The first quarter of 2023 was characterized by a tremendous amount of pressure on financial institutions around the globe caused by the rapid hikes of interest rates in the respective geographies. Warren Buffets' famous quote: “Only when the tide goes out do you discover who’s been swimming naked.” has rung true yet again. Two cases stood out as in both cases, clients got wind of their financial services providers potentially hitting financial difficulties (i.e., “swim naked”) and as a result staging a “bank run” and forcing a collapse of these firms:
1. The news around Silicon Valley Bank’s financial troubles caused its clients, technology start-ups and wealth management clients alike, to withdraw deposits in large quantities. SVB was forced to seek emergency funding and ultimately to close down operations leading to an emergency rescue by First Citizens Bank and HSBC UK respectively. The aftermath of this collapse is still in motion with many SVB advisors (and their clients) moving to different wealth management firms as we speak.
2. The crisis accelerated even further in late March when Credit Suisse had to agree to an emergency rescue by arch-rival UBS. Very similar to SVB, it has been the clients of Credit Suisse that lost trust in the firm and as reported in April, Credit Suisse experienced asset outflows of US$69 billion in Q1 alone, representing 9% of its wealth management assets. While its acquirer saw a US$28 billion inflow of new money during the same period, it is clear that the vast majority of assets has gone to other firms.
Click the image below to read the Wealth & Technology Insight Digest for Q1, 2023:
Both examples not only demonstrate how important it is for financial institutions to be trusted by their clients, but also, how quickly the tides can turn on well-regarded entities and how efficient “bank runs” are in a digital age. No longer do clients have to form lines outside bank branches to withdraw their deposits, but rather a quick transfer of fund online will accomplish the same … in seconds. Receiving banks will most certainly be those that have the infrastructure to onboard assets in lightning speed vs. those that require a paper needing to be pushed along the process chain.
Beyond the advantage technology gives financial institutions around onboarding assets that are migrating from troubled firms, there are a number of additional implications for the WealthTech market resulting from this crisis:
1. The collapse of Silicon Valley Bank has all but taken away the preferred funding and banking platform that several generations of SF- (and London-based) startups have relied on. Start-up funding had tightened before SVB’s collapse already, the demise of SVB is a further blow to the start-up market.
2. The current crisis situation has scared many financial institutions into delaying technology spending. Paired with tighter funding (prior point) and lower industry spending, it can be expected that the crisis might spread to technology firms resulting in continuous consolidation of technology firms, favouring the bigger entities over smaller ones.
3. WealthTech firms will have to work harder to find a precise market niche where they will be successful instead of the often-seen watering can approach of too little focus. The heightened pressure on technology firms will see new senior leadership being installed on top of many technology firms in search of new direction as prominent examples such as Temenos and InvestCloud have shown in the first quarter already.
It is safe to assume, that 2023 will hold many more surprises for the wealth management industry and many more changes will result from it. The year will relentlessly call out the firms (WM firms and technology firms alike) that swim naked.
Read and download the full WealthTech Insight Digest for Q1 here.
