Wealth Tech in India: Opportunities, challenges and behavioral patterns shaping the space

Can WealthTech be a large outcome sector in the Indian context?

Indian Fintech space is amidst the action, as always. Within the broader Fintech space, Paytech has been the poster boy. Paytech has seen a wave of innovation, multiple product cycles and IPOs. In the wake of the recent RBI guidelines, the credit tech segment has also been getting a fair share of attention, albeit for not-so-positive reasons. This gets us to the sector in question. How is the Indian wealthtech space placed, is it ripe for a take-off? While the first wave of start-ups tasted limited success, we are witnessing the second wave of advisory and personal finance products hit the market. In this post we touch upon questions such as - Is this the time to be building in this space, what are some key lessons and how are other countries faring.

 When we look at a mature market like the US, it has 21 wealthtech unicorns (crypto is not included) while India has currently only 3 unicorns. Before embarking on a comparative journey, one also needs to consider the potential in the market for churning out unicorns. Some obvious factors stack against India, for instance, the depth of the investor class or the disposable incomes are relatively low compared to the US. At the same time, some structural and behavioural issues colour the Indian landscape. We try to throw light on a few of these issues – For instance, social trading has been an exciting arena of value creation in the US, whereas in India this is a regulatory grey area.

 Within the Indian setting, the wealthtech success has majorly been limited to solving the accessibility problem. Discount brokers like Zerodha, Groww and Upstox have solved distribution by making customers comfortable with investing through digital platforms. Like in the US, there was a wave of robo-advisers alongside discount brokers in India. But unlike the US only a few of them have been able to stay afloat in the Indian market and are still struggling to become big. As such it is as important to understand the nuances of the Indian market as it is to identify opportunities. With this understanding, we have summed up the trends in wealth tech in the US in the first half of the article and in the second half, we have tried to highlight the unique challenges of the Indian wealth tech market.

Trends in Wealth Management Tech: taking a cue from the US

The innovation and trends taking shape in the US can be categorized under three categories based on the nature of the solution – For Individuals, For Advisors and Infrastructure players  

Individual

• Many discount brokers providing easy access to equity and debt markets at nominal cost have become established entities. Robo-advisory firms providing automated investment advice also closely followed the growth of discount brokers in the US. Their growth can be attributed to their low fee model (0.5% of AUM) vs human advisors (1% to 2% of AUM). When we go beyond capital markets in the realm of alternative investments, real estate has emerged as the preferred investment asset class. Platforms providing a digitalized experience of investing in Single Family Rentals (SFR) and Commercial Real Estate to retail investors are growing big. Pravega is an investor PropertyShare, targeted towards fractional commercial real estate, aimed at democratizing the asset classes
• GenZ & New to investing:  When we look at the early trends, the major focus has been on making investing more accessible, particularly to gen Zs and lower-income individuals. Gen Z is particularly more lucrative when they are assessed based on their lifetime value. To attract Gen Z, ideas like spare change investing, social-networking-based investment platforms, prize-linked savings, group investing, value-based investing etc. have come up. Some Gen Z-focused startups have turned into user acquisition channels for banks and established fintech. To attract lower-income individuals, fractional investing across different asset classes has become popular. Also, many platforms have drastically reduced their minimum investment limit or changed their fee model from AUM percentage based to a subscription fee. 
• For mature retail investors, a lot of new avenues for portfolio diversification are being created. These alternative investment platforms are providing access to various asset classes viz. private equity, startups, asset-backed loans, sustainable projects (solar and storage majorly), collectibles, gold etc. New challenger startups are coming up in relatively mature real estate space as well. All intend to make investing in real estate hassle-free and almost as easy as investing in public markets

Advisor

• Software suite to digitalize the experience for advisors and their clients are seeing traction. They are differentiating themselves on various fronts like access to diverse financial products, portfolio management, research/analytical capabilities etc
• Within the domain of financial planning, retirement planning has been an important focus area and a large outcome sector. By providing digitalized low-cost solutions for the 401 (k) plan, many startups are making the plan affordable for underserved areas like small and medium businesses
• When we look into early trends, multiple advisor marketplaces are booming where individuals can find vetted advisors based on their needs. The need for such a marketplace arises as there exists an entire class of retail investors that lie between the HNI and mass-market category. This, in fact, is the urban aspirational diaspora that is growing at a breakneck pace.
• Financial wellness products aiming to help understand personal finance were always present in the market. The new wave is to try to penetrate the market through channels of partnering with banks, credit unions, employers, welfare organizations etc. This is an interesting channel to sell such products as partner organizations are also looking for meaningful customer engagements through which they can better understand customers and cross-sell.

Infrastructure

• The innovation at the infrastructure level is happening on two fronts – modernizing the tech stack and adding new capabilities based on advanced tech. Within tech-stack modernization, one set of companies is targeting the core of the trading system – the settlement and custody layer. They are helping even prime brokerage firms to build scalable digital financial products. Other sets of companies are more in the realm of embedded finance working closer to the end user. They are helping banks, fintech, advisors etc. easily add investment products to their tech stack. SafeGold for instance has an infrastructure play on the gold side.
• On the other hand, some startups are using advanced technologies like machine learning, NLP, blockchain etc. to build additional capabilities. These capabilities as being utilized in various areas like fraud detection, secure communication, risk management, compliance etc.

Challenges of Indian wealth tech market

While new and innovative models have taken shape in the US wealth management space. Certain structural and regulatory issues have thwarted the proliferation of similar models in India. We have tired to bring to light a few of such challenges –  

1.     Dynamics of ticket size

Indian retail investing in public markets has been on the up. We have seen a massive uptick in retail participation. Fueled by the pandemic the number of demat accounts in the country has jumped by 63% in the past 12 months to 89.7Mn. While the investor class has surely burgeoned, what is more important is the quantum of disposable income that is available for wealth investing-related activities. 

