Fintech Growth

As we highlighted in our last post, fintech, or financial technology, is revolutionizing the delivery of financial services by integrating cutting-edge technology with finance. Despite a decline in activity in 2023, Q1 of 2024 witnessed a resurgence in the number of deals, returning to pre-pandemic levels, with seed-stage deals remaining remarkably stable, indicating sustained interest in early-stage innovation. Consequently, several opportunities in fintech still need to be tapped. McKinsey projects that revenues in the fintech industry will grow almost three times faster than those in the traditional banking sector between 2022 and 2028 (McKinsey, 2023).

At Angeles Ventures, we are focused on high-growth fintech sectors to identify the most promising market opportunities and target outsized returns for our limited partners.

Sectors of Interest: High Growth Segments

To assess growth potential and prioritize fintech sectors, we combined quantitative growth data with qualitative insights from our network of financial services experts, including experienced senior executives and board members of leading financial institutions. Based on this analysis, we ranked fintech sectors by funding, growth, and overall market impact as perceived by our community.

Source: McKinsey, Fintechs: A New Paradigm of Growth, 2023. EY, AI report, 2024. Angeles Ventures, Fintech Survey to Angeles Experts, 2024.

The graph above shows that many of the sectors with substantial funding in recent years exhibit varying growth trajectories. At Angeles Ventures, we are concentrating our efforts on the upper echelon, highlighted in yellow. The sector with the highest growth is Artificial Intelligence with 63% and a market impact score of 9, demonstrating its transformative role in the financial sector. Embedded Finance follows with 36% growth and a score of 8, emphasizing its integration of financial services across platforms. Additionally, SME and Corporate Services, Payments, and Wealth Management sectors also signal rapid expansion.

Our Picks

Artificial intelligence, generative AI, and machine learning are revolutionizing the financial sector at an unprecedented pace, transforming various aspects of the industry. The benefits are numerous, including enhanced customer experience, increased operational efficiency, and more effective risk management. This technological shift is crucial for fintechs as they strive to innovate and remain competitive. According to Grand View Research, the global Artificial Intelligence in fintech market is projected to achieve a 16.5% CAGR from 2022 to 2030. By leveraging AI, fintechs can offer personalized services, streamline operations, and better predict and mitigate risks, thereby driving growth and fostering a more resilient financial ecosystem.

Embedded Finance integrates financial services into financial and non-financial platforms, creating innovative business models and addressing challenges with legacy systems. Businesses benefit from off-the-shelf solutions for payments, open banking, and core banking technology provided by digital natives, among others. According to EY, global embedded finance is expected to grow from $246 billion in 2021 to $606 billion by 2025, achieving 25.3% CAGR. This trend enables companies to seamlessly offer financial services such as bank accounts, debit cards, and lending through robust APIs and technology. As embedded finance expands, it enhances business value creation, boosts customer engagement and loyalty, and drives revenue growth.

SMEs, comprising ~90% of businesses and ~50% of global employment, have historically been underserved by traditional financial services. Fintech firms are effectively addressing these needs by offering tools that integrate with existing systems to enhance productivity while maintaining low costs. According to Market to Markets, the automation market for CFO functions and accounts receivable is expected to grow at a 14.2% CAGR from 2022 to 2027. This automation will enable finance leaders to optimize processes, improve accuracy, and focus on strategic initiatives, which will ultimately transform financial management and drive significant organizational efficiencies.

What is next?

Fintechs are poised to reshape the financial services industry with innovative business models and strategic alliances, particularly through advancements in AI, Embedded Finance, and SME and Corporate Services. The next series of posts will delve deeper into these segments, exploring the trends and startups we believe will continue to transform the financial industry.

Authors: Angeles Team

Francisco Mariscal
Diego Torres
Manuel Rivera

As we celebrate one year of delving into the Hispanic and Latino startup ecosystem at #AngelesVentures, we are delighted to share our insights on market trends, disruption, and investment activity with the Angeles community.

