There has been extraordinary growth in funding for financial technology (FinTech) ventures in recent years, during which FinTech innovation, and especially disruption, has been a near constant focus of media and publicity. Worldwide, over $60bn of investment has flowed into the sector in the past 6 years1, with funding in 2016 at more than ten times the level in 2010.
FinTech’s growth has largely been driven by the possibilities of implementing technologies such as big data, cloud-based solutions, AI, and machine learning within the financial services industry. However, the growth of the FinTech sector is also partly due to the post-financial crisis environment in which the financial services industry has faced increased regulation, challenging firms to keep costs and fees low, as well as increased appetite for disruptive challengers to compete against entrenched players.
While lending and payments related companies within the consumer banking sector remain the largest targets of FinTech investment, one of the fastest growing areas of funding is investment management. Since 2010, over $11bn2 of equity investments have been made into asset and wealth management focused FinTech firms, with Venture Capital investment constituting a significant majority versus that from Private Equity or through M&A activity. This means that investment managers may have faced challenges when looking to acquire FinTech firms, since many entered the market as competitors rather than collaborators. Further, this is of particular importance to the asset and wealth management industries due to their relatively lower barriers to entry and more fluid competition structures than most other areas of financial services, such as corporate finance or retail banking.
In light of this, it may seem counterintuitive that FinTech’s proliferation has been fuelled not just by disruption of the status quo, but also by collaboration with existing financial services firms. The increasing maturity of the FinTech sector has led to a diversification of business models. This is perhaps best exemplified by the growth of robo-advisors, where investment managers have pursued a variety of approaches from acquisitions, to partnerships, to the launch of in-house propositions, and even combinations of all three. The challenge for firms is to build the most effective strategy to capitalise on the potential offered by FinTech, in a sector where the risk of disruption brings with it the possibility for reward.
1. Blockchain and Distributed Ledger Technology (DLT)
Little has yet come of the buzz surrounding Blockchain, primarily due to the need for potentially vast infrastructure changes. However, Blockchain’s potential may soon start to be realised: “2017 will see the first examples of distributed ledgers for investments moving into production, showing the increasing maturity of the sector and its underlying technologies” says Alpha’s Olivia Vinden.
DLT is most commonly viewed as an opportunity for clearing, settlement, and custody but it is now being investigated for other purposes, such as KYC. Vendors and outsourcing firms to the asset management industry have invested in the technology, but we are now seeing increased interest from managers themselves.
2. Big Data and Alternative Data
The impact of FinTech on investment management reaches beyond asset allocation to other core parts of the investment process. Firms such as Novus offer attribution, risk, and data solutions. Others provide solutions that can even aid individual investment decisions, for example by augmenting equity analysis; VogelHood combs through public US government information to provide investment managers with data and reports to predict M&A activity or the winners of government contracts. Most solutions like this are currently provided by independent firms and, as such, managers will need to look to exclusive partnerships or towards the purchase of these firms in order to gain alpha.
In 2015, investment in collaborative FinTech ventures grew to 44%5 of total funding. Importantly, the lines between disruption and collaboration are not set in stone, as can be seen in the differing approaches of managers to the issue of robo-advisors:
- Blackock acquired the robo-advisor, FutureAdvisor, in 2015 and partnered with Youvestor in 2017
- Charles Schwab launched its own robo-advisory in 2014
- Fidelity partnered with Betterment in 2014 before launching its own robo-advisor offering. It also acquired eMoney Advisor in 2015
- UBS entered a strategic partnership with SigFig in 2016, including an investment into the firm by UBS
4. Competition and Collaboration
The FinTech industry is maturing to the point where start-ups may aim to be neither disruptive competitors nor targets for acquisition by established firms. Instead, several FinTech firms have established themselves as ongoing service providers directly to the investment management industry. The question for asset and wealth managers is how to take advantage of FinTech’s opportunities by treating firms as partners, as targets for acquisition, or as competitors.
How can Alpha help?
- Digital expertise – Alpha’s dedicated Digital practice is comprised of consultants with experience in the technology and digital space. They have worked with asset and wealth management clients across a diverse range of digital topics including big data and analytics, robo-advice and artificial intelligence and platform strategy
- Technological expertise – Alpha Technology Services provides teams with deep, specialist technical expertise who work directly with our consultants to provide development, testing, support, integration and implementation services exclusively for the asset and wealth management industry
- M&A expertise – Alpha’s dedicated M&A practice has a deep understanding of managers, platforms and IFAs enabling us to provide detailed market views of potential opportunities, rigorously assess firms and integrate post-merger/acquisition. Our integration experience is unparalleled and covers people, systems and processes
Written by Jon Benson & Michael Karlsson-Greenhill
Data Sources: 1. CB Insights/Citibank, 2. Pitchbook, 3. Alpha FMC, 4. White & Case, 5. Accenture
Further Sources: Capital IQ, Eagle Alpha, Forbes, Financial Times, FT Partners, JP Morgan, Oliver Wyman, Novus, Professional Investor (UKSIP), VogelHood, William Garrity Associates