The global private banking industry came together at the Private Banker International Wealth Summit in Singapore on 24 October 2012. While many topics were discussed, the key issues were the need for a new private banking business model and the digitalisation of customer interactions and management.
Facing external factors such as increasing competition from independent asset managers as well as the continuous lack of customer trust, speakers at the Private Banker International Wealth Summit foresaw the industries’ need to move away from the traditional private banking business model, which basically charges for product sales and move towards an advisory fee model.
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Standard Chartered Private Bank’s head of North and Southeast Asia Rajesh Malkani said: "Private banks need to focus on the quality of financial advice they provide their clients, which will then allow them to then charge for advice rather than depend solely on execution of investment trades for their income. Execution is hardly a differentiator today and those who cannot do it properly should not be in the business, digitalization of execution will further erode the already small margins. Therefore I anticipate a shift towards a "high-tech, high-touch model".
Charging customers for advice instead of execution comes with a number of advantages, but it will be a long and difficult process to get there, which will require serious commitment and investment by the banks to further improve the quality of staff and customer education. Advisory fees will be a more transparent and sustainable business model believes Malkani: "If customers do not see the ‘value’ in the advice of a private banker, they will go somewhere else. Private bankers will be measured on the relative returns and increasingly on risk-weighted returns. The industry needs to work together to develop common standards for the measurement of returns in order to make it easier for customers to understand the relative performance of their portfolio and enable them to benchmark the quality of financial advice."
Uncoupling advice from the sale will also be important to improve client suitability and eliminate aggressive product pushing once and for all. This pre-crisis behaviour to go for the sale "no matter what" remains one of the key reasons for frustration among clients and resulted in the trust issue many private banks face today. More than that, it also triggered considerable regulatory activity to assure client suitability and protect customers propelling operating costs upwards.
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By GlobalDataMalkani believes that an advisory fee model will be more sustainable for banks. He argues: "The current model is not sustainable. Today private banks tend to do well in bull markets, not so well in bear markets, but they still have to carry the same load of costs. An advisory fee model will create sustainable annuity income and will be less dependent on the mood in the capital markets."
DBS head of private banking Tan Su Shan agrees: "We see a lot of arbitrage in terms of pricing here in Asia, as customers may expect certain price advantages or rebates. For a number of players in the region, the cost-to-income ratios are not sustainable today, linking positive returns to bull markets only, while losing money in a bear market. A fee model therefore does look appealing, but it depends on our ability to educate customers and make them see value, where they currently don’t see it."
Competing on the quality of advice may help banks to manage costs more effectively, allowing them to move execution to cheaper channels such as online and mobile. This is where digitalization comes into the game.
Rory Tapner, Coutts’ chief executive, warns that banks need to be careful about balancing digitalization and the personal touch of private banking. After all, private banking needs to be different from a retail banking mass affluent proposition.
Tapner says: "Technology has always been important for banks, although wealth managers were a bit slow to embrace it. Although it is convenient to have technology capabilities, private banking is about people and personal relationships. Clients want the personal advice and want to meet their private banker a few times a year. On the other hand they do not want to call the RM every day for trivial things. Giving customers control over some areas of their portfolios will be increasingly managed by alternative channels, assuming they wish to do so."
For the pure transactional needs of customers, Tapner conceptualizes an intelligent online execution system. After being advised on and setting predefined parameters for risk levels and suitability, customers can execute their own transactions online.
The system will step in if the desired transactions cross the predefined thresholds and investment objectives, and a discussion with their adviser would then follow to determine suitability and needs. At the beginning and the end of such an intelligent system there will always be a human interaction via a relationship manager.
Asia might well lead the way in the digitalization trend, given the high operational costs private banks are facing in the region. Furthermore, Asian customers tend to be more transactional than their European counterparts and many of them are very technology savvy. Moving executions
online against a flat fee will help banks to bring down costs and allow relationship managers to focus on the relationship and the quality of their advice, rather than execution and administrative work.
DBS Tan Su Shan believes: "Digitalization of client communication has enormous potential for Asia, given the infrastructure challenges many Asian cities face today, such as traffic jams for instance.
Some markets, such as China, India, Indonesia, or the Philippines, also face vast geographic spread and fragmentation, so offering access through alternative channels is crucial to satisfy customer needs.
And customers are moving fast. There are vast populations who will are likely to skip email as a communication tool and move straight to social media for instance."
She adds: "Technology will be crucial for private banks to move ahead. Imagine having a Watson [IBM’s artificial intelligence project] for private banking – wouldn’t that be great? It never sleeps, is never sick and is getting smarter by the day. No question, there are a lot of challenges ahead of us and I expect a lot of movement in the industry. Who will come out as the winner, the future will show – and it might not be a bank."
Many reports show that Asia is the fastest growing region globally in terms of wealth and HNWIs. Nonetheless most of the growth comes from the lower segments.
This gives a competitive edge to the region’s universal banks, which can leverage their retail network for customer acquisition and upgrading.
With Asian customers leapfrogging technology adoption and the gross of new HNWIs running their own businesses, universal banks have a competitive edge over boutique private banks given the economies of scale for technology investments and the synergies between private banking, retail banking, investment banking, treasuries and wholesale/ commercial banking.
The difficulty of running a profitable private banking business in Asia is clearly demonstrated by the exit of major international players, such as Bank of America Merrill Lynch. PBI’s latest private banking benchmark also indicates tougher competition from domestic and regional banks,
which maintain healthy growth rates, while foreign banks seem to lose momentum. The local banks benefit from capturing the fast growing onshore wealth, while foreign private banks are stuck with a f lat offshore market.
Coutts’ Tapner believes that the split between the local banks capturing the onshore market, while foreign banks remain dominant in the offshore market will continue. Local banks are still some years away from reaching the international private banking model.
This begs the question however in how far the offshore private banking model will remain a suitable business model given the impact of expanding local and international regulation changing the offshore model to its core. Clearly the reasons for clients to move funds offshore will move away from tax reasons towards asset diversification and product availability, but with continuing liberalisation of the onshore markets the competition for offshore banks will become much tougher.
After all, "This is the time of the regulators", says Bruce Weatherill. "And while they have the limelight, they will come up with as many new regulations as they possibly can. Moreover, there is a vast array of bureaucrats sitting in international regulatory and governmental organisations, who are put in charge of passing new regulations ‘to ensure that it never happens again’, and this has a significant impact on the global financial services industry. One certainty of having bureaucrats setting the regulatory framework is that you get even more
bureaucracy."
Given this continued pressure from international regulators and foreign governments, domestic regulators in Asia will sooner or later have to follow suit. Some markets may try to hold off some regulations for a while, but eventually they will not be immune to it. Former global CEO of Société Générale Private Bank Daniel Truchi foresees: "As a result, banking secrecy as we know it will come to an end – not confidentiality, but secrecy. I believe regulations in Singapore will become even more stringent than in Switzerland."
Former global CEO of Société Générale Private Bank Daniel Truchi and founderof DT & Partners SA, in Geneva foresees: "As a result, banking secrecy as we know it will come to an end – not confidentiality, but secrecy."
Change lies ahead of the private banking industry, whether it comes from regulators and new technologies, or changing business models to regain the trust of the customer.
Not all players will succeed and some may fold, not being able to keep the pace and adjust to these new dynamics. On the other hand given the positive growth outlook for the region and its wealth, Asia Pacific willoffer an amazing potential for those players who are quick to grab the opportunity.
