Eastern customer.”
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