Citi Ventures head Arvind Purushotham says there's a 'generational opportunity' for wealth management technologies.
Citi Ventures is leaning more into wealth technology as its parent company, financial services group Citi, looks to harness a generational opportunity, unit head Arvind Purushotham tells Global Corporate Venturing.
“One of the biggest wealth transfers between generations is going to happen in the coming years. Something like $84 trillion in assets are going to be passed down from older Americans to Gen X and millennials by 2045,” says Purushotham.
“When that happens, I think we need to think about it as a business, and fintechs are coming in there and in many cases trying to partner with banks to enable that better experience. So, that makes it timely. Not only is it aligned with Citi’s strategy, it also makes sense from a market and technology standpoint.”
Citi’s CEO, Jane Fraser, has been overseeing an ongoing restructuring programme within the company and, as of September last year, its wealth management is one of five businesses within Citi that report directly to her. As its strategic investment arm, Citi Ventures is actively exploring technology to modernise that activity.
Wealth management is a very complicated industry in terms of structure, Purushotham says, which means there is a lot of scope for fintech startups to come in with technology that can remove friction and extend the reach of products that were only available to the superrich. But is the decision a result of advancements in technology or a shifting of the economy?
“I would say it’s a combination of those,” he says. “And I would add a third element, which is the desire for customers to operate in the wealth space the same way they use retail banking or any other consumer product. Client experience and their expectations around that experience keep going up. They learn from how they interact with other products and services, and they expect the same on the website.
How Citi is investing in generative AI
Purushotham (below) is speaking at the GCVI Summit tomorrow about the current state of fintech and financial services innovation, and for many investors in the sector, one area has stood out among the others over the past 18 months: generative AI. Purushotham says Citi has been experimenting with how to use the technology to improve productivity at the bank.
“In general, there have been two broad themes: how to bring in the technology, capabilities and controls you would need as an infrastructure to use generative AI inside Citi, and identifying use cases,” he says. There is a task force within Citi narrowing those use cases down so the most urgent ones can be targeted first, and two of the key priorities are helping software developers increase productivity and harnessing knowledge within enterprises.
Those areas are already influencing Citi Ventures’ recent investments in gen AI startups. Glean has created a gen AI tool that can be combined with search engine technology to manage companies’ knowledge more efficiently, while Lexion uses it to summarise complex legal and regulatory documents. But that’s just the start.
“We are also looking at a bunch of other things including companies developing security for AI and gen AI, and a big theme for us is security for AI and AI for security: how can AI help cybersecurity products we might use, and how can you secure AI and gen AI itself,” Purushotham says. “We’re less than 18 months from that November 2022 release of (ChatGPT large language model) GPT-3, but it feels like it’s been several years, just because of the pace at which the technology has been moving.”
The big question is whether investors, corporate or not, can keep a lid on exploding valuations. Citi Ventures took part in some huge rounds during the 2020/2021 boom period, and Purushotham says he’s pleased by how many of them have since cut costs to make sure that money goes further. Gen AI’s vast potential means that the risk is often worth the dollars, even if the technology isn’t making a huge difference to companies’ bottom line yet.
“Being at a company like Citi, we have a good view of how big a potential market can be when a startup is targeting enterprises”
“From a financial profile, we look at the valuation relative to what’s possible as an eventual outcome,” he says. “Being at a company like Citi, we have a good view of how big a potential market can be when a startup is targeting enterprises. It’s the complexity and size of what we have here multiplied by a thousand. That certainly benefits us when we’re evaluating companies, looking at the valuation relative to what an eventual outcome could be.
“That being said, we try to impose price discipline on ourselves. But valuation is driven by two things: the size of the ultimate opportunity and by growth rates. When you think about gen AI, there is an understanding right now that there is tremendous ability to impact how enterprises operate generally, and it is growing at a rapid rate. And some of that growth rate isn’t just the venture dollars going in, it’s real revenue we’re hearing about from companies like OpenAI.”
What’s hot and what’s not in the ’fintech revolution’
Beyond wealth tech and generative AI, Citi Ventures is excited about the growth of financial infrastructure technology, the expansion of what Purushotham calls the fintech revolution. Financial services firms may have come a long way over the past decade, partly by investing in and partnering with fintech startups, but there is still a long way to go and money to be made, as illustrated by Visa’s $1bn acquisition of banking digitisation specialist Pismo just two months ago.
“As the fintech revolution happened, a lot of entrepreneurs looked at it and saw an opportunity to provide fintech infrastructure for fintech companies,” Purushotham says. ‘And this infrastructure could be interesting for banks, so let’s design something institutional that can also be sold to large and medium-sized banks or maybe the larger insurance companies.’ I think that will continue to be interesting.
“The other thing we think about a lot is embedded finance. We started investing in that a few years ago and we still think there’s a huge amount of runway. People transact, operate and live their lives and if you provide that particular client the ability to pay, borrow or invest wherever they live and do business in an embedded fashion, that removes the friction and makes it much easier for clients to work with their banks or lenders.”
On the other hand, Citi Ventures is being more cautious when it comes to consumer business models like alternative lending or buy now, pay later that are more dependent on a balance sheet, because interest rate rises make it harder for them to secure the financing they need to lend unencumbered.
“People are asking if the business model really works for those companies”
“The other thing people realised was that for direct-to-consumer fintech startups, the cost of customer acquisition can be prohibitive. So, people are looking at that and asking if the business model really works for those companies,” Purushotham says. But he sees the process as one that is necessary for the sector to evolve.
“Among VCs and investors, there’s a bit of a step back to see what works and what are sustainable business models that can withstand that upset to the market, versus some that were maybe driven by the availability of capital in 2020 and 2021.
“In many ways I feel like, with valuations and the activity in the fintech space, it’s a better time to be an investor. Valuation are more rational and we feel there are still some great entrepreneurs in the tech space. [Neobank] Monzo just got a really big round done and that was great to see. Maybe that is a signal that fintech is back.”