We will start with the Fintech sector, where we have been active investors and which now comprises half of our portfolio. Each month, we will post one Medium article discussing the fintech businesses that captivate our interest and how they align with Angeles’ rigorous investment criteria.

This first article will offer a brief history of the fintech sector and highlight key market trends we have examined recently.

We hope you find these reflections valuable!

Fintech 101

Fintech, or financial technology, revolutionizes the delivery of financial services by integrating cutting-edge technology with finance. It encompasses a wide range of innovations, including mobile banking, digital payments, blockchain, and cryptocurrencies, all oriented toward making financial services more accessible, efficient, and inclusive.

From a broad perspective, fintech’s origins can be traced back to the late 19th century with advancements like the telegraph and transatlantic cable. The late 20th century introduced ATMs, electronic trading, and early online banking. A more recent pivotal event was the 2008 financial crisis, which catalyzed fintech innovation further, as it exposed substantial flaws in the traditional financial system and highlighted the need for more transparent, efficient, and customer-centric financial services. This led to a new era within the fintech ecosystem, with startups driving innovation and delivering value digital payments, lending, wealthtech, insurtech, and blockchain technology, among many others.

To remain at the forefront of innovation and meet evolving customer demand, venture capital firms and major financial institutions are making substantial investments in fintech startups, driving rapid growth and advancements in the sector. In fact, in recent years, fintech investments reached a peak of $144 billion with 6,392 deals in 2021. Although we observed a decline to $80 billion with 6,302 deals in 2022 and $40 billion with 3,973 deals in 2023, Q1 of 2024, saw a resurgence with 904 deals, returning to pre-pandemic levels. Seed-stage deals have remained stable, reflecting sustained interest in early-stage innovation. At Angeles Ventures, we are optimistic that this trend will persist in the coming quarters and years, sustaining accretive transformation and generating attractive investment opportunities.

Source: CB Insights, 2024

Regarding the latest trends, recent advancements in artificial intelligence (AI) and machine learning are transforming various aspects of financial services, from personalized banking experiences and robo-advisors to fraud detection, risk management, and data analytics. Additionally, decentralized finance (DeFi) and blockchain technology will continue to disrupt traditional financial systems over the long term.

In summary, fintech has evolved significantly, becoming a crucial component of the financial ecosystem. It is driven by innovative business models, substantial investment, and technological advancements, particularly in AI and blockchain. We expect fintech to continue enhancing financial inclusion and transforming financial services. The collaboration between traditional institutions and fintech innovators will undoubtedly shape the future of finance.

Firstly, I would like to express my sincere thanks to everyone who took the time to provide me with the names of Wealthtech companies that are leveraging AI. Your assistance has been immensely valuable, and I am learning a lot through my research and conversations with the founders/team members of these startups.

Although I am still in the early stages of building this pipeline, I have already identified four primary areas where AI is revolutionizing Wealthtech, that align with my thesis:

1. Financial advice and personalization: This category focuses on utilizing AI to provide tailored financial advice and personalized services to clients. It involves leveraging algorithms and machine learning techniques to analyze individual financial data, preferences, and goals. Their goal is to offer customized recommendations and solutions for wealth management, retirement planning, investment strategies, and more. Some startups identified in this space include Tifin, Vise, Abaka, Range, Mdotm, Responsive.ai, Multiply.ai, Global Predictions, Parthean, Alphatena, and Pefin.

2. AI investing tools: This category entails the development of AI-powered tools and platforms that assist investors in making informed investment decisions. These tools leverage AI algorithms to analyze vast amounts of financial data, market trends, and indicators to enhance investment strategies and decision-making processes. They offer features like portfolio optimization, risk assessment, and real-time market monitoring, among others. Some startups identified in this space include Alphasense, BoostedAI, Toggle.ai, Cyndx, OptionsAI, and Danelfin.

