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A sharp slump in digital wealth management fintechs suggests the segment is becoming saturated

The number of digital wealth management startups entering the market globally has seen a drastic slump in recent years, according to a report by Deloitte. Since 2014, when a record 81 startups entered the market, there’s been a drastic decline, with only one wealthtech startup launch recorded in the first nine months of 2019.

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The decline has been so steep that the 19 players that have entered the market since 2017 represent just over half of the 34 new entrants launched in 2016 alone. This is also true for any other year, with the lowest single-year tally before 2017 being 22 in 2008. This suggests the segment has become particularly crowded, making it an unattractive focus area for upstarts.

The steep drop-off in new market entrants comes despite record levels of funding for the segment. Bar 2018, no year has reached the levels of funding registered for the segment in 2019. Funding for these upstarts in the first three quarters of the year reached $1.37 billion.

Although this figure is less than half the $2.82 billion raised across the whole of 2018, a record year for funding for wealthtech startups, it’s only shy of the $1.4 billion raised across 2017. Moreover, excluding 2017 and 2018, the sum raised across the first nine months of 2019 is significantly higher than any other single year.

The dramatic decline in new upstarts suggests the competitive dynamic in the industry is no longer conducive to new startups.

  • Actions by incumbents have likely played a crucial role in driving down the number of new entrants. VanguardFidelity, and Investec are among a slew of incumbents that have launched their own robo advisors, for instance. And while not all have been successful — Investec shuttered its robo platform in May 2019 — these efforts have enabled incumbents to better compete with and counter startups.
  • A grueling competitive pricing climate among fintechs also likely had an impact. These fintechs have struggled to make their businesses sustainable amid high customer acquisition costs and limited per-customer revenue. This is because they tend to have lower minimum deposit requirements, likely to attract young customers: Wealthfront, for instance, has a minimum deposit requirement of $250, 200 times less than the $50,000 required by Vanguard. This likely helped deter new upstarts from entering the space.

The challenges facing the wealthtech segment will drive existing players to shift their business models and focus on strategic partnerships with incumbents.Given the sustainability challenges wealthtech players face, especially those operating direct-to-consumer models, we expect a number of these players to tweak their businesses. Many will likely be forced to shift to business-to-business models, offering their technology to incumbents that have significantly greater scale and resources.

Others, we anticipate, will focus on partnerships with incumbents. This approach could be particularly useful, given how incumbents like Investec have failed with their digital wealth management platforms.

Startups can lean on their established partners’ resources and wide customer bases, while incumbents can tap into startups’ technical expertise to deliver hybrid offerings that bring together the cost reduction of digital wealth management with consumers’ desire for human advisors, for instance. And we’ve already seen examples of collaborative efforts like this: Dutch banking giant ING partnered with Scalable Capital to offer its German customers wealth management services.

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