Embedded Wealth Management: The Untapped Trillion Dollar Opportunity

May 3, 2022

5-7 minutes reading time

Embedded finance has seen explosive growth over the past decade. However, one critical area of financial services has thus far been left out; embedded wealth management. 

Due to a variety of factors including major regulatory hurdles, unique industry factors, and a lack of entrepreneurial know-how, this massive untouched market is only now emerging as an incredible opportunity. 

With dramatic shifts in consumer expectations around personal wealth and investments over the past few years, embedded wealth management is likely to be the next major force in reshaping a multi-trillion dollar industry. 

A simple embedded wealth management platform unlocks the ability for  non-traditional players to offer a highly desirable and sticky product that introduces a new revenue channel. It also lets traditional financial institutions modernize their own delivery, increase volumes, and improve profitability, all at a fraction of the cost and time it would take them to do so in-house. The benefits are therefore shared by incumbents, disrupters, and customers alike.

A short history of embedded finance

Over the past decade, innovation in financial services was centered around digitizing and automating processes and delivery. This usually meant the unbundling of services as new entrants, mostly technology startups, created niche solutions designed to address specific problems. We are now witnessing the rebundling of financial services as the environment has made way for disruptors to compete with incumbents. 

The rebundling is happening in two distinct formats: 

First, early disruptors who were able to dominate their niche are now going beyond their core offering by building other services at a rapid pace in order to increase customer share of wallet; think PayPal and Square.

The second format is via embedded finance. Incumbents, disruptors and non financial services companies are now increasingly broadening their offerings by embedding those products and services via third parties; e.g. Shopify offering banking and merchant lending services. 

Embedded finance has become a game-changer for enterprises, consumers, and providers for a variety of reasons:

Enterprises

Enterprises can rapidly deploy solutions without building the often complicated technical, regulatory and operational knowhow and capabilities. In today’s fast moving economy, the ability to add additional services faster than your competitor is critical. 

Furthermore, lifetime value (LTV) per customer often increases as people are prone to prefer an application that services all their needs in one place. This is often why customer loyalty continues to be extremely high at traditional banks, despite their shockingly low net promoter score (NPS). 

Finally, enterprises can utilize the vast internal data that they already have and augment it with the data they generate from offering multiple services via partnerships to make better product recommendations that are tied to unique customer journeys. The data can also be extremely valuable to the delivery of their core product or service.

Consumers

Consumers are presented products right at their point of need. No need to shop around and potentially take a chance on an unknown brand, sign up for yet another service, or deal with legacy delivery channels. 

Not to mention, for consumers, making financial product purchase decisions is often very psychologically taxing. The ability of embedded solutions to recommend and offer the perfect solution from a trusted brand at the exact right time in a consumer’s journey can dispel many of the anxieties associated with financial services transactions.

Further, there is growing demand from consumers to have financial products available via their preferred brands or have the ability to engage via their channel of choice, all through a unified, modern, and simple digital experience.

Embedded Finance Providers

Early embedded finance use cases that gained significant traction have generally centered around payments and lending, but banking and insurance are rapidly catching up. 

When two teenage brothers from Ireland launched Stripe almost 13 years ago, few people quite understood its game-changing potential at the time. Now, any enterprise can offer financial services and products with little to no code, directly integrated into their own front ends.

Over the last few years we have seen a subtle shift from direct-to-consumer fintechs competing for end users, to fintechs that offer embedded solutions competing for enterprise clients. These embedded players don’t have to spend hundreds of millions of venture capital (VC) dollars on social media to acquire individual consumers and build a trusted brand. Instead, they behave like more traditional SaaS companies, even though their ultimate end users are still individual consumers. Embedded finance has enabled the proliferation of a business-to-business-to-consumer (B2B2C) model; which has emerged as the de facto platform behind some of the best financial services delivery.

Embedded Wealth Management

This brings us to the surprising fact that there are next to no embedded wealth management solutions in the market. 

Given that wealth management is a natural extension of financial services and it’s a massive segment with trillions of assets under management globally, and rapidly rising, why is there not a burgeoning embedded wealth industry? There are several hypotheses for what barriers are keeping embedded wealth from going mainstream:

1. Legacy wealth management is “sticky” 

Assets held through an intermediary such as a “financial advisor", the vast majority of all retail investments, are highly “sticky”; meaning, they don’t move between holding institutions very often. Investors are mostly reluctant to move their assets and often keep their assets with the same advisor for their entire lives. These advisors tend to be part of the incumbent segment of the market, where it’s often made even more cumbersome to move assets. Furthermore, wealth is largely concentrated among Baby Boomers and prior generations - where the benefits of embedded wealth don’t hold the same appeal.

2. The regulatory moat is both wide and deep

Wealth management is an extremely complex regulatory environment to navigate. It’s not only challenging to receive regulatory approval, it also usually requires deep industry expertise to build products as well as significant resources and knowledge to ensure ongoing regulatory compliance. This can be a huge burden to new entrants.

