Fintech/Analysis/

Travails of US wealthtech sector provide lessons for Europe

Europe is a few years behind its Atlantic neighbour and may have to reckon with the challenges hitting American frontrunners

By Adam Green

Robinhood

Europe’s wealthtech startups can learn lessons from the US, where early hype around investment apps and platforms has given way to a more nuanced reality, with some highly successful businesses and others that have disappointed.

“In the US there were hundreds of wealthtech businesses that didn’t work out very well,” says Michael Meyer, managing partner at Middlegame Ventures.

He includes in the category of damp squibs those businesses focusing in areas like investment education, budgeting, person-to-person platforms and “even robo-advisory, outside of the likes of Wealthfront and Betterment”.

He thinks the companies that have been more successful are the passive “invest-from-your-couch” investment platforms and those with innovations that democratise access to capital markets through “fractionalisation” which allow, for instance, a retail investor to get $10 off an Apple share if they can’t afford the whole price.

Another potential flashpoint is the “gamification” of investing

Regulatory changes could also impact European wealth management, especially in areas like digital trading.

Giant online brokerage Robinhood saw its share price take a tumble recently when the SEC indicated that it was reviewing the rules around payment for order flow — in essence, a revenue stream in which digital brokers sell trading data to market participants.

This constitutes around a quarter of incoming revenue for Germany’s Trade Republic, one of the continent’s biggest wealthtech players, indicating such trends could be relevant in Europe, although not devastating.

Another potential flashpoint is the “gamification” of investing. Once again, Robinhood has been at the forefront, criticised by some, such as Massachusetts securities regulators, for its attempts to lure users into trading with various marketing techniques.

“Digital brokers are democratising trading, but this is not without risk and regulators need to look at this and probably need to do more,” says Eddie Anderson, founding partner of Pentech Ventures in the UK.

Europe cocooned

To date, few US wealthtech giants have tapped into the European market. California-based Robinhood scrapped its plans to open in the UK and neither Betterment nor Wealthfront have sought entry to the market yet.

It’s likely that the huge size of their home market and the regulatory complexity of Europe, especially now the UK is a separate jurisdiction, has deterred them. “The US is the largest capital market in the world and is one regulatory market with one consumer tax situation,” says Johan Brenner, general partner at Creandum, an early-stage VC firm.

Cocooned from US competition, Europe has had the space to build its own companies. To be sure, many are clones or copycats of their US peers.

“It’s OK if Europe is a couple of years behind. It can take the best of the US and innovate our own things too”

The buoyant market in the US and large flotations such as that of Robinhood could benefit Europe, predicts Mark Pearson, founder of Fuel Ventures, the early-stage VC firm. “Large VCs realise that Europe is the next destination. If multibillion-pound businesses can be built in the US, they can be built here,” he says.

He thinks the validation of wealthtech public listings stateside, combined with the liquidity they have given early investors, could see more mega-rounds in the continent over the coming months and years. “It’s OK if Europe is a couple of years behind. It can take the best of the US and innovate our own things too.”

Europe’s hotspots

At present the UK and Germany are Europe’s wealthtech hotspots. “London is the capital of Europe in terms of wealth management,” says William Rudebeck, founder of Bite Investments.

Sweden is a vibrant market because its “banking and wealth management is the most competitive in the world in terms of margins,” says Brenner. “Companies coming out of Sweden have had to compete [and win] in that market”.

“We’ve not seen a pan-European robo-adviser yet”

Meyer, of Middle Game Ventures, reckons European wealthtech entrepreneurship is “booming” thanks to a new generation of millennials and Gen Zers who are more open to risk-taking.

Greater regulatory support, especially driven by the UK Financial Conduct Authority’s Project Innovate scheme, “has had a massive change on the continent” too, Meyer adds.

Still, Anderson of Pentech Ventures says, “we’ve not seen a pan-European robo-adviser yet. Where they have moved into other countries, I’m not convinced they’ve been wholly successful. It’s somewhat surprising, they tend to be specific. At the same time the market within countries like France or Germany is big enough to build a business on its own.”

The eurozone is a single regulatory market which allows for “passporting” across borders, but markets still have different savings characteristics that wealthtechs must localise, says Brenner. “You still need to cater to local adaptations to get product-market fit”.

For a deep-dive on Europe’s wealthtech industry, download the latest Sifted report here.

Adam Green is a science and technology writer and editor based in London. He tweets from @AdamPenWord

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