3. AI investing: This category centers around AI-driven investment strategies and solutions. Startups utilize AI algorithms to manage investment portfolios autonomously or semi-autonomously. These algorithms analyze market data, historical trends, and other relevant factors to make investment decisions, aiming to deliver optimized returns and improve the Sharpe ratio. Some companies identified in this space include iFlip and AIEQ ETFs.

4. Client engagement: This category emphasizes enhancing client interactions and engagement within the wealth management industry using AI technologies. Startups are developing AI-powered virtual assistants and chatbots that offer personalized and interactive experiences for clients. These virtual assistants can handle various client queries, and provide information on account balances, portfolio performance, and personalized financial guidance. Startups identified in this space include Amelia and Hearsey System.

I will continue my investigations and discussions with founders in the field to deepen my understanding, gain more insights into how Wealthtech will be disrupted, and gather insightful takeaways to share.

If there are any other takeaways, verticals, or startups that you believe should be considered for this pipeline, please let me know.

If you are a founder building in Wealthtech, please don’t hesitate to reach out. Additionally, if you are aware of any other AI startups operating in the Wealthtech space, please comment.

Let’s build together this pipeline of Wealthtech startups leveraging AI:
https://docsend.com/view/wheeiujbjzrdy2n3
(Did you find any mistake? Please let me know 😊)

To begin with, I would like to express my gratitude to everyone who is helping me to further develop my thesis and that has commented on my last LinkedIn post. I am grateful for the positive feedback :).

After researching Wealthtech and identifying gaps in the market through the Market Map we built together last time, the next step is to identify opportunities where novel technologies can disrupt the industry in the future.

Through conversations with industry experts, I am convinced that the future of Wealthtech lies in the integration of AI to improve returns, liquidity, and the distribution of Wealthtech products and advice. In this post, I will explain high-level new solutions that can fill the gaps in the market for wealth advice, wealth offering, and types of products.

One of the key gaps where AI will have a significant impact is in automated wealth advice. By using personalized and optimized investment strategies, clients will receive tailored advice based on their risk-return profile and investment term. AI tools and copilots for wealth advisors, AI-powered direct advice, and D2C financial planning tools will make this possible.

Another area where AI will be leveraged is in automated wealth offering. This will enable just-in-time personalized wealth offerings to be seamlessly integrated into clients’ preferred online/offline platforms, web pages, or apps. Wealthtech solutions and APIs will be embedded in these platforms, along with automated wealth managers that use AI to optimize investments.

Finally, new wealth products are expected to emerge in the industry, including alternative investing platforms, interval funds, social investing, tokenization, fractionalized assets, and AI-powered ETFs. These products will enable clients to access new opportunities and build more efficient investment decisions and tax structures.

In the following weeks, I will validate this thesis by finding examples of startups disrupting Wealthtech and filling the aforementioned gaps. If you know of any Wealthtech startups leveraging AI, please share your insights in the comments below.

Firstly, I would like to express my gratitude to everyone who commented on my last LinkedIn post and is helping me to further develop my thesis. I am flattered by all the positive feedback and support that I have received so far.

Following the advice of Cowboy Ventures (Cowboy Ventures, 2020), doing an investment thesis and becoming an expert in any industry requires building a market map. A market map is e process of using a graph to plot competitors and their products to understand trends and spot a gap in the market (BBC, 2023). Therefore, in this post, I will explain how I built my market map (the most updated version is available in this link) and my key takeaways.

How to Build a Market Map: Steps to Follow

Below you will find the 3 steps that I followed to build the Wealthtech market map

1. Segment the industry

A market map involves segmenting the market based on use cases, verticals, capabilities, or any relevant aspect of the specific industry. The easiest way to begin the segmentation process is to use the framework defined by a market leader or use a framework previously used in the investment thesis. There are many types of segmentation that can be made, such as by type of customer (B2B/B2C), use cases, geographies, etc.

