How strategic partnerships are shaping fintech funding
The rush to form strategic partnerships among wealth management firms is not only reshaping the industry, it's also dictating how and why fintechs are landing venture capital funding, according to a new report by Deloitte.
Dozens of big banks have partnered with fintechs through third party cash management intermediaries. Banks like Citibank and Wells Fargo use the third-party firms to offer savings accounts to digital brokers like Wealthfront, Betterment and Personal Capital.
In the case of Marstone, a New York-based digital wealth management and robo-advice platform, integrating with top custodians allowed it to build an efficient electronic onboarding process for new clients, according to Deloitte’s “Driving Innovation in Investment Management” report.
Over the next few years, it's expected that more partnerships will take place to allow firms to share digital capabilities, says Sean Collins, research manager at Deloitte and the report's co-author, in an email.
The trend may explain why investments in wealthtech dropped precipitously in the first three quarters of last year. A slow second quarter caused funding to fall behind the record setting pace recorded in 2018, when funding topped $2.8 billion. The increase in partnerships may contribute to a rise in late-stage-funding as incumbent financial institutions look toward wealthtechs that have reached a higher maturity stage, according to Collins.
“It’s no longer about coming to market and getting funding with some kind of novel pitch and seeing if it sticks,” he says. “The industry is now focused on firms that are generating cash.”
Last year, wealthech investments reached $1.3 billion as of September. Twelve outright acquisitions ocurred in the first three quarters of 2019, the latest data available.
One of the biggest advantages to a partnership is how much less it can cost firms, Collins says. While acquisitions can be time consuming and expensive, firms can cultivate a "partner network," where each new wealthtech firm will boast differtent digtial capabilites.
As for wealthtech startups, firms are looking to partner with big banks for stability or to expand their capabilities. For example, a host of digital firms have tacked on new banking features in recent months and have expanded their traditional wealth management products into banking and even lending.
Wealthfront, a Palo Alto, California-based digital firm works with cash management intermediary firm, Total Bank Solutions, which in turn facilitates partnerships with a number of banks including Associated Bank, Wells Fargo and East West Bank. The robo advisor also recently teamed up with the banking and financial services company Green Dot to offer clients a Visa debit card and the ability to direct deposit paychecks from employers.
"The data shows us that these [incumbents] have made a strategic decision to allocate more of their resources toward firms that have a proven business model,” Collins says.