A $3.2 Trillion Market Opportunity for Female-focused Fintech

Globally, women remain underserved and underrepresented when it comes to financial inclusion. And it is everyone’s loss: if women invested at the same rate as men, the global fund management industry might have had a staggering $3.2 trillion in additional cash to allocate in 2021. Including women in our financial systems could be potentially game-changing for the capital markets, not just in terms of increasing invested assets but by improving the manner in which investments are made and managed.

This article takes a look at the following aspects:

• The three gender gaps which have created a need for women to change how they approach personal finance.
• Industry conditions that have led to an uptick in female-focused fintechs.
• The key drivers and challenges that explain why now is the right time to develop fintech solutions focusing on women.
• A market map of major players in this space along with the funding environment.

In recent years, this issue has gained more attention, as women feel more empowered to handle their own finances. Yet, we are nowhere close to the level of financial inclusion our society should see in the 21st century.

So what is holding women back from attaining the same level of economic participation and financial inclusion as men?

The Three types of Gender Gaps

While the Gender Pay Gap is widely discussed and debated, it is not solely responsible for the financial inequality between genders. In reality, there are three types of financial Gender Gaps:

1. The Gender Pay Gap
2. The Gender Investment Gap
3. The Gender Retirement / Pension Gap

The three Gender Gaps are intricately linked. The Gender Wage Gap and the Gender Investment Gap together feed into the Gender Retirement Gap, forcing women to spend their retirement in poverty.

The Gender Pay Gap: The Gender Gap is more complex than just a difference in pay scale for the same job. It is, instead, driven by a myriad of forces which include, but are not limited to:

• The role of women as caregivers in our society: Women are traditionally seen as the primary caregivers in families. As a result, women are often forced to take career breaks due to their responsibilities at home, leading to pay gaps, part-time employment, and delayed promotions.
• Delayed promotions: Delayed promotions further widen the Gender Pay Gap: a single delayed promotion results in a lifelong setback in terms of raises, with each delayed promotion leading to further widening of the Gender Pay Gap.
• Hiring and promotional biases: Around the world, finding a job is much tougher for women than it is for men. Biases towards women often revolve around concerns about motherhood and familial situations. Various studies show that, amongst candidates with similar resumes, male candidates are more likely to be considered “hirable”. Read more about it here and here.

The financial implications of Gender Pay Gap can sometimes be lost in the nuanced arguments surrounding the subject. Yet, when we defer to cold hard numbers, the effects of this gap can be chilling. By the end of her career, the gender pay gap would cost a full-time working woman $417,400 of income, which results in a loss of $1.6 Million at retirement, assuming a 6% annual rate of return, and career duration of ~40 years (i.e. from 25 years to 65 years of age).

Moreover, the Wage Pay Gap is not uniform across women but affects each social group differently. For women of color, the situation is bleaker. For example, in the US, the gender pay gap could cost a Black woman $3.8 Million at retirement. The stakes are even higher for Hispanic women, costing each of them $4.5 Million in retirement savings.

The Gender Investment Gap

It may be tempting to simplify the Gender Investment Gap by simply connecting it to the Gender Pay Gap. While the Pay Gap definitely plays a role here, the Investment Gap is way more nuanced due to the cultural and historical backdrop of female finances.

• Cultural connotations: Over time, our society has established a strong narrative that women are not properly equipped to handle finances through statements like, “Women do not bother with financial decisions,” “Women are too risk-averse to invest”’, or “Women are bad with money”.
• Lower investable income: women tend to have a smaller amount of disposable income to invest due to factors such as the Gender Pay Gap, career breaks, personal situation, delayed promotions, and others. Capital.com found that men, in general, allocate larger sums of money towards savings and investments than women. As per the study, while 27% of females deposited more than $1,000, some 41% of males did the same.
• Historical preference for liquidity: women have an illustrated preference to keep their savings in cash, with 71% of women keeping their wealth in cash or in savings accounts. In comparison, men keep only 60% of their savings in cash. This is clearly a loss-making strategy since interest rates were as low as 0.1%, or even negative in the recent past, whereas the S&P 500 gave an average return of 7.45% from 2001 to 2020 (5.3% when adjusted for inflation).
• Delay in initial investments: women also start investing much later in their careers than men. According to Forbes, only half of millennial women have started investing for retirement, compared to 61% of men. This difference becomes crucial when we consider the fact that one of the critical aspects of investing is compound interest, which rewards those who invest early over a long period of time. Thus, women lose wealth on a compounding basis by delaying investment timelines.
• Lack of confidence: according to a research report by BNY Mellon, only 1 in 10 women globally feel that they fully understand investing, while just 28% of women felt confident about investing their money. An eye-watering 45% of women viewed the stock market as too risky for them.

