Strategic Observations for M&A and Wealthtech for week ending July 22nd

M&A Theme of the week ending July 22nd, 2023

Last week, a lot of the M&A news that came to the market was not about acquisition for growth and expansion, but rather about divestment.

When looking at these, a couple of themes emerge.

1)????Many firms in the financial service industry have been continuously backing away from globalization pursuits for the past few years and are selling non-strategic assets to local players. This comes amid rising operational costs, tougher regulatory environments, esp. in relation to reserve capital, and failure to scale. These local players are often those who have scaled business in one segment of the market but need to expand their solution portfolio to increase reach and profitability.

2)????Newer entrants, who pursued a capital allocation strategy to higher risky consumer finance have been rethinking their strategies amid rising delinquency rates, and higher loan loss provisions.?While new entrants seem to have little trouble growing through credit extensions of different underwriting models, this approach has proven challenging to risk management in volatile rate conditions, even while employment rates have remained resilient to weaker growth.

The observation about this later development is that while venture and growth capital funds continue to see value in backing non-bank financials seeking to provide capital (in many different forms) to small and medium enterprises, direct support for consumer financing has been drying up.?There is clearly a strong belief that the entire infrastructure for helping the finance function of the SME operate more optimally is still up for grabs, but consumers have not yet found the same evolution when it comes to the transition from personal finance management to innovative secured and non-secured personal lending.

On the first theme, I would say that we have been moving from a globalization period, into a regional one. It seems that ambitions to build businesses in Asia/Pacific, the Sub-continent, and even South America have disappeared, but firms that have strong regional franchises, particularly in higher margin corporate lending and private banking are continuing to look for bolt-on as well as transformative acquisitions. At the same time, European and UK firms are continuing to advance the development of their infrastructure in the GCC, noting increasing ambition and competition from the largest integrated financial institutions in the region.

WealthTech Observation of the week starting July 23rd, 2023

I have been tracking client requests for information over the last few months given the work I am doing in the industry, and wanted to share some quick thoughts on the capabilities evolution that is unfolding.?

When the idea of providing digital wealth first started to gain attention about a year ago, the whole focus was transforming the on-boarding experience, while also offering significant improvement in managing diversified model portfolios. ?While this approach was well backed for a period of time, as we all know, despite model portfolio design principles becoming increasingly more “personalized”, the asset flows expected to emerge beyond those that could be attained by the world’s largest ETF managers, failed to materialize.

As far as I can tell, financial organizations with larger mass affluent and lower high net worth client banks, as well as investment management capabilities have not fully abandoned these ideas, but they are now recognizing that:

1)????They can’t limit their proposition to a self-service proposition. They need to incorporate several journeys into on-boarding and triage the customer in a dynamic way.?While in the past this approach was solely driven by compliance operations, it now needs to also incorporate commercial opportunity too. This changes the approach toward incorporating rules.

2)????The right propositional design needs to apply a lifecycle management rather than solely a relationship management approach. ?Firms seem to now recognize that the infrequent, planned engagement model doesn’t meet client expectations and thus are developing a new service model that feeds off data intelligence.??This is particularly true for organizations that have ambitions to service 100’s of thousands of clients, rather than just the 20-50 that would be served through an ultra-high-net-worth model.

3)????AI looks increasingly likely to have a significant service and client development role to play if you start to put points 1 and 2 together, especially given the development trajectory of financial data sets that can interact compliantly with generative AI.?Clients haven’t quite yet articulated information requests in this way but are certainly asking about how they can identify “next best action” across a range of business functions that will create a more frictionless and satisfactory client experience.

Alongside witnessing the emergence of these requests, in many more markets, clients are interested in exploring alternative operational approaches.?Cloud deployed and managed software and services are of course part of this request but one also increasingly sees that:

1)????Firms that have expanded out of the UK into other jurisdictions are increasingly interested in a richer outsourcing solution design for both regulatory and non-regulated service support. These firms have become much more comfortable with this type of offering in their home market and want it to be replicated elsewhere.

2)????Organizations that are setting out greenfield projects that cover digital wealth are interested in partnering with full-service delivery companies that can work with a range of custody or depositary banks. While in the past many firms would have started out with solutions directly provided through these partners, this doesn’t seem to be a given for organizations with larger ambitions or with cross border requirements.

3)????Plans are seeking to develop new types of client service models that can properly leverage advances in automation, and AI while also keeping the human in the loop.?Firms want to work with partners who can help create a lot more value out of their own client service/success teams, seeking to introduce a model that can combine high touch human engagement when needed with the best operational STP solution designs, when not.

With the work I am doing in the space, and particularly with Objectway Objectway , Iintend to try to develop a monthly observation piece that will hopefully help those involved with digital and innovation initiatives think about the evolution of their own solution design concepts.