We can get a sense of the available market size based on Income Tax returns data for individuals to get a sense of the earning ranges. According to the AY19 filing data 55.5L individuals are earning more than 10LPA and just 25.5L individuals earn more than 15L. We can consider a year-on-year growth based on historical estimates to arrive at the current figures.

 Based on the propensity to allocate to new age wealth products across various buckets, for an average allocation size of 2L per individual, one would require 4L users to reach an AUM of 1Bn dollars. This is nearly 10% of the total market base of folks earning more than 15LPA when accounting for an annual growth from AY19 levels.  Hence we believe that average contribution and ticket size from an individual become very important levers in helping build a decent AUM in this space. The lower the ticket sizes the more difficult this journey of scale would be.  

2.     Monetization avenues  

One of the challenges with the monetization of products is that the propensity to pay for software/tools is low. One can think of going the services route in wealth management, but that severely limits the ability to build a mass market solution. It, therefore, becomes very crucial that the target segment chosen must have both the ability and willingness to pay along with a sizeable base.  

One common revenue stream is the distribution fees that manufacturers of wealth products offer. The distribution fee is typically a percentage of the capital invested through the platform. The problem with this stream is that the distribution margins are always dictated by the manufacturers (e.g. AMCs in the case of mutual funds) and there is little that the fintech can control. Relying on distribution commissions to build a large outcome is hard to model. One needs to unlock the ability to monetize by tying it closely to the segment that the product is aimed at.  

3.     Regulatory compliance

The regulator has been very clear about the intention of protecting the interests of retail investors. There are some limitations on what is allowed and the prescribed ticket sizes. For instance, one needs to be very clear whether the product falls under the RI vs RIA vs PMS category and has the corresponding structures in place. At the same time, some exciting models such as social trading, models involving the pooling of retail investments to guarantee a yield have to be pressure tested for regulatory compliance  

4.     Yields on real estate 

The residential rental yields in India are far less attractive in comparison to the US market. Given this fact, solutions built for this market will have a much lesser size of prize to build for. Therefore monetization for any startup in the residential real estate market would have to be different to the playbook adopted in the US. Secondly subletting or the Airbnb culture is a behavioural pattern that one does not observe in India. Commercial real estate is however a sweet spot given and we have been a part of the PropertyShare journey an investors.

The India opportunity

Notwithstanding, the above challenges, India is home to the one of the largest base of wage earners with a highly aspirational frame, and given the skew of digital initiatives the ecosystem is primed for growth. India first solutions must be built for the landscape with a close eye on regulations and the retail investors.

For many domestic investors the journey of wealth is yet to begin, this might be a right opportunity to build in the space with a long term vision. It would be hard to expect quick outcomes, given that this is a high-trust product and trust is hard currency to build digitally. Founders ought to bear in mind the strong need to establish trust and the role that is plays in this sector.  

 On the other hand, solutions for advisors or institutions is also quite attractive space to be building in. For instance –

a)     Going through the employer route for distribution of products, similar to the 401K plans can be a large outcome event

b)     Rated advisor marketplaces, where one can not only discover advisors but get a sense of their past performance is an idea picking steam in other geographies

c)     Domestic advisors will mature and begin to offer a range of additional services to their clients through products/tools/platforms built for this purpose. This again is an exciting area to build for

Potential growth drivers  

While the Wealth tech space in India is emerging and beginning to take shape. There are certain behavioural cues and technological levers that we believe are interesting to take into account while building in this space.  

a)     Solve for friction – Traditionally investing has been a high friction sector. There used to multiple mandates, signatures and even passport photos required. Right now eKYC and mandates have made the onboarding process more smoother and this has had a massive impact on the growth of new age brokers and investing apps. Can a similar experience be delivered in new age wealth management avenues. For instance can investing in an alternate asset class be automated? If a customer is investing in a 45 day invoice discounting product, can the process of re-investment be automated into a similar risk profile instrument, while ensuring that this falls in the regulatory green zone? What is also interesting to observe, is how an unembellished concept of SIP has changed the mutual fund industry. Relying on long term consumer discipline to build large outcomes can be supplanted by ingenious solutions like automated SIPs to reduce friction. Similar ideas will be crucial to crack the space 

b)     Solve for financial literacy – The average investor is not very financially literate, not just in India but in nay part of the world. For instance, alternative investments can be large outcome arena and hold potential to generate respectful returns. However, most of the products in the market are publicised for their IRR returns, and the average investor confuses this with real return. We have come across scores of investors during our diligence calls that have shared a sense of being misled due to the promised IRR returns. While technically, the fintech is right is claiming the IRR, it becomes crucial to understand the gap in understanding such terminologies. We believe educating the end-customer can go a long way in driving stickiness to the product and that in itself is also a large opportunity to play in. Smart product features like nudges and pre-emptive suggestions go a long way in driving consumer loyalty and repeatability 

c)     Solve for transparency – Founders need to think about democratization of information, especially in financial services. For instance, direct mutual funds make more sense for the end customer. If the tool that is being built is aimed at financial wellness, it makes all the more sense to educate about direct mutual funds vs regular mutual funds. Optimizing for short term gains is not a recommended course of action in a segment where trust is inherently low to begin with 

 We at Pravega have had a front row seat to the wealth tech journey in India. We are early backers of SafeGold and PropertyShare, aimed at democratizing digital gold and real estate in India. If you are a founder building out products/ solutions in this space, we would love to hear from you. Please feel free to reach out to Sridhar to brainstorm, and discuss developments or opinions at [email protected]