WealthTech 3.0: Where to put your money?

"How can we expand the investor base across the markets in the country?"  

This is the fundamental question all the players in the wealth management space are trying to address. Before 2010, Indians used to resort to traditional banks and financial institutions to park their savings and get advice from these institutions to help them invest their money into various financial instruments. This can be referred to as the WealthTech 1.0 version of the industry. Zerodha and Upstox introduced the concept of discount broking and superior in-app trading and investing experience to Indian investors. This would be the industry's transition from WealthTech 1.0 to WealthTech 2.0. The 2.0 version companies tried to address the above question by providing investors with affordability, accessibility, speed and convenience. On top of that, they were able to capitalize on the digital riding wave in the country and built their products and services around the new-age investor. 

Before we dive deep into understanding how the new-age start-ups are trying to address the issue, it would be imperative to get an insight into the market dynamics and user characteristics.

Understanding the Market Size and Growth:

Last two years, we have witnessed significant growth in the number of Demat accounts. 5Mn accounts were opened between FY19 and FY20, and around 56Mn accounts were added to date post FY20. Out of the total 97Mn Demat accounts, we roughly have 60-70Mn unique account holders. On a percentage level, this implies that around 5 per cent of the population has access to the capital markets as an investment option.

Compared to the global economies (US 55%, UK 33%, China 14%), the 5-percentage number indicates enormous market potential for new-age platforms to leverage technology to get the users access and acquainted with investing in capital markets. 

However, we believe that the above statistics paint an incomplete picture:

• As per NSE’s active client data, as of August 2022, there are around 37Mn of active investors in the market. Active investors represent those who have taken at least one trade in the last year. We believe the “active clients metrics” better represent the market penetration and size when it comes to investing in the capital markets. On a percentage level, we still are at a low 2% compared to the other countries.
• While we are way behind in comparison with developed and emerging countries, we must also realize that the lower per capita income and savings are one of the primary causes of a lower investment base in the country. What paints an optimistic picture is that the future increase in the per capita income base combined with the development of the wealth management ecosystem will ensure the expansion of the overall market in terms of its depth and width.

Industry and Customer Characteristics:

• Transition to WealthTech 3.0: The focus in this leg of the transition would be around increasing the investor base by assisting them in their investment journey and providing them with multiple investment options.
• Existing or New Investors: As the end goal is to bring in new users in the capital market, for us as VCs, it becomes critical to determine whether the business acts as a value add to the existing users or is built around bringing new users in the market.
• Customer Retention and Churn: Investors' participation in the capital markets reflects market patterns. If we were to take the broking business as a proxy, more than 70 per cent of brokers' revenue comes from investors not more than two years old into the market. This makes wealth management space a treadmill business characterized by constant user churn. 
• Investor preferences and financial literacy: A common theme witnessed when making investment decisions is that the users prefer financial experts to handle their money rather than manage it themselves. Thus, assisted/passive investing is much more preferred by users than themselves actively investing in the markets. Another crucial aspect is that new investors might require handholding regarding their financial products knowledge. This is why many new-age wealth tech startups are resorting to content-led strategies for customer acquisition and retention. 

Now that we have established a brief understanding of the market dynamics, we jump into analyzing a few segments that are building the Wealth-Tech 3.0 ecosystem.

Micro-Savings Platforms

These platforms save users from the hassle of maintaining fiscal discipline and making investment decisions. It enables users to convert their spare change and invest that amount into various financial assets such as gold, mutual funds, etc. The target audience for such platforms is 18-30 years of digitally savvy users new to investing. What essentially plays a hook for them is the gamified version of these platforms and a constant nudge to have goal-based savings targeted towards making an aspirational purchase.  

Few companies operating in the space:  Jar , Gullak : Highest returns on Gold (investing spare change into digital gold), Deciml App (investing in mutual funds). 

While quite a few platforms have emerged in this space in recent years, most of them are in a nascent stage in their business life cycle. However, since all are targeting similar target audiences with little differentiation in their asset class and business strategy, success would primarily depend on the distribution strategy adopted by these platforms.

Robo Advisor / Investment Management Platforms

This space appears to be the most promising in achieving the objective of increasing the investor base in the country. The reason for holding such a belief is that such platforms help investors in making their investment decisions. Empirically, we have observed that investors tend to stick more to the platforms when provided with sound investment advice, which is usually followed by high returns. 

