Strategy Note /
Global

Investment fintechs: Delivering cheap capital markets access to the masses

  • Fintech disruptors like Robinhood, are re-shaping the US stock market; the scope for change in EM is greater still

  • Investech firms offer safe, convenient access. Their strategic priorities are tech investment, product suite expansion

  • Key brakes on the sector’s development are weak funding, poor in-house expertise and consumer protection laws

Investment fintechs: Delivering cheap capital markets access to the masses
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
29 January 2021
Published byTellimer Research

Recent days have highlighted the power of retail investors in the US, with clients of platforms like Robinhood facing off against hedge funds across a range of stocks. In populous emerging markets, fintech upstarts like India’s Zerodha could have an even bigger impact on their local capital markets.

This in-depth report, part of our series on the risks and opportunities in the emerging markets fintech space, focuses on digital investment platforms. Our work draws on the results of our detailed proprietary surveys of 10 investech firms and 700 consumers in seven emerging markets (BrazilChinaIndonesiaIndiaKenyaMexicoSouth Africa), allied to desk research of 200 investech companies.

Our key findings

  • The investech sector is relatively underdeveloped; digital investment firms account for only 10% of the total EM fintech universe (ranging from 19% of fintechs in South Africa to just 7% in Kenya).

  • Funding flows into the sector have been weak, H1 2020 investments were just US$0.2bn out of a total US$26bn investment in global fintechs. However, the trajectory is at least positive – full-year 2019 funding into the sector was US$0.3bn.

  • Product quality, greater convenience and security are the top values that digital investment platforms believe they deliver to their customers.

  • The most important factors driving the success of these firms to date are innovation, targeting the unbanked population and management expertise.

  • Investechs currently have c2ppts higher market share than fintechs in other product areas.

  • Over the next three years, customers believe digital investment providers will gain 5ppts market share (slightly lower than the 7ppts gain expected in other fintech products), mainly by serving currently financially excluded customers.

  • Top strategies for investech companies include investing in technology and expanding their product offering.

  • Greater use of cloud technology is the most targeted innovation for investechs over the next three years.

  • In-house skillset and funding/capital are the major growth constraints faced by digital investment firms. Consumer/data protection, capital requirements and client funding account segregation rules are their key regulatory hurdles.

  • Innovative investech firms identified in our study include Abacus (Kenya, it enables customers to set up accounts within five minutes and invest as little as KES200 – cUS$2) and Zerodha (India, which offers algorithms to allow customers to automate their trading strategies).

The investech ecosystem in selected emerging markets

Source: Tellimer Research

Overview

We examine the investech landscape in seven large emerging markets, including the drivers of firms' success to date, their future strategies, targeted innovations, key growth constraints and the impact that investech companies have on their customers. We also discuss global funding trends into this fintech segment. Our work is complemented by the results of our consumer surveys in these same seven countries; we ascertain consumers’ current service provider preferences, assess their future expectations and determine the implications of these findings for investechs. Lastly, we highlight some interesting innovations from selected digital investment providers.

The investech sector is relatively underdeveloped, with digital investment providers accounting for only 10% of all firms within the fintech mix. By country, South Africa, being a key investment hub for Africa, has the highest weighting of investech at 19%, followed by India at 15%. Funding flows into the segment have been much weaker than into other areas (notably payments and lending), but the trend in H1 2020 has been positive, despite the pandemic.

According to investechs, the top value they deliver to their customers are through product quality, greater convenience and security. They think the most important factors driving their success to date are innovation, targeting unbanked populations and management expertise.

Based on our unweighted consumer survey, fintechs currently have a 26% market share in investment products, higher than the 24% average for fintechs more generally; the segment is still dominated by traditional financial institutions. Based on our consumer survey results, investechs are likely to gain 5ppts market share over the next three years (lower than the 7ppts gain consumers expect for fintechs generally), mainly by servicing individuals who are currently financially excluded.

