INTRODUCTION
One of the most important inventions in the modern world is the development of FinTech. By the merger of finance, arguably the most important facet of social life, and technology, the sweetest fruit of scientific development, a paradigm shift was sparked in the traditional regime of financial services.
FinTech is the use of technology to digitize and automate several financial services. From Automated Teller Machines (ATMs) down the street, to the digital wallets (eg. GPay, PayTM, PhonePe) making our purses obsolete, to the oft tweeted about cryptocurrency, FinTech has perforated all aspects of our daily lives in a very short span of time. WealthTech is one of the most popular sub-sectors within FinTech. State of the art technology such as Artificial Intelligence and big data has revolutionized the system of Wealth Management.
This article shall discuss about the WealthTech industry in India. For this purpose, preliminarily, the background of WealthTech and its salient features will be highlighted. Subsequently, the different types of WealthTech and the different business models based of WealthTech will be discussed. On the foundation established by the preceding sections, the WealthTech industry in India will be elucidated upon along with the probable future of WealthTech industry.
BACKGROUND OF WEALTHTECH
WealthTech is a portmanteau word formed by merging of ‘wealth’ and ‘technology’, the two underlying systems which merge to create the new sector. Unlike its parent sector, the purpose of WealthTech is streamlined and specific. In this industry, machine learning driven algorithms are used to create a robust and methodical system for analysis of investment opportunities. Therefore, WealthTech primarily focuses on the management of wealth and investments.
WealthTech has consolidated under the same subsector a myriad of companies, initiatives, digital tools and innovations which focus on management of investments and savings. This system is also credited for democratization and extension of the investment sector. The enhanced data mining, mass availability via low entry barriers, digitization of services and customization of information has made several crucial services readily available to both ordinary investors and investment management professionals and experts alike. Although, the use of technology in investment markets is not a recent development, WealthTech is still considered novel because of its continued evolution which has now led to the emergence of totally innovative and distinct services and tools which are wielded by end-users directly instead of the intermediaries.
TYPES OF WEALTHTECH
In the recent years, the WealthTech industry has witnessed a marked rise in India and the world at large. The primary reason behind the ground-breaking success of this industry is its unparalleled dynamism and variety. The most relevant and popular types of WealthTech services are robo-advisors, personal finance management, and digital brokerage.
1. Robo-advisory
Robo-advisories are digital platforms and interfaces which provide investment strategies, management solutions and financial advice to users with minimal human involvement. These platforms built with advance software and algorithms, use customer choices and preferences as the input data for customization of results.
Further, the Artificial intelligence powered technology and analyze the data available on the web including but not limited to social media data to provide optimal asset allocation strategies with due to considerations for the real-world events and mass sentiments. Passive indexed portfolios based on the portfolio theory are created by the robo-advisors and are further monitored and optimized in accordance to the changing market.
Robo-advisors are inexpensive readily available services which anyone with the bare minimum technological infrastructure can utilize. However, they are not suitable for convoluted investment issues which do not have any one straight jacketed solution. Further, the lack of humanness of this system makes it apathetic to consideration beyond the profit-driven market.
2. Personal Finance Management
Personal Finance Management (“PFM”) is a form of WealthTech made for helping users manage their accounts. This software is used for aggregation of financial transactions and use of data for management of the input money. Users can categorize their expenditures, organize their accounts in various institutions and manage their budget in the same place by using PFM.
Further, data visualizations such as cash flow, spending goals, debt management, spending and saving trends and net worth are also some features provided by PFM. The upgraded models of PFM use artificial intelligence to include novel features like predictive cash flow analysis, automated capital management, and personalized financial advice.
3. Digital Brokerage
Digital Brokerages are virtual platforms and software which provide access to stock markets and investment vehicles. This software serves as a medium for connection of brokers, insurers, current policyholders and prospective clients and provides detailed investment related information. This system has overhauled the traditional system of brokerage and business operations and heralded an age of paperless, digital brokerage which is both time and cost effective.
Digital brokerage helps in seamless exchange of information, expansion of client base and better data-driven analyses. Due to the invaluable benefits of digital brokerage several traditional brokers are switching to the digital platform to automate their business and enhance customer service.
BUSINESS MODELS BASED ON WEALTHTECH
The ubiquitous use and efficacy of WealthTech has led to the sprouting of various novel business models. Two of the most popular business endeavors which extensively use WealthTech are discount brokerage and thematic investments.