In my case, I will use the following framework by use case that we defined in the previous post: Wealth Offering, Wealth Advice, and Support.

Additionally, I will include an additional layer replicating the view of Windmill that states that there are two main categories in Wealthtech: those that leverage digital to deliver traditional wealth management services more effectively and those that expand the availability of wealth management services to wider social groups.

2. Step 2: Do a comprehensive list of startups

The second step is to do research to find the market leaders. I recommend leveraging the resources on the internet and other available market maps. I conducted my research analyzing the Wealthtech market maps of CB Insights (CB Insights, 2022), FT Partners (FT Partners, 2018), and Kitces (Kitces, 2023) that Max, Ignacio, and Jose shared with me in previous posts.

In my case, I did my analysis with the Wealthtech market map of (CB Insights, 2022), (FT Partners, 2018), and (Ktices, 2023) that Max, Ignacio, and Jose shared with me in previous posts.

3. Step 3: Define category leaders

The third step is to recognize what are the category leaders of each segment, given the novelty and market penetration of the solutions and the actual traction of startups. In my case, I used simple Powerpoint slides (slides 3–8) to track the traction and funding status of each solution.

Welthtech Market Map — Category Leaders

Building on this framework, I identified the following six categories of category leaders. However, it’s worth noting that this is not an exhaustive list, it is only for discussion purposes, and there may be other categories or category leaders that should be included (happy to hear which category and category leaders I should include 😊)

Category 1: Wealth Offering — Traditional Wealth Management Digitized

This category includes startups that offer direct investing, retirement products, and other traditional wealth management services through digital platforms. This is a crowded space with category leaders such as Acorns, eToro, Stash, Robinhood, and Webull, for direct investing, and Betterment, Forusall, Guideline, Human Interest, and Vestwell for retirement, among others.

Category 2: Wealth Offering — Wider Wealth Solutions

This category includes solutions that expand the availability of wealth management services to wider groups of people. It includes firms that offer robo-advisors like Betterment, Drivewealth, Sigfig, Sofi, and Wealthfront, among others. As well includes companies that offer access to alternative investments for both accredited and non-accredited investors, such as CAIS, iCapital, Moonfare, Republic, and Yieldstreet, among others. It’s important to notice that this category has a significant number of giant category leaders. However, I believe there is substantial space to grow given that in the US, mutual funds today account for ~$27T (ICI, 2022), while Alternative Investments and Robo Advisory only for $7T (Preqin, 2020) and $1T (Robo Advisors Pro, 2023), respectively.

Category 3: Wealth Advice — Traditional Wealth Management Digitalized

This category includes startups that offer portfolio management tools and other services to help financial advisors better serve their clients. Examples of companies in this category include Addepar, Investcloud, and Masstro, among others, which provide all-in-one portfolio management solutions. In addition, there are various solutions that digitize wealth advice core processes, such as lead generation startups like Harness Wealth, SmartAsset, and Zoe Financial. While this vertical is mostly saturated, there is still room for development in optimizing the workflow of advisors and integrating the different tools they use into a super platform/neo Wealthtech manager.

Category 4: Wealth Advice — Wider Wealth Solutions

This category includes companies that leverage new technologies, such as Artificial Intelligence, Big Data, and Open Banking, to provide automated and hyper-personalized advice and investments. Magnifi by Tifin and Vise are two companies that have been developing this technology and have created a massive interest in the ecosystem. Category leaders are also trying to offer automated and digital-first wealth planning for life and retirement, such as Facet Wealth and Trust & Will. Overall, this vertical is a blue ocean market where we can expect big disruptions to happen. For example, today, some Morgan Stanley are experimenting with Chat GPT to offer wider wealth solutions.

