The proliferation of tech-enabled financial services has led to an explosion of offerings for consumers looking to get their financial lives in order. But if you think there are already too many budget apps or lending platforms, get ready for more.
According to a report from research firm Arizton, the U.S. financial wellness industry—the category that these services fall into—is expected to grow at a compound annual growth rate of 13% over the next five years.
Broadly speaking, “financial wellness” is broken down into a few different categories, financial planning, debt management, and financial education being the main segments. And it’s that financial planning subcategory, which includes budget and investment apps, that has really grown to dominate the market.
Driving this growth is the massive inflow of capital investment. According to Mike Durbin, head of Fidelity Institutional, there has been $11 billion of venture capital invested in financial planning and wealth management alone in 2019, with the average deal size having grown by 50% in the last 10 years. And to date, there are more than 50 private equity firms invested in the space.
This investment in financial wellness has not just inflated valuations—there are currently 12 fintech startups valued at over $1 billion, including financial wellness firms like Credit Karma, Chime, and Nubank—it has enabled companies to go out and chase as many users as possible without regard for near-term profitability. As of July, there were over 20 fintech startups that had exceeded 1 million customer accounts, according to CB Insights, including Acorns, Robinhood, and SoFi, among others.
“Fintech companies are using technology to reinvent an extremely outdated industry,” said Phill Rosen, Founder & CEO Even Financial, a fintech firm that offers APIs to financial services companies and acts as an intermediary between many financial institutions. “By targeting margins and fee-based models, fintech startups have been able to pick off customers from financial institutions. As a result, financial institutions have no choice but to respond with more consumer friendly models.”
Not to be dismissed, is the fact that many of these companies operate on razor-thin margins as they grow, though a report from S&P Global warned that may soon begin to change.
According to the report, much of the growth of this industry can be explained in part by the long period of economic expansion we’ve been in. The ability of these companies to keep growing during an economic downturn “may depend not only on the strength of their own algorithms but also on their choice of financial institution partners with reliable funding, well-established brands and experience navigating changing economic circumstances.”
As Rosen sees it, partnerships in the financial wellness space are going to increase as companies target more niche customers. This will lead to some consolidation in the space, but that will ultimately bo good for the consumer.
“As those partnerships also increase, banks will begin to outsource their non-essential products to focus their resources on their core offerings. In time, we’ll see the fintech industry’s offerings for financial wellness become more granular, more consolidated, and the consumer will benefit immensely from this transition.”
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