There’s a new kid in town in Wealth Management, and some of the big traditional corporations are not too happy about it. Actually, there is a whole bunch of new kids in town. Only they’re not necessarily kids, they have excellent ideas, lots of enthusiasm and we call them fintechs.
Nowadays, there are thousands of fintechs only in the U.S. In the Wealth Management industry, fintechs have grown by 300% in just three years. Many Wealth Managers regard these new companies as a threat. Actually, a survey conducted by PwC concluded that 60% of wealth managers believe that fintechs can endanger their businesses.
And indeed they can. Fintechs might lack big budgets, but they’re faster, innovative and they can reply first to new trends and needs in the market.
But you know what they say: “If you can't beat them, join them.” And that’s what many Wealth and Asset Management firms have decided to do.
Fintechs are bringing all kinds of things to the Wealth and Asset Management industry. Robo-advisors, innovation in ESG investing or even in retirement planning. And Financial Institutions should keep both eyes open.
What are the benefits of collaborating with fintech startups?
Many. To name a few:
- Speed: If there’s one thing a startup has to be in order to survive, is fast. They have to be fast (if they want to make it). Financial Institutions (FIs), on the other hand, are heavy and strangled by bureaucracy and hierarchy. But we’ll come back to this point later.
- Radical innovation: You can find good professionals with good ideas in corporations and startups alike. BUT - While corporations have bigger budgets, fintechs can take more risks and try crazier ideas. When collaborating with startups, Financial Institutions can take profit of that freedom.
- Visibility: In many cases, Financial Institutions are not aware of startups that could endanger their business until it’s too late. Basically, they’re not watching what’s going on. It’s important to stay in touch with the startup ecosystem in order to find opportunities, detect new trends and avoid risks that could be prevented.
Are Wealth Managers ready to collaborate with fintechs?
In order to answer this question, we have interviewed one of the two sides involved in this matter: a Fintech company. We’ve talked to Ben Fried, CEO and Co-Founder of Cred, a Tel Aviv-based fintech operating in the U.S. and Europe.
Fried is very optimistic about the potential for collaboration and mutual value between big corporations and fintech startups, but he also notes that this process really depends on the corporation. However, they have seen “the amazing shift that large Financial Institutions have made in the last three years towards an open ecosystem which invites collaboration with tech startups.”
3 things Wealth Managers should take into account when working with fintechs
More data, more speed, and more testing. That’s Fried view about what FIs should do to remain competitive.
Let’s analyze them one by one -
Use your data
The main strengths of big corporations are their “relationships with a broad user base,” says Fried. And, of course, “the data from those relationships.” Both strengths are, in Fried’s view, “very difficult to replicate. The FIs that are effective in leveraging these advantages can create a moat which is very difficult to cross.”
“Startups can move 10 times faster than a large corporate. Most fintechs do not expect to move quite that quickly when engaging with an FI - however, it is important that the Financial Institutions have clear, actionable processes so that a smaller organization can feel comfortable knowing that there is a light at the end of the tunnel.”
And Fried makes a relevant remark: “It is important to note that the fintech ecosystem is quite small - and news travels fast between founders regarding the best partner.”
Test, test, test
“Good founders ground their vision in testing,” says the Cred Co-Founder. “In an initial engagement with an FI, we want to be able to show those results in an environment which proves or disproves the specific use case. The FIs that are flexible with this testing phase -and develop a framework to enable those tests- will be poised for success.”
So, what will happen to those Wealth Managers that don’t adapt?
In Fried’s view, things are going to get hard to those wealth managers that don’t keep up with innovation coming from fintech startups.
Numbers don’t lie:
“In 1965, the average tenure of an S&P 500 company was 33 years,” he says. “Today, that figure is down to less than 20 years – not a very long time in the lifespan of major corporates.”
“It is very difficult to predict where the next disruption is coming from – but every entrepreneur has heard about Yahoo missing out on acquiring Google for $1M, or about Blockbuster laughing at a partnership offer from Netflix.”
“The cost to start a tech company has gone down, leading to an explosion of amazing, talented individuals pouring their hearts into innovative projects – and moving at the speed of light.”, says Fried. “Smart corporates have learned that rather than spend a fortune pushing internal projects through at a slow pace, they can 10X their speed and visibility by working with a wide range of great companies, with industry-changing technologies. The amount of work and collaboration that can be accomplished in this manner is nearly impossible to accomplish alone.”
There’s so much going on in Asset Management. At Plug and Play’s Fintech accelerator, we match cutting-edge startups with the largest corporations. Join our platform today.