Shakeout predicted in automated wealth management
The boundaries between banks, automated savings apps and robo-advice fintechs continue to erode as each has developed digital-first investment management products aimed at younger customers.
Big banks such as Wells Fargo and Bank of America have added digital-first banking services and automated investment advice, while startups such as Wealthfront and Betterment now offer checking and savings accounts to complement their digital advice platforms.
For further perspective on the evolution of automated savings and wealth management advice, American Banker spoke with David Sica, who recently became a partner at the venture capital firm Nyca Partners. It recently raised $210 million for its third fintech fund.
The following conversation has been edited for length and clarity.
What is Nyca’s perspective on the automated savings advice landscape? Do fintechs disrupt incumbents, or do incumbents cancel out independents?
DAVID SICA: We really don’t view this as a zero-sum game. Financial services is a really big part of our economy, and there are always going to be folks who want to deal with Morgan Stanley or a Merrill Lynch to open up a savings account. We also feel there are folks out there that aren’t served under that current model. In the current structure of a wirehouse, below $250,000 in assets and liabilities really doesn’t even get a phone call back. You’re in a call center. That’s not a great experience. I think fintechs can serve them better.
There’s going to be some incumbents that respond. There’s going to be incumbents that partner with fintechs to go to market with better product. And there are going to be stand-alone upstarts that succeed long-term. In the early days, the incumbents weren’t that concerned. Wealthfront, Betterment, 25 basis points versus 3% on a wrap account. They were like, good luck, you’re going to need [assets under management] just to compete. Now the landscape has become intense, and there are companies out there managing to get significant traction.
We think about it as there are some players who are established that have offerings like Square Cash, Apple and Marcus by Goldman Sachs. Elegant solutions, and it’s very easy to acquire customers, you are right in their pocket. There’s a second tier of companies — Robinhood, Chime, Acorns, Coinbase — that have cracked 4 to 5 million actively engaged users, and they’ve been able to wedge into the relationship with a product that was interesting enough to acquire customers. That’s all that really matters, whether it’s free stock trading or roundup savings. Now there’s a rebundling, it’s moving to other products.
It should be said, incumbents live in a very complicated environment. There’s many systems that don’t talk to each other, and there are a bunch of acquisitions that happened post-crisis. So you still can’t seamlessly transfer from a Bank of America account to a Merrill Lynch account; it’s been 10 years since they bought them. I can sign up for an IRA in my Acorns account with one click; that’s a superior experience. One of the things that fintechs are debunking is that you can’t cross-sell in financial services. Now it’s, you can cross-sell in financial services, if you have a well-designed product with a stack behind it that can support it.
Is that one reason why we’re seeing so many digital advice startups, like Wealthfront and Betterment, move to bundle their wealth management offerings with savings and checking accounts?
I’d tweak that slightly. If you’re going to have a dozen fintechs in the running to be around in 20 years, and they are going to be public companies and profitable, they need to start offering products that tap the traditional profit pools in personal finance, like lending, interchange revenue, management fees on investment accounts and commissions from insurance.
From a consumer perspective, step one was the unbundling of banks and getting comfortable with engaging with your personal finances over your phone. But ultimately, I don’t want 15 apps forever — I want to pick a relationship and have everything I need under one roof. I really think there will be a few fintech breakouts out of that dozen or so. They’re going to need to offer a comprehensive suite of products that interact together seamlessly.
From a company standpoint, it’s about improving the unit economics of that customer. If you can make the customer more valuable, the ratio of what it costs to acquire the customer is going to improve, and that will improve the health of the business in the long term. So you need to be rebundling quickly, and the ones that I think are doing a good job are shipping products quickly. It’s a tight race. You have the fintechs, you have the U.K. fintechs now entering the U.S. market, you have companies like Marcus looming. You have companies like Affirm that have accounts and have a lending solution. So if you want to increase the bond with the customer, products is how you make the relationship sticky.
Do you expect incumbents to become even more aggressive in their responses to fintech challenges?
Now, if you’re an executive in a bank, and you don’t really have a strategy, it’s going to become a real threat to your business. In my experience speaking with bank executives, a lot of the tech budget goes to maintaining what is, and putting systems in place to comply with a pretty intense regulatory environment. So we’re in a period now where it makes sense to make an acquisition, to figure out how to work with a company who’s interested in pivoting to enterprise and help you up your offering.
There’s always going to be that consumer that wants that digital experience 90% of the time but wants to talk to an expert when they are making a really big decision: a will, putting together a trust, buying a home. There’s going to be many who want to talk to a human being when they are making decisions that will affect their lives, and often at a time when it’s very emotional, too.
How have fintech disruptors in savings and wealth management managed to keep growing?
In the early days, there were pockets of financial companies after the financial crisis that emerged; banks shut down their innovation factories. There were a set of products that were really well known, but for whatever reason, banks no longer wanted to be in that business. A good example of this was marketplace lending. Banks wanted out and companies like LendingClub and Prosper, and on the business side, Kabbage, arrived to take their place.
This holds true for automated savings. The infrastructure is now in place where you have a new set of data tools, cloud providers and everybody has a supercomputer in their pocket. You can build a mobile-first, digital solution and go after brokerage-heavy models, where there are many layers of brokers, which equal commissions — and where the product is inherently designed to trick consumers into a profitable relationship. There’s hidden fees and all the stuff of financial services of years past. So the elegance and the speed by which you can get that loan or sign up for an account are 10 times better than ever. I really believe that’s what the last five years of fintech has been. If you’re successful, you’re delivering a product that’s easier to get, it’s a better value to the consumer and it’s transparent. That has essentially become table stakes.
Consumers want apps on their phone, where they can do these sorts of activities that are on par with everything else in that mobile real estate. But when you go to the traditional financial institution app, you see they electronified a paper process, made it into a web portal, and now have repurposed it for mobile. They never took a step back and said, "Let’s really start with the customer" and design a product that suits their needs. So the formula of going after brokerage-heavy pockets, where the products are opaque, has proven to work in many different areas.