The Future of Private Banking: Lessons from Big Tech Unicorns, Mainstream Media and Fintechs
The central topic of the discussion, co-hosted by Hubbis and Simon-Kucher & Partners, was whether global tech giants such as Amazon, Google and Tencent (collectively the BigTechs), and the rapidly proliferating FinTechs, pose an existential threat to the existing business model of banks. Or can their technology, models, platforms and strategies actually be utilised to help guide the banking industry to a healthier and more robust future?
The key takeaways
A top-down strategy
Taking an agile approach to digital evolution in a bank while making the necessary investments and adopting the necessary long-term cultural changes certainly requires a top-down strategy, putting digital transformation at the heart of the bank.
Management must embrace change
The top-echelons in any bank need to both understand and embrace the changes required to move them forward. They cannot have a revolutionary digital strategy by hiring a team, putting them in the basement and talking to them once every three months. They need to commit to a strategy, and a realistic budget and then bring the ethos of change into the bank’s core.
New entrants might eat your lunch
New entrants in the world of online payments are competing aggressively at the mass retail end of the market, but wealth management experts expect them to gradually move up the wealth segment ladder to later compete for private clients. “Beware,” one expert warned. “The industry will eat your breakfast, lunch and dinner before you realise it.”
But brand containment is an issue
While the BigTech companies will undoubtedly become threatening competitors in the mass-affluent and higher wealth space over time, their biggest challenge might be the fear of letting down their customers if they have a negative experience. Offering third-party financial products and services on their platforms opens the door to significant brand containment issues.
Partner up to achieve optimal solutions
Financial products and service providers such as global asset management companies can create the best products, but they also need to partner up with the right tech firms and FinTechs to convey and deliver their core expertise to their clients.
Empower people, don’t exclude them
The model that appears to be most viable for the wealth management industry is one in which technology reduces costs and empowers people throughout their firms, including high-cost relationship managers. Combining productivity with cost efficiency is a vital goal.
Banks must understand their value propositions
To remain competitive, private banks, especially those part of global universal banks, will have to be far more specific in terms of their value proposition. And at the retail level, pricing must be carefully refined to compete with new entrants, who are cherry-picking their way into the market. Appropriate discount models should be created to target customers who deserve price concessions, who deserve incentivisation.
Segmentation is vital
Segmentation is another associated factor. Banks must realise that some clients will not gain access to some services and information because they pay less. But at the same time they should understand that even if a customer is in a certain segment has modest account balances, they might want access to specific services and be prepared to pay for them.
“Yes,” agreed an expert, “at our bank we have different segments of clients all based on AUM and the proposition is tailored differently, but there are other ways to segment your client base; for example, according to their level of sophistication, their need for involvement in the decision-making process, their age