Despite these roadblocks, it is absolutely crucial for women to understand the importance of planning and saving for retirement as early as possible.

The Gender Retirement / Pension Gap

As per World Economic Forum’s 2017 paper, “We’ll live to 100 — how can we afford it?”, the retirement balances of women globally are typically 30% to 40% lower than those of men. In 2015, the Gender Retirement Gap stood at ~$70 trillion. By 2050, this number will reach ~$400 trillion, growing at a CAGR of 5%. This means that the Gender Retirement Gap grows every day across the globe, at a frighteningly fast pace of $28 billion EVERY DAY!

Women have smaller funds for retirement than men do but live 4 to 8 years longer on average. As medical science advances, we expect that the lifespan of the current youth will be longer than the current expected life duration. Thus, smaller corpuses will have to be stretched over longer lifetimes, leaving women financially weaker after retirement.

Yet, studies show that most women are unaware that the Gender Retirement Gap exists, leading them to underestimate the effect of this gap on their ability to finance their own retirement. But the Gender Pension Gap is, in fact, a very serious issue.

In order to retire in a financially secure manner, women need to start investing as early as possible in their lives. While it is understandable that, at the young age of 21, retirement financing is the last thing on anyone’s mind, it is never too early to plan for your retirement. This is especially true for women, as studies show that the Gender Retirement Gap starts building right from the start of women’s careers. In fact, by the time women reach the age group of 30–39 years, the gap is already at 18%, reaching 35% for the age group of 50–54-year-old women.

The Gender Retirement Gap has different implications for women in different situations. A woman’s personal situation plays a major role in her retirement planning. Retiring as a single woman as opposed to being married creates financial disadvantages for single women, since single women have more difficulties balancing investment requirements against cost of living from their wages. Additionally, the number of children a single woman has also affects her retirement corpus, with each child costing her more in retirement savings.

The Gender Retirement Gap can also be seen in the German statutory pension system, with men receiving an average of €1,266 in statutory pension per month and women only €792, i.e., the monthly pension for German women, on average, is 62.5% of that for men.

As a result of the gender pension gap, approximately 1/3 more women spend their retirement in poverty in European countries as compared to the men (16% vs 12%), with widows,Black & Latina women typically experiencing higher rates of poverty.

The Gender Retirement Gap across Europe.

How Do We Solve the Gender Retirement Gap

The Pay Gap is so nuanced and complex that it would need a combination of multiple tools including legislations, regulations, scrutiny, stronger corporate policies, and a general change in the social mindset. We, as a society, have made slow but definite progress in this area over the last few decades, and as awareness grows among the younger generation, we will continue to close this gap.

But there is something we can do to promote financial gender equality. One solution would be to find solutions that address the Gender Retirement Gap. Just like the Pay Gap, solving the Gender Retirement Gap would also need collective effort. A great start would be building more equitable, policy-driven systems that even out the financial inequalities that affect women.

Policy changes can help women tremendously. The current pension systems across the world are built in such a way that they punish women. The German pension system, for example, calculates benefits based on monthly earnings. This implies that pension payouts often depend on how long a person works and how much he/she earns during this time. Similarly, in the US, the Social Security formula is based on an individual’s 35 highest earning years. Since most women often have fewer working years, usually with a salary much lower than the male counterparts, they often collect less pension benefits than men. Thus, to address the Gender Retirement Gap, countries must move towards universal pension policies that could support women during career breaks and part-time work.

But policy changes are just one piece of the puzzle, and it cannot compensate for the gains that would be reaped from women taking the responsibility of retirement planning and investing.