3. The wealth management industry is highly complex

In fintech, like in many sectors, speed to market is everything, so most entrepreneurs have focused on those areas that are “easier” to disrupt. Significant barriers to entry have led to years of underinvestment. That said, as sectors who saw earlier adoption (such as payments) have started to become saturated with providers, new areas of financial services are explored. 

One of these neglected legacy sectors is wealth management. As ancillary sectors and services have made significant progress, e.g. KYC and AML, the wealth management industry is now finally emerging as one of the largest untapped opportunities. This is significantly important for smaller players, such as credit unions and community banks, that don't have the same level of scale as larger incumbents, as they can use technology platforms to compete directly. 

4. There are barriers to sharing data across different platforms

Many tech companies are built around data. In wealth management, customer data is considered especially sacred because it involves people’s life savings, home down payments, or their child’s education fund. This means enterprises are all the more careful in how that data is treated and shared between entities; even within the same organization. Entities offering wealth management, like a traditional bank’s wealth division, have been largely unable to leverage the data they generate to improve customer experience across all services offered and vice-versa due to siloed operations and the nature of deep-rooted, legacy infrastructure. Similarly, concepts such as Open Banking have only been enabled in a limited fashion in a few countries globally thus far and are only starting to emerge in Canada.

What’s Next?

Legacy infrastructure and experiences are crippling innovation in wealth management and many of the barriers above have thus far prevented embedded wealth from becoming a reality. However, that is changing.

Policy makers and regulators have realized that in order for their respective domestic financial services industries to remain competitive, innovation has to be supported, not prevented, and is key in driving future state growth and stability of the market. Many policy makers and regulators in global markets are now working hand-in-hand with fintechs and are encouraging the use of technology as an enabler of the market.  

Consumer demands in wealth management in particular are shifting at a dramatic pace, as investors are demanding more value. Until now, wealth management has seen significantly less innovation than other segments of financial services. But, in the same way that the original version of Facebook would look incredibly dated today, the legacy experience in wealth has become ever more obvious. This is prompting many incumbents to reevaluate their positions of “maintain the status quo at all cost”. 

The key benefits for consumers of embedded wealth are undeniable. Tech has enabled institutions across industries to meet customer needs in a much more proactive and data driven way. The same concept applies to wealth management and ancillary services. Consumer behaviour drives adaptive, relevant, and personalized wealth services by reducing friction resulting from channel switching. By being able to deliver the right wealth product or service to consumers at the right time and via the channel of their choice, consumer experience dramatically improves. 

Embedded wealth has the potential to be highly accretive to many businesses. By introducing a new service to an existing user base, platforms can potentially gain high attach rates and better customer retention with little or no additional customer acquisition cost. As companies are starting to rebundle financial services, embedded wealth can significantly contribute to an improved Lifetime Value/Customer Acquisition Cost ratio, especially due to the sticky nature of assets held.

Delivery Model

Embedded wealth management consists of both technology delivery and financial product/service delivery. Enterprises can utilize a Wealth-as-a-Service (WaaS) model to deliver end-to-end fulfillment across multiple channels. The enterprise simply integrates an API into their front-end mobile and web applications and the full wealth program is managed by the embedded wealth provider. 

The enterprise client can also work with the embedded wealth provider to experiment  with ways to use its other services and products to create a more unified experience for the end user; e.g. bundling, householding, subscriptions, etc. It can also use data from its other product lines to inform risk tolerance as well as tailor portfolio construction to consumer preferences.

There are multiple use cases where embedded wealth can be a gamechanger: 

  1. Retail banks and credit unions focused on modernizing legacy experiences, increasing share of wallet, and maintaining competitive pace with new entrants.     
  2. Fintechs and challenger banks looking to rapidly increase digital product offerings to include wealth and investments, without the inhouse expertise or resources to launch these programs.  
  3. Asset and wealth managers wanting to diversify their customer acquisition channels, service new customer segments (e.g. mass affluent), digitize client interaction, and reduce manual administrative hurdles.      
  4. Insurance providers leveraging their data and customer insights, helping them build more goals based financial planning programs. 
  5. Benefits and payroll providers supercharging their financial wellness offering, and embedding investing and savings into unique consumer journeys.    

Conclusion

Embedded wealth is a global multi-trillion dollar opportunity. 

As disruptors are starting to rebundle financial services, making them more competitive with traditional firms, wealth management is the next evolution of that trend. 

In response, incumbents are increasingly investing in modernizing their wealth management delivery. Often they are finding they are lacking the in-house capabilities and are therefore looking to external partners for them. Embedded wealth management can power both traditional and non-traditional market participants in delivering better wealth management to consumers. Recent changes in historical barriers to wealth management innovation and shifting consumer demands have created tailwinds for this greenfield opportunity to go mainstream. 

The beauty of this space is that everyone can win; incumbents, disruptors, and consumers alike. 

If you want to learn more about how you could supercharge your wealth delivery, reach out to us at partnerships@onevest.com.