Key strategies investechs are adopting over the next three years include investing in technology and expanding their product offering. Their most heavily targeted innovation is using cloud technology to save costs and improve the security and safety of their infrastructure. Selected innovative investech firms we highlight include Abacus (Kenya, it enable customers to set up their accounts within five minutes and invest as little as KES200, equivalent to cUS$2) and Zerodha (India, which offers its clients access to algorithmic trading rules that allow them to automate their trading strategies).

The most relevant constraining factors for digital investment providers are their in-house skillset and access to funding/capital. The main regulatory issues they face are consumer/data protection, capital requirements and client funding account segregation rules.

South Africa has the highest weighting of investechs

Investech is a relatively underdeveloped segment, accounting for just 10% of all EM fintech firms (compared with 29% for payments and 27% for lending-focused fintechs). By country, South Africa, as a key investment hub for Africa, has the highest weighting of investechs at 19%. Indian fintech also has an above-average exposure to digital investment firms and is home to one of two EM investech unicorns, Zerodha. The other one is in China, Wind Financial Terminal. 

Weighting of investechs by country

The investech sector has severely lagged other fintech segments for funding access

Investment flows to the investech segment have been much weaker than to other areas of the fintech space; globally, digital investment platforms attracted just US$0.2bn of funding in H1 20 from a total of US$25.6bn directed to the overall fintech space. However, H1 20 flows were nevertheless stronger than in 2019, where the full-year flows to investech were just US$0.3bn.

Investech funding flows

Investechs’ customer value-proposition: Product quality, convenience and security

According to investechs, the top values they deliver to their customers are product quality, greater convenience and security. Relative to other fintechs, investechs are more focused on security, but place less importance on pricing (both in terms of cost level and transparency).

Product quality is a broad term that includes factors like ease-of-use, product innovation, seamless execution and speed of service. This may explain why it is mentioned as one of the top values by both fintechs and consumers, not only for digital investment firms but also in other sectors. Some investechs highlighting this as their key value proposition include Savart (India) and Bareska (Indonesia).

Convenience. Managing investments from their smartphones is much easier for customers than visiting brick-and-mortar institutions. Convenience is one of the key values digital investment platforms provide to their customers. Investechs that cite convenience as their key value include Moripesh (Kenya) and Wealth Migrate (South Africa).

Security. Cybersecurity is a key concern for the financial services industry; both fintechs and incumbents need to continually enhance their security protocols to protect consumer data and funds. Blockchain technology can improve transaction security, making it more difficult for hackers. Investechs that mention increased security as one of their key values include Zerodha (India) and Chamasoft (Kenya).

Investechs' customer value proposition

Key success factors: Innovation, targeting the unbanked and management expertise

The top success factors cited by investechs are innovation, targeting unbanked populations and management expertise. Compared with other fintech sub-sectors, investechs feel they have benefitted more from having management expertise, but less from providing good quality products.

Innovation in service offerings enables investechs to reach their customers in more cost-effective ways. It also helps fintechs to be more relevant to their customers, for example by offering them greater convenience and/or a better user experience. Investechs that cite innovation as their key success driver include Moripesh (Kenya) and LTCV Investments (China).

Targeting unbanked customers. Underserved customers can represent a large constituency in some countries, and fintechs can avoid competition from traditional providers. Moreover, rising smartphone adoption is making it easier to target such customers. Examples include Chamasoft (Kenya) and Bareska (Indonesia).

Management expertise. Investech companies often require expert personnel, eg from the investment management industry for investment advisory and product development. Technology expertise is also required. Investech firms like SIPP Investments (South Africa) and Savart (India) mention management expertise as a key reason for their success to date.

Key success factors

Investechs’ strategic plans: Technology investment, introducing new products

The top strategies that investech firms are deploying over the next three years are investing in technology and expanding their product offering. Compared with the other fintech segments, investechs are less focused on geographical expansion or fund-raising and more intent on increasing operational efficiency.