Discount Brokerage
Discount Brokerage is the modern system of virtual brokerage services in which stockbrokers provide the fundamental and quintessential trading services at a lower commission. This kind of brokerage offers a robust online platform for purchase and sale transactions. Oftentimes, discount brokers provide the elementary informational manual and knowledge compendiums which are essential for trading.
The portfolio provided by Discount brokers, unlike traditional brokers, do not encompass all the fringe information related to investments. Only the core transactional services are focused on by discount brokers. This makes the service specialized and economical. Further, since this service operates virtually overhead costs are reduced, client base is varied and customer services are available 24×7.
Thematic Investments
Thematic investment is a business model which focuses on placement and materialization of investment by identifying macro levels trends and their underlying investment opportunities. In this model, portfolios created by compiling the companies involved in a particular field which is predicted to have above-market returns in the long term.
The macro themes behind the portfolio are unprecedented factors such as globalization, ageing demography, climate change, which have a strong influence over the economies and market structures. Thematic investments involve “formulation of strategic context, getting behind future tailwinds, narrowing the universe, and focusing further research while avoiding spot forecasting or market timing.”
WEALTHTECH IN INDIA
In the last half a decade, WealthTech industry has undergone massive development in India, drawing international attention. From having one of the highest numbers of startups in the funding and investment sector to being a potential $60 billion market, the meteorically flourishing WealthTech industry in India is only sought to growth further in the near future.
Indian WealthTech companies are employing advanced technologies to provide a diverse range of digital services. In 2018, the fourth most funded FinTech sector in India was WealthTech, at investments of approximately $122 million across 23 deals.
A few illustrations of the developing Indian WealthTech industry are Paisabazaar and BankBazaar, which are PFMs, Scripbox and Finpeg which are Robo-Advisory WealthTech and Sqrrl and Cube, the Investment Platform Spaces.
Some of the reasons behind this increased participation in investments and the consequent growth of WealthTech are as follows:
- Heightened commercial awareness and financial literary of important investment related issues such as risks, budgets, etc.,
- Rise in disposal incomes due to rapid urbanization and education,
- Proliferation of sophisticated technology solutions and products
- Influence of mass media via investment related contents
- Revitalization of the demography of the workforce by employment of millennials.
This steadfast growth of WealthTech industry in India however faces many impediments. In order to smoothen the path paved for WealthTech, the shortcomings of the current model need to be addressed and innovations measures must be undertaken. Some of these are discussed subsequently.
Firstly, the technological perforation in India is limited. Even in the year 2018, only 26% of the population had smart phones. Without the creation of the basic technological infrastructure required for investments, WealthTech cannot be developed in an inclusive and diverse manner.
Secondly, the WealthTech industry due to its modern and novel nature is mostly driven by start-ups. Unlike other established business sectors where companies have been in existence since decades, WealthTech industry is new and volatile therefore its players require additional protection. In order to promote the WealthTech industry, the State must take measures to ensure some degree of protection for the Start-ups and encourage them to invest in this sector.
Thirdly, to increase the presence of WealthTech at the grassroot level, tie-ups between established businesses with mass connect and WealthTech companies are required. For example, the tie-up between Karnataka Bank and the Indian WealthTech entity Finwizard has enhanced customer navigation, fund selection and introduced new services such as redemption assistance and live tracking.
AMLEGALS REMARKS
Wealth management is one of the largest growing industries in the world, with assets worth over $60 trillion. The rapidly developing science and technology is fast transforming this sector from a human-run industry to an automated sector. The use of technology in wealth management has led to the inception of the WealthTech industry.
Evolving at an exponential pace, this dynamic subsector now has a plethora of facets and models. Robo-advisory, digital brokerage and personal financial management are the three most ubiquitous forms of WealthTech and these find direct application in the business models of Discount Brokerage and Thematic investments.
WealthTech holds a promising future full of inclusive innovations. However, we must not be so bedazzled by the shimmery success of the industry that we overlook the predicaments this industry poses to data protection and environment.
WealthTech, much like all other Fintech sectors, are powered by AI and use machine learning algorithms. The fuel for these algorithms is the data of the users. Therefore, as the technology evolves the threat it poses to the private data of the user becomes graver.
For the constant and enormous data mining required to keep these industry trailblazing, egregious amounts of natural resources are consumed. To maintain this supply of natural resources, the environment is harmed gravely. Therefore, unless green substitutes of these natural resources are found, this sector may turn unsustainable in the future.
– Team AMLEGALS assisted by Ms. Istela Jameel (Intern)
For any query or feedback, please feel free to get in touch with arushi.vyas@amlegals.com or riddhi.dutta@amlegals.com.
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