Educating women on the importance of retirement planning and investing is important, and yet, this is still not a complete solution, as resolving ignorance about personal finances is not enough. When women grasp the importance of investment and savings, there is one more roadblock they must face: lack of access to gender-relevant and unbiased financial advice.

Understanding how Women Invest

It makes more sense why women feel uncomfortable with investments and wealth advisory services when we understand that men and women invest very differently. When financial products are built by men, they tend to tick more boxes for the male clientele than the female clientele. Thus, the fundamental differences in how women invest have mostly been left unaddressed by the industry. And it is quite difficult for women to find investment products which match their own investment goals and preferences. In fact, women invest in a manner very distinct from that of men, such as:

• Women have a strong ESG-focus: Women are more likely than men to use investments to support social and environmental causes. Researchers estimate that $1.87 trillion of the $3.22 trillion currently missing from the market would have been invested in ESG investments, had women invested at the same rate as men.
• Women are risk-averse: Women are indeed risk-averse, but the negative connotations to this characteristic are unearned. Instead, being risk-averse could actually make women better investors, as they tend to spend more time researching their investment choices and are more likely to take on appropriate levels of investment risk as compared to men. Data shows that when women do participate in financial markets, they tend to be more disciplined and circumspect than men when it comes to investing and trading.
• Women are long-term investors: Data shows that women tend to favor long-term stability over short-term gains. In fact, N26’s research found that amongst its female users, the top three reasons for investing were “Building financial security for the family”, “Growing money in the long-term”, and “Saving for retirement”, all of which are long-term investment goals.
• Women have a stable approach to investment decisions: Women are more prone to have appropriate age-based asset allocations, achieve proper diversificationand tend to stay calmer than male investors in down markets. Due to their risk-averse nature, women intuitively follow prescribed “best practices” in their investments. On the other hand, data shows that men tend to trade more on whims and “hot tips”, leading to weaker portfolios.
• Women focus on risk-management rather than pure returns: An analysis by Capital.com of the behavior of around 2,000 traders for 18 months between February 2020 to July 2021, showed that female investors use stop-losses more often than men, with 43% of female traders using a stop-loss in more than half of their trades vs a corresponding 35% of men. A stop-loss is often used as a risk management tool to limit losses, exhibiting the tendency of women to lean more towards conscious risk management as compared to men.

Thus, statements such as “Women make bad investors” have no foothold in reality and have been proven wrong by numerous studies. In fact, should women start to invest towards building their pension corpus, the chances are that they would be well-equipped to build strong long-term portfolios which could work towards bridging the Gender Pension Gap and allow women to retire without slipping below the poverty line.

The (not so) Niche Female Finance Market

The Wall Street’s symbol, the Charging Bull, is an overpowering signal of the industry’s masculinity.

When it comes to personal finances, gender bias is something that almost all women must face. Historically, the financial industry and its products have been built by men and for men. In finance, the male perspective has become the default. The “neutral” financial products are often designed with men’s needs in mind — and unintentionally put women off. As Sallie Krawcheck, founder of Ellevest, points out, even the Charging Bull statue outside the New York Stock Exchange is “an overpowering signal of masculinity”. It is, thus, unsurprising that an industry designed for the wealthy white male population seems unable to address its female clientele. As Caroline Criado Perez put it in her book, “Invisible Women”.

The result of a deeply male-dominated culture is that the male experience, the male perspective, has come to be seen as universal, while the female experience — that of half the global population — is still seen as niche.”

The USA is an excellent example of why women are inherently uncomfortable in the world of finance. The inclination of the traditional American financial industry to focus heavily on the male perspective is very evident from the statistics of the industry:

• 86% of all financial advisors in the US are men.
• 98% of the $12.6 trillion mutual fund market in the US is under male management.
• 98.7% of the $69 trillion managed by the U.S. asset management industry is managed by firms owned by white men.
• 86% of professional asset managers say their default investment customer is a man.
• 73% of professional asset managers say their firm’s investment products are primarily aimed at men.

The media has not helped women’s cause either, as it continues to treat money as a “man’s issue”. Women regularly receive wildly different information and messages about personal finances than men. Mainstream media pushes this point further home by pushing the same narrative of that women are not equipped to handle money. While 73% of financial articles targeting men focused on investing, 90% of the financial articles targeting women focused on spending less.

