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February 11, 2020
Learning from the rapidly proliferating challengers of wealth
Learning from the rapidly proliferating challengers of wealth
Digital Banking

Digital disruption within the wealth management space is rapidly moving from a possibility to a live competitive situation. To avoid getting caught off guard, traditional firms should seek to predict both the threats and the opportunities this disruption will create, gain a deeper understanding of the ways that customers’ expectations are changing, and study the array of service design innovations already emerging from digitally native wealth challengers.

As we embark on a new decade, the wealth management industry is facing a rapid onset of relatively visible and predictable disruption. Investors’ expectations as to how they want to use wealth management services, and what they want their money to do, are evolving fast: indeed, it is far from certain that investors of the future will want to use traditional types of services at all.

The rise of wholly-digital, smartphone-focused wealth management startups is both a market response to, and a driver of, these new expectations.

Meanwhile, the urgency of addressing the potential disruption is being further compounded by existing pressures in the industry, such as margin squeeze, regulatory burden, and market volatility.

Industry pressure

While the wealth management industry already has plenty of competitive pressures, the rise of digitally-native challengers threatens old business models with a loss of relevance, if ignored in incumbents’ strategies.

Traditional wealth management firms now have to manage not only growing internal industry competition and pressure on revenues, but the complexities of pivoting their own business models to ride the digital wave rather than being swamped by it.

Disruption is regarded by analysts in the sector as an existential threat. Yet it should also be viewed as an opportunity for growth, triggering a strategic rejuvenation and ensuring that firms remain relevant and meaningful to their customers, including those from the new generations – Millennials and Gen-Z.

The key strategic question is whether established financial brands see themselves as passively observing the onset of the digital era – far off until it’s suddenly swept over them – or whether they can adjust to view themselves as part of the technology story and even perhaps driving some of the change.

The power of digitally native brands

To appreciate both the challenges and opportunities associated with digital disruption, it’s useful to consider how it has already reshaped other industries, such as fashion and retail.

dollar shave club

Take Dollar Shave Club for example. While it may seem a rather out of place brand in the context of a discussion of wealth management, this digital-only business has brought a completely new form of competition to the male toiletries business, significantly disrupting the formerly-dominant incumbent players such as Gillette and gaining an 8% market share in just a few years. The business sold to Unilever in 2016 for US$1bn, just five years after launching.

Dollar Shave Club is just one example of many new brands collectively recognised as ‘digitally native vertical brands’ (DNVBs).

digitally native vertical brand

Consumer challengers – DNVBs are also known for rapidly dominating pre-digital consumer sectors, leaving the incumbent players behind as they struggle to understand how their industry has changed.

DNVBs are brands born on the Internet. They are built from the ground up as digital businesses, tend to target a clear market niche, and sell directly to consumers. Crucially, these brands are built on the principle of consumer convenience – and maintain a laser focus on the customer experience.

DNVBs are also known for rapidly overrunning pre-digital consumer sectors, catching technologically sluggish incumbent players off guard as they struggle to understand how their industry has changed, let alone recreate themselves in order to compete. DNVBs have been making waves within industries such as fashion and retail for many years now, and it’s only a matter of time before they proliferate across all sectors of the economy, including (especially) those considered relatively well insulated from change because of a dependence on human relationships, face-to-face service, and trust built on heritage.

Digital natives in retail banking

In a similar way, digital disruption has already transformed the retail banking space – laser-focused fintechs have been etching away at defined pieces of the traditional full-featured banking model for a number of years now.

unbundling of a bank

CB Insights ( analysis of US fintechs “unbundling the bank” with our highlighting to indicate the wealth/investing space

For each element of what a traditional retail bank offers, there are now a multitude of often venture capital-backed brands aiming to do well just at that. As Chris Skinner puts it in his book “Digital Human”:

“the universal model of a bank doing a thousand things averagely around the world is replaced by a thousand companies doing a thousand specialist things brilliantly, thanks to the deployment of technology for financial processing”

So while there may be no single challenger brand offering the full range of services of, say, HSBC, every service that it offers has a growing multitude of new competitors. All of the successful new generation of challenger banks can be understood in this sense of taking a digital native’s view of a broad market and focusing down to perform better, to capture previously less well served parts of the consumer market – Monzo, Revolut, Starling and N26 to name just a few.

challenger banks

These challenger banks broadly follow the DNVB model – they are narrow in scope, mobile first, highly technically capable and unburdened by legacy, focused on customer experience, and are rapidly growing as global brands.

This is exactly the profile of rapidly emerging challenger that the wealth management industry now has to consider.

A whistle-stop tour of DNVBs in UK wealth management

Although it is still early days, we can already see rapid growth in both the variety and market potential of the DNVB challengers within the wealth management space.

(In the illustrations that follow, all logos and trademarks belong to their respective brands and are shown for illustration of categories. CREALOGIX does not endorse or prioritise any particular brand mentioned in this post. Examples are UK market focused.)

wealth management DNVB challengers

Guided passive investing was perhaps the first service to be subjected to a digital rethink by challengers, with the best known examples being and Betterment in the USA and Nutmeg in the UK, both now established players competing with established wealth management firms and banks for mass affluent investors, not just smaller scale consumer savers. While these brands have been around for over a decade, more recently there has been an explosion of new names on the scene and the list is expected to continue expanding significantly over the next few years.