Technology investment. Technology, such as machine learning and artificial intelligence, can improve the speed, cost and quality with which services are delivered to consumers. Savart (India) and Bareska (Indonesia) are among the investechs planning more technology investment.

Introducing new products. Investechs have many ways to expand their product offerings to meet the needs of specific customer groups; for example, they can add new asset classes, investment markets or investment tools. Investech firms planning to launch new products include Zerodha (India) and LMC Capital (China).

Strategic priorities

Cloud computing is the most targeted innovations for investechs

Considering their innovation plans over the next three years, investech firms are most focused on using cloud technology. Compared with fintechs in other sectors, investechs are less interested in developing chatbots or digital banking and are much more focused on cloud technology.

Cloud technology has several benefits for investech firms, which include i) cost-savings, as the companies can outsource the infrastructure rather than building their own, ii) easily scalable infrastructure, as per business requirements, iii) high security and safety of data. For example, Orama, a Brazilian online wealth management platform, plans to innovate in cloud technology over the next three years. 

Targeted innovations

Investech firms already have a respectable market share; unbanked customers are an opportunity

We asked consumers which kinds of providers were meeting their current financial services needs for investments/savings, and which types they expected to use in three years. We use this data to estimate current and likely shifts in share of wallet for different types of firms.

Currently, fintechs have a 26% share of investment products, which is above the 24% average share fintechs have in other products. Looking ahead three years, consumers expect investechs to gain a further 5ppts market share, slightly less than the 7ppts average gain expected by fintechs in other product areas. The gain for investechs would arise largely from serving more financially excluded customers. Consumers expect traditional providers to maintain their grip on investment services, however.

Investment providers' market shares

Key constraints on growth: In-house skillset and funding

The in-house skillset and funding/capital are the biggest growth constraints faced by investechs. Compared with fintechs in other sectors, market size and growth is less of a challenge for investechs, while limitations around in-house skillsets are more of an issue.

In-house skill set. As highlighted earlier, management expertise is one of the key requirements of the investech business. Highly skilled investment professionals can command good salaries from traditional firms, which makes it difficult for startups to attract talented individuals. Investech platforms citing this as a key growth constraint include Orama (Brazil) and SIPP Investments (South Africa).

Funding/capital. Depending on the business model they employ, funding access can be a crucial issue for investechs; there are often stringent regulatory requirements in place to protect clients’ assets. Fintechs citing this constraint include Savart (India) and Moripesh (Kenya).

Key constraints on growth

Investech regulatory hurdles: Consumer protection, capital and client funds segregation

According to our survey, consumer/data protection, capital requirements and client funding account segregation are the key regulatory hurdles that investechs face. Relative to fintechs in other sectors, investechs find client fund segregation more of a challenge, while deposit insurance is less of a concern for them.

Consumer/data protection requirements. One way that investechs can generate a competitive advantage is through the collection and utilisation of customer data to improve their product offerings. Data protection regulations play a key role in determining the extent to which these companies can obtain and use such information, and the processes they must follow to protect it. Investechs citing consumer/data protection regulations as a hurdle to their growth include Chamasoft (Kenya) and Orama (Brazil).

Capital requirements. In general, investech tend to favour capital-lite business models; any regulations that challenge this approach can have a serious impact. Investechs citing this regulatory hurdle include Wealth Migrate (South Africa) and LTCV Investments (China).

Client funding account segregation. Investech companies may take control of customers' funds, if only for a short period of time. Regulators are usually extremely vigilant about safeguarding customer funds and preventing fraud; a key tool in their arsenal is to enforce client funding account segregations, which generates an additional layer of complexity for investechs. Fintechs that cite client funding account segregation as one of their key regulatory challenges include Savart (India) and SIPP Investments (South Africa). 

Key regulatory hurdles

Investechs’ innovative practices

In the table below, we highlight some innovative practices by investech firms, based on our desk research:

Investechs' innovative practices