Do Current Fintech Players Close the Gender Gap?

Similar to the traditional financial industry, fintech firms have not fared much better with female clientele. The female user numbers across the top neo-brokerage startups narrates the story of how, even as investing became more accessible, women were largely left behind.

Take the case of Robinhood: between 2020 and 2021, the number of female users on the platform quadrupled. Yet, women only form 30% of their total user base. That means, even after a 4X growth in female users, Robinhood is still largely male-dominated, with 70% users being male.

It’s a similar story for Scalable Capital. When the startup launched in 2020, only 7% of its investors were female. Although the number has increased significantly, as of today, female investors account for only a quarter (24%) of its total user base.

Trade Republic’s 2022 metrics are even more discouraging, with 84% of the 200,000 users surveyed being men.

This lack of diversity in the user base is strongly connected to the lack of diversity within fintech talent running these startups. Only 29% of employees in fintech businesses are women, while less than 5% of them are CEOs. Worse yet, only 1.5% of fintechs globally, (i.e., 16 companies), have female-only founders. In fact, fintech firms tend to have worse gender representation than even the traditional financial services industry. Naturally, this gender gap in fintech translates into a gender gap in users, with only 21% of women using fintech products.

With low female representation in building these platforms, fintech startups have failed to connect meaningfully with female investors. An excellent example of this is Revolut’s 2021 disappointing and condescending menstruation campaign, titled “Invest in Yourself”. As part of the campaign, Revolut promised to cover the costs of menstrual care products for 12 months for current and future users. This led to widespread criticism on social media, as women called out the startup for reinstating outdated stereotypes while trivializing the very real problem a major chunk of global women face w.r.t. access to menstruation products.

Female-focused Finance is a Rapidly Growing Market

Although, historically, women have mostly steered away from investing and the overall financial industry, this is changing rapidly. A big catalyst for this change in women’s perspective was the Covid-19 pandemic.

A study by eToro found that 42% of their female investors started investing in 2020 and 2021. Moreover, half of them aimed to become long-term investors with an investment horizon of 6 years or more.

Similarly, between 2020 and 2022, BUX noticed a marked increase in investments and financial planning amongst its female clientele in Europe. In just one year, BUX’s female user base increased by 200% and their AUM increased by more than 3X since 2020.

With a third of the world’s wealth under their control, women have become a sizable economic force. Overall, growth in women’s wealth is expected to outpace global wealth growth over the next several years.

The pandemic disproportionately affected women financially, forcing them out of the labor market as primary care responsibilities at home suddenly ballooned. Thus, women were forced to think critically about how they manage their finances. With an increasing need to diversify income streams and shore up emergency savings, women became more interested in investing.

This increased interest has led to women demanding more financial products and services that cater to their specific interests. An increased awareness about financial independence combined with the lack of suitable products has created a massive wave of distinct drivers for increased growth in the female-focused financial industry.

1. Higher financial awareness among millennial women: 70% said they take the lead in all financial decisions, compared with just 40% of female baby boomers. Moreover, 66% of married millennial women remain involved in financial decisions vs. a corresponding 29% of female baby boomers. As per research, gender-based differences in investor behavior and attitudes diminish as generations get younger, with millennial men and women sharing similar views.
2. Specific need for tailored financial services: Financial institutions and wealth managers have focused increasingly on providing better service to female customers. However, many women still find their interactions with financial professionals to be condescending and uninformed about the specificities of how women invest. Moreover, institutions treat “women” as a homogenous group, missing out on the vastly different needs and preferences of different female clients. 30% of women report that their relationship manager spoke to them differently because of their gender. In comparison, 64% felt that their bank or wealth management provider needs to improve its value proposition for women. Firms that pay attention to women’s specific needs and preferences and tailor their service accordingly can capture a large share of this important and growing market.
   Interestingly, as per a McKinsey report, 70% of women change financial advisors within a year of their partner dying.
3. Growth in female accumulated wealth, paired with increased awareness of the importance of investing amongst Millennials:
   From 2016 to 2019, women accumulated wealth at a CAGR of 6.1%. Over the next four years, that rate will accelerate to 7.2%. Women are adding $5 trillion to the wealth pool globally every year.
   Women have also started investing at a younger age, with consumers aged 18 to 34, making up 21% of new-to-market ETF investors. Five years ago, the average age of a woman investing in an ETF for the first time was 46. However, among women who began investing less than 12 months ago, the average age was 37.
4. Covid-19-induced influx of female investors: In 2020, Fidelity saw a 10% increase in female customers, as opposed to 7% increase in male customers. Meanwhile, Robinhood saw the number of women on its platform quadruple in February versus the same month last year.
   The situation in Germany is no different. As per an N26 report, 70% of German women plan to invest 54% more in 2022 than they currently invest.