Within this segment, we can broadly categorize the platforms into the following three sub-segments based on their product/service offerings:

Stock Signaling / Tips: These platforms provide stock signals or what is popularly known as tips to investors. On a broader business model level, they might create different rooms based on the investors’ risk appetite (e.g., balanced, aggressive etc.) and work on a subscription-based model. Investmint , Stratzy are some of the exciting companies in this space.

Financial Advisor: This segment tries to leverage technology to increase the accessibility of a financial advisor to the public. The platform provides an investor with a financial plan/recommendation for their investment decision after gathering some data about the investor profile and goals. 

Investment Management: These are the new-age portfolio managers. The play here is to provide expert advice and customized portfolios to the investors and leverage technology to ramp up the existing distribution network and thus increase accessibility. Over the last couple of years, we have witnessed the likes of Dezerv , Upside.ai, etc., emerging within this segment and offering increased access to portfolio managers and various other asset classes apart from equities and mutual funds. 

Alternative Investment Platforms

If we empirically observe the acceptance of the asset classes as an investment option, we can gather some interesting insights. In the last decade or two, we have witnessed an increase in the acceptance of equities and mutual funds as investment options. Improving financial literacy, awareness through campaigns like “Mutual Funds Sahi Hai”, and impressive returns over the last decade are some factors that can be attributed to the increasing share of the said asset class in the investment pie. While there is still significant scope for growth of equities and mutual funds, the point we are trying to drive here is that what will be the next asset class that shall include similar adoption in the next decade? 

The foundation of the alternate investment platforms is built on the question mentioned above. The product offering here is any asset that requires substantial capital upfront and usually requires financing. Such a wider definition leaves us with endless possibilities for narrowing down the asset class. That’s what we are witnessing in the industry. The asset class range from debt financing, renewable project financing, crowdfunding and angel financing, fractional ownership of assets such as real estate, and movie financing. The operating model involves sourcing and vetting quality assets and then pooling investors’ money to finance the asset. Lendbox , Grip Invest , Jiraaf - Powered by AI Growth , Strata , and hBits are a few interesting companies building in this space.

We believe there is a wide scope for the development of alternative assets. Having said that, if we had to pinpoint one asset class that we think would be at the forefront in the next decade, it would be the debt markets. If we compare the debt market in India with the other developed and emerging markets is highly underdeveloped and underpenetrated. Even when we compare innovation in debt products vis-à-vis the USA, we would be way behind in the line. 

Given the potential in the debt markets and the scope for innovation in the debt offerings, we expect a few tailwinds in the debt markets bringing in the next wave of innovation within the industry.

Other Emerging innovations 

New-Age broking platforms: Zerodha, Upstox etc., introduced the concept of discount broking. The core value proposition of the new-age broking platforms is improved UI/UX and customized features addressing specific problems associated with investing/trading. While these platforms offer ease of use to new investors and sophisticated tools to experienced traders/investors, it would be interesting to see how they would be able to create a wedge in the highly competitive broking industry.

Verticalized SaaS platforms: With the development of the wealth management industry and the increase in the financial literacy of users, we would gradually witness an increase in the number of financial advisors and wealth managers. This opens the scope for the emergence of tech platforms that assists wealth managers in providing services to their clients in their pre/post-investment journey.

Save Now Pay Later: This is an antithesis to the Buy Now Pay Later concept. These platforms enable the users to save specifically for a targeted purchase and earn investment returns on the periodic savings made. In the future, it would be interesting to witness the product/industry partnerships running their savings scheme on such platforms.

Treasury Management/Tools: Much has been spoken about the wealth management industry and the opportunity in the B2C segment. And we also witnessed how the industry has transitioned, driven by innovation at various stages. Comparatively, there has been little or no disruption within the B2B wealth management space, i.e., treasury management solutions for the corporates. While we agree that the dynamics of the B2B treasury industry are more characterized by the traditional method of conducting business, the industry is yet to witness any tech-led disruption or innovative models in this space.

What the future holds in store:

At WaterBridge Ventures , we believe that the wealth management industry is broken both from the product and distribution side. And the under-penetrated nature of the industry leaves ample scope for innovation and emerging models to create a wedge and lead the industry transition to WealthTech 3.0. We are looking for entrepreneurs building innovative wealth tech products along with the ideal customer targeting and creative GTM strategy.

Do write to nihar@waterbridge.vc or reach out on LinkedIn or Twitter if you are building in the space or would like to brainstorm.