Democratization of Financial Services

New access to wealth building opportunities for the retail market

Technology is making financial services that traditionally have been reserved for the few, available to the mass market. A good example of these are wealth management services, the service model of which has traditionally relied on high personal touch provided by advisors. This model comes with high overhead costs and therefore has typically been available only to high net-worth individuals. The democratization of finance is making these services available to more people while hyper-personalizing experiences using AI, Big Data and Predictable Analytics.

By Chris Crespo,

The concept of democratizing a service or a technology, simply refers to the process of removing any barriers keeping the public from accessing them. A good example of democratization is the use of the internet. Back in the 80’s and early 90’s the internet was a resource only available to the military and academia. As personal computers with internet connectivity became more widely available and networks grew and expanded, the internet was democratized giving users access, while enabling them to build new services on top of them.

Similarly, financial services, specifically within the wealth management space have traditionally been reserved for high-net-worth individuals. At the same time, other type of investment options like venture capital and private equity have only been available to people close to the companies seeking funding.

But to the delight of many, who have previously been mere observants of the capital markets, the landscape is changing rapidly thanks to three main drivers:

The availability of democratizing technology 1 Democratizing technology fulfils two main functions. First, it can pool resources from large numbers of people. This is a concept we sometimes refer to as crowdfunding. Secondly it automates parts of the advisory model. By doing this, technology can significantly reduce the cost

of finding investors and of providing customers with viable options to invest their money.

Artificial intelligence and big data have been combined to create robo-advisors; essentially algorithms that are able to automatically make investments on our behalf. This is done based on preferences about our risk tolerance, patience and expected returns, usually gathered through a survey. Thanks to fintech solutions, people like you and me can today access investment services with as much or as little money as we want, and for the first time, participate in the success, or the failure of companies that create and multiply value.

Companies like e-Toro, Lightyear, Kameo, and FundingPartner are creating platforms through which retail customers, can back up companies in exchange for a piece of ownership, interest or other type of financial benefits.

This trend is not only opening investing opportunities for an entire new market of to-be investors but is benefiting small and medium companies too. Through the power of crowds, companies with new services and products can reach out to a huge pool of new investors and raise capital from hundreds and thousands of sources. Technology companies, real estate and even movie production companies are benefiting from this trend which brings investors and visionaries closer together, across borders, to create value.

A highly digitized population pushing for equal access to services 2 The increase in digitally savvy people within society is also driving momentum for this trend. New generations are comfortable investing their money though companies that exist only virtually. While the brickand-mortar model used to be a signal of trust and sturdiness, millennials and increasingly generation Z are more and more comfortable placing their money in organizations with no branches, or offices but that offer them intuitive customer experience through mobile applications that are friendly, and easy to use. This has been combined with an us -vs them culture where the younger generations are less trusting of financial institutions and have felt underserved or outright overlooked by the traditional financial system. Leading them to look for alternative services that allow them to participate in the investment economy. generate higher demand for wealth generating alternatives. 3 Finally, two important movements are emerging amongst young people who refuse to follow in the steps of their parents and spend their lives working in jobs that leave them unfulfilled and dissatisfied. The Antiwork movement, which gained popularity during the COVID pandemic, is driving young people to adopt lifestyles centered around the pursuit of purpose and meaning rather than around work.

Similarly, the FIRE or Financial-Independence-Retire-Early, movement is changing young people’s approach towards earning and spending. These two trends are creating a demand for wealth products, from customers that have traditionally been ignored by incumbent institutions and who have decided not to wait around until compound interest on their savings can afford them a decent lifestyle.

The democratization of financial services is expanding market opportunities both for potential new investors and for companies. This trend is likely to generate a positive loop where the increase in funding will lead to an increase in innovation, and entrepreneurship which in turn will lead to an increase in available capital. Ultimately this can result in better products and services in the market, more competition, better prices, and more choice for consumers.

The promise of this space is very encouraging however, for it to stick, fintechs and regulators will need to increase the availability of financial education. Recent surveys show that only around 30-33% of adults in Europe have an adequate understanding of their finances. Consumers of new types of democratized financial products must develop a better understanding of personal finances as well as the new opportunities and risks available to them. Learning to differentiate between the seemingly unending supply of fast-money schemes and sound long-term strategies for wealth building, will be the cornerstone that makes or breaks this developing trend in finance.

As personal computers with internet connectivity became more widely available and networks grew and expanded, the internet was democratized giving access that could also build and create new services on top of it.