The female-focused fintech market is ripe for disruption, as cliched as it sounds. And a few players are at the forefront of this trend.

An Overview of the Market

The Fintech market catering to women is still sparse, leaving large untapped market opportunities for new entrants. A study of the competitive landscape leads to interesting observations:

• The most popular investment is that educating women on finances and investments can solve gender inequality by enabling women to take financial decisions with more confidence.
• The European ecosystem has higher levels of activities than the USA or the Rest of the World, based on the number of start-ups active in this region.
• Size of funding rounds is smaller than that in the USA.
• The startups offering investment platforms or solutions mostly offer pre-constructed portfolios consisting of ETFs or a mix of stocks and bonds. In some cases, users have the flexibility to choose the level of risk they are willing to take on, and in even fewer cases, the flexibility to choose individual investments rather than an offered pre-selected composition.
• Most investment platforms charge a flat management fee in the range of 30 to 50 basis points on assets invested. Very few players offer subscription models.
• Most players focus on offering investments opportunities that are ESG or impact-focused.

For any start-ups or VCs not included here, please get in touch via LinkedIn.

Till date, majority of the funding raised by female-focused fintech startups is mostly at seed and early stages. The largest amount of funding raised by a single startup to date is by Ellevest (USA) with $74M total funding raised, and a Series B of $53M. Thus, 90% of the $82M venture capital invested in this niche has been invested in a single startup: Ellevest. Interestingly, of all the startups across all geographies, Ellevest is the only player who has reached Series B.

The VCs investing in this area include:

Market Overview Data Source: https://docs.google.com/spreadsheets/d/1D9plx9QvE9dhV0F7Gtm0i012ZV2HLp7_uFKB9TJA0Tc/edit#gid=0

Implications of Lack of Gender Diversity for Female-focused Fintech

The three Gender Gaps are intricately interconnected. And solving them individually in a silo would be insufficient to yield the results we want to see.

But there are enormous benefits to be gained from improving the financial inclusion of women.

• As more women start investing, more capital will flow into ESG investment and development. This can create a strong push for social issues which plague our current society such as social inequality and climate change.
• As women tend to be more balanced as investors, involving them in our markets could create more efficient and stable financial markets.
• As women attain financial stability and equality, closing the Gender Investment Gap would enhance gender equality in multiple ways.

To bridge the Retirement and Investment Gap, we need to build a complete ecosystem of education, investment products, advisory, and wealth management solutions catering to the specific needs of distinct subsegments of female customers, instead of considering them as a single group. The figures involved are staggering, and a market size of $3.22 trillion, which will just grow further in the future, is indeed mouth-watering for investors, entrepreneurs, and other stakeholders alike.

However, investment in this massive market opportunity has largely suffered due to a low level of female representation amongst fintech entrepreneurs as well as investors at the decision-making levels. If there are no women at the table, who would notice the problems they face? How could a male entrepreneur solve a problem that does not affect him? Why would a male investor put millions into a solution he does not understand and would never need?

It is undeniable that start-ups have a massive opportunity here: through behavioural and cultural changes, education, and a confidence boost, fintech firms can get women to start participating in the financial markets on an extensive scale. On the other side, women are also becoming increasingly aware of such gaps, leading to increased importance being placed on retirement planning and investing for the future. These factors create an incredible market opportunity for founders and investors who can find the right mix of education, support, community, and investment options to engage the specific style in which women invest.

_________________________________________________________________

If you would like to get in touch about this article, please reach out via LinkedIn.