The rapidly increasing importance of environmental and ethical motivations to new generation investors will further drive growth in this area: one popular digitally native challenger, Tickr, focuses exclusively on sustainable and impact investing. The modern design and effective growth marketing tactics of startups like this are their biggest strengths, gaining them rapid growth in customer numbers and assets under management. Incumbents looking at these challengers and only seeing their early stage lack of parity with the complexity and breadth of traditional services, risk missing the point about those strengths.

Market entrants offering mobile trading

Other market entrants – such as Etoro and Robinhood – offer active mobile trading, a digitally native version of execution-only stockbroking. They provide the means and opportunity for customers to trade directly with low or no barriers in terms of financial knowledge or investment amounts. Again, the design and usability are key strengths rather than attempting to match all of the features of a traditional stockbroker. Although online sharetrading has been around for over 20 years, the new services offer substantial improvements from the ordinary investor’s point of view both in accessibility and cost saving: as with the passive investing services, we expect to see them move “upmarket” as their service matures and user base continues to experience strong growth.

Other challengers are pushing the boundaries in completely new ways – for example, using a mobile app, Dabbl! allows anyone to take a photo of a consumer item such as a can of Pepsi or an Estee Lauder compact and automatically match the brand to buy shares in the company that produces that product. It is hard to imagine traditional investment managers prioritising this kind of R&D, but it’s this kind of distinctive innovation which incumbents need to start considering, to be able to compete on the same terms in the decade ahead.

Peer-to-peer lending platforms

Peer-to-peer lending platforms such as Zopa and Funding Circle provide fixed interest investment services to customers who want to earn interest on their cash, as an alternative to paltry savings rates with banks, and without the complexity of investing in shares. The wealth management industry should consider P2P lending as both a competitor for funds and an opportunity for commercial collaboration.

alternative assets

There are also now a number of digital platforms that provide access to investment in different, often very innovative, types of alternative assets – wine, art and music royalties to name a few – that often offer considerably higher potential returns than traditional stocks and shares.

Some startups are getting even more creative with what an investment asset might look like: The Football Index is one such investment platform which, given how far removed it is from the wealth management ‘norm’, should provide traditional firms with food for thought as to the possible future direction of the industry. Few people in established firms are thinking about “gamification” yet, but this will rapidly become an important theme in digital service differentiation, particularly with passive, long-term investing services which struggle with the need to keep customers engaged without encouraging people to become traders.

Auto savings platforms

Auto savings platforms such as (US-based) Acorns, that analyse customers’ account balances, identify where and how much they can save, and invest these amounts automatically, have gained a lot of momentum and, like peer-to-peer lending, could capture a lot of growth by helping people put cash savings to work without the perceived risk or difficulty of formal investing.

Digital challengers in the pensions space

Digital challengers in the pensions space, such as Penfold, offer customers an intuitive user interface, and can be marketed at specific markets such as contractors, business owners or the self-employed. They are redefining the industry towards a broader view of ‘retirement’ and lifestyle, which is likely to resonate more strongly with younger and more career-mobile generations.

Artificial intelligence chatbots

Artificial intelligence (AI) chatbots like Charlie that can chat with customers, analyse their finances and even provide suggestions are already, in essence, providing a digital alternative to financial advice. While this might not be taken too seriously as a competitive threat to wealth management firms currently, it’s more difficult to predict where this could be in five or ten years, given the rapid developments in AI.

Narrower scope of performance and lower cost, followed by rapid growth in customers and improvement in performance, is the disruption pattern to consider over and over with such challengers.

automated holistic financial advice

The advent of open finance will bring substantial new use cases to digitally native financial advice platforms. Anticipating this, the likes of Snoop and Multiply aim to offer automated holistic financial advice by allowing people to connect all of their finances in one place. Considering the potential value to investors, this could spark the biggest transformation in the wealth management market yet.

Act now to stay ahead

In the same way that they have disrupted retail, high-end fashion, and retail banking across the world, DNVBs are set to disrupt wealth management on a global scale. Given how quickly digitally-native businesses have transformed other sectors, it’s clear that traditional wealth management firms need to become more aware of their new DNVB competitors and to take them more seriously.

The new brands which are already visible in the market should serve as a source of ideas and inspiration to traditional wealth management firms, as well as an early warning about the competitive threats of tomorrow. The technology underpinning these disruptors is often readily available to traditional firms too, making it more a matter of strategy and investment in WealthTech than it is about the need to reinvent the wheel.

Established firms must get on the pulse of ongoing shifts in customer expectations around savings and investments, and be prepared for these changes to apply as much to high net worth clients as to mass market consumers, particularly among younger generations. As the competition from new challengers in wealth hots up, the worst thing established brands could do is to ignore either the threat… or the opportunities.

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