Category 5: Support Tools — Traditional Wealth Management Digitalized

This category includes all the digitized support tools that advisors and investors use to streamline their processes. Category leaders that provide data and visualization solutions include TradingView and YCharts. Additionally, there are leaders streamlining other processes, for example, RiainaBox and SmartRIA are digitizing compliance and KYC. This is a saturated space with high market penetration, especially in CRM, Reporting, Data, etc. (T3 Conference, 2022)

Category 6: Support Tools — Wider Wealth Solutions

This category includes companies that extend further the support tools for financial advisors and investors. A big area of disruption is ESG data and portfolio assessment. Market leaders include Clarity AI and Ethic. Additionally, there are leaders trying to help advisors and investors better qualify their risk levels such as Riskalyze and Stratifi. With the use of Artificial Intelligence and Open Banking, the different support tools are a white space to help further advisors and investors.

Takeaways

Overall, this Wealthtech map and its categories provide a valuable framework for understanding how the wealth management industry is being disrupted by startups and new companies. As the industry continues to evolve, it will be interesting to see how new startups emerge and leverage new technologies such as AI, Open Banking, and Crypto. The market map highlights that there is a lot of room for further development of automated and personalized wealth offerings and advice. With advancements in technology and the increasing demand for personalized financial solutions, it is an exciting time for the industry to innovate and grow.

Are there any other takeaways, verticals, or category leaders that I should consider for this market map?

Please feel free to comment and provide ideas for further inclusion in this analysis

Wealthtech At-A-Glance:

Wealthtech, short for wealth technology, refers to new tech-enabled business models, software, and hardware that aim to improve personal and professional ways of managing and investing wealth (Surf.dev, 2021). The main goal of Wealthtech is to make wealth management and investment more accessible, affordable, and transparent to customers. Wealthtech is relevant to the financial industry, given that it accounts for a market of $10 billion in 2022 and is growing at 25% (Market Reports World, 2023).

Using a similar layer framework to Charge VC (Charge.VC, 2021), Wealthtech offers a range of direct-to-consumer (D2C) offerings, including micro-investing, digital investing, retirement investing, and robo-investing. It also offers wealth advisory services, such as automated advisors, hybrid advice, tech-enabled advisors, and portfolio management solutions, among others. Additionally, Wealthtech offers support tools for either advisors or customers in their processes (Surf, 2021). Finally, there is an execution layer where investment products are traded.

Evolution of Wealthtech:

In any investment thesis, it is important to understand the industry's history to identify trends by understanding what has worked and what hasn’t.

In my opinion (which is debatable), the origin of Wealthtech can be traced back to 1993 with the invention of exchange-traded funds (ETFs). According to Windmill (Windmill, 2021), the origin of Wealthtech was in the early 1990s, when the first tech-enabled solutions to wealth management and investment processes emerged. During this period, financial engines, retirement planning, fund picking, and ETFs gained popularity.

After the crisis of 2008, the growth of Wealthtech was fueled by the launch of new technologies, such as smartphones, and the aftermath of the financial crisis. During this period, new platforms like Wealthfront and Betterment emerged, offering app-delivered services, digital brokers, and robo-advisors. However, some peer-to-peer (P2P) business models didn’t gain enough traction, and there was not enough regulation in place to structure new wealth business models.

From 2020 to today, Wealthtech is experiencing consolidation, with incumbents offering Wealthtech products through their own development and acquisitions (i.e., Nutmeg, Wealthfront). Some successful models during this period include wealth business models and wealth management for the broader masses.

The future of Wealthtech:

In my view, the future of Wealthtech will be characterized by new use cases and the proliferation of AI, with a focus on personalized investment portfolios and new asset classes. The proliferation of AI in Wealthtech will lead to the development of more sophisticated investment strategies and personalized investment recommendations. The CB Insights report highlights that AI-powered wealth management will become more prevalent, with algorithms improving investment recommendations and portfolio management (CB Insights, 2023).

Help me to continue building this thesis:

Do you agree with my view on Wealthtech? What other things have worked in Wealthtech, and what hasn’t? What are future trends that you are excited about?

About me:

Francisco is an MBA Candidate at Kellogg with diverse work experience in the fintech industry. He started his career in Investment Banking at Citigroup and later worked in a fintech startup as Chief of Staff, and he interned in 3 different venture funds, including almost a year with Citi Ventures’ Fintech team. During his time at Citi Ventures, Francisco participated in various deals and helped map diverse fintech verticals. He is now exploring what is next.

Fintech has transformed financial services and continues to disrupt fintech verticals. However, due to the impact of the recent economic turnaround and turbulence in the banking ecosystem, some of these verticals that were being disrupted are no longer relevant, at least in the short term. On one hand, interest rates and delinquency rates are high, making it difficult for startups to build lending business models. On the other hand, digital assets are suffering from the pressure of immediate profitability from investors. As a result, the focus has shifted to other areas of fintech that are showing significant potential for short-term growth and profitability. As Nigel Morris said on Thursday 4/30 in the FT Partners Video Conference: State of Fintech, fintech development will go back to the basics in the following years. , according to CB Insights, in Q4 2022 Wealthtech was already the second investment category in Fintech with 164 deals.

My hypothesis: Why Wealthtech?

Wealthtech is one area that will develop significantly over the next few years. Wealthtech refers to technology-driven solutions that aim to simplify and enhance wealth management and investment services. The transfer of $30 trillion in wealth from baby boomers to millennials over the next few decades (CNBC, 2018), coupled with new investment strategies to control and stabilize financial situations after this economic turnaround (Windmill Digital, 2022), presents a significant opportunity for Wealthtech. According to data from Refinitiv Lipper Data (Reuters, 2021), after the 2008 financial crisis, there was a profound change in investment strategy, and we expect something similar in the next few years.

Additionally, the consolidation of AI and the maturity of open banking will help streamline the processes of wealth offering and advisory. The development of new AI algorithms and the connection between financial institutions through APIs will drive differentiation in the Wealthtech industry (KPMG, 2022).

Let’s build a thesis on Wealthtech together!

Given my hypothesis, in the next few weeks, I plan to build collaboratively a point of view and thesis on the Future of Wealthtech, identifying both category leaders and new disruptors that will shape the future of this industry. To build this thesis, I plan to use a framework inspired by Cowboy Ventures guide (Cowboy Ventures, 2022) by (0) describing why Wealthtech will be disrupted now (Done), (1) explaining the Wealthtech industry, (2) categorizing the segments of the market, (3) identifying the drivers of the industry and investment themes that will shape the market, and (4) identifying interesting players in each investment theme.

Opportunity for collective learning to understand the industry’s direction…

To get started, I will begin building step (1) collaboratively. Looking forward to hearing the thoughts of you all about Wealthtech that will help us get smarter on the topic (i.e. thoughts, articles, research, videos, etc. about Wealthtech definitions, development, what has worked, what has not worked, areas of likely to be disrupted, etc.). I will send the final investment thesis deck to people who help by sharing their insights 😊.

If you are a founder, investor, or simply passionate about Wealthtech, let’s chat!

About me
Francisco is an MBA Candidate at Kellogg with diverse work experience in the fintech industry. He started his career in Investment Banking at Citigroup and later worked in a fintech startup as Chief of Staff, and he interned in 3 different venture funds, including almost a year with Citi Ventures’ Fintech team. During his time at Citi Ventures, Francisco participated in various deals and helped map diverse fintech verticals. He is now exploring what is next.

Stay tuned: I have something AWESOME to share with you all soon! :)

After 3 years of growing fintech startups and investing, I will share with you all some ideas and perspectives on the future of fintech — I will start with Wealthtech.

In short, I will be uploading trends, frameworks for discussions, startup maps, investment thesis, and much more! Let’s share ideas and perspectives to learn together. I’m excited to exchange thoughts and complement each other’s views.

Any ideas or advice to share? Feel free to reach out to me at francisco.mariscal@kellogg.northwestern.edu

Stay tuned!