© 2020 Arizent. All rights reserved.

Wealthtech funding plunged 56% in a year. Why?

Register now

Global funding for wealth management technology fell precipitously in the second quarter to $421 million in 35 deals, according to CB Insights’ Global Fintech Report Q2 2019.

That’s down from $970 million with 57 venture capital-backed deals in the same quarter last year — a more than 50% year-over-year drop. That’s edging close to a dangerous fault line, says Aite Group research analyst Greg O’Gara.

“There’s a real change and concern if it dropped below $400 million,” he says.

O’Gara says that the market is becoming saturated with wealthtech companies and the best investments might have already been made early in the game. Now that the standards have been set, VC investors might be looking for companies that prove their model and ideas are revenue-generating, he says. “The quality of fintech firms entering the market will have to reach a higher benchmark for funding compared to past deals.”

Another reason for the deficiency of second-quarter wealthtech deals could be a change of focus on the part of VCs. In the first quarter, wealthtech companies like Betterment, Stash and Acorns had large funding rounds. Last quarter, it was software companies that were leading the deals, according to senior intelligence analyst Lindsay Davis from CB Insights.

“There’s appetite for advisors to adopt software,” she explains. The deals just aren’t as intense on the advisor-program side as the business-to-consumer side. Vestwell, a retirement investing platform for RIAs had a $30 million Series B funding with investments from BNY Mellon, Nationwide Ventures and Goldman Sachs PSI.

Last quarter, VC-backed funding was over $768 million.

But there’s a huge opportunity wealthtech is starting to take hold of, according to Davis. “These companies are solving universal pain points,” she says, because more and more firms are expanding their financial services to attract clients.

"First there was an unbundling of services and now there’ll be a rebundling,” says Davis, who adds that data collection will also play an important part in understanding consumer needs.

One of the biggest deals of the quarter involved data aggregator Plaid, which landed a $250 million Series C funding round and promptly expanded into wealth management with the purchase of Quovo. The acquisition was valued at $200 million. “As our customers, or fintech companies, redefine the lines and blur those lines, we have to meet them there with new data sources and data types,” Quovo’s founder Lowell Putnam told Financial Planning when Plaid’s investment product was launched in June.

The drop in wealthtech investment comes at a time when robo and digital advisors have entered the banking industry with savings account offerings. For example, Betterment and Wealthfront both launched high-yield cash accounts. Betterment added a partnership with Georgia Banking Company in the last quarter and last month added the Kansas City-based nbkc bank as a partner. Other Betterment partnerships include Barclays Bank Delaware, Citibank, ConnectOne Bank, Seaside National Bank & Trust, Third Coast Bank SSB and Valley National, according to the firm’s website.

Wealthfront, on the other hand, launched its banking service in partnership with Green Dot Bank. Acorns, a trading platform that offers robo advisory services, partnered with Lincoln Savings Bank last quarter as well. In June, Personal Capital launched banking services in partnership with UMB bank.

But that’s just the beginning, industry experts say. More firms will follow, expanding their services in the quest to stake claims on Americans’ every financial need.

The biggest M&A deal in the wealthtech space last quarter was Goldman Sachs’ purchase of United Capital for $750 million. The acquisition gave the investment bank access to a new segment of high-net-worth individuals and United Capital’s technology, like its FinLife CX digital platform, to better serve them.

Overall VC-backed fintech funding in the United States grew by almost $2 billion year-over-year, according to CB Insights.

For reprint and licensing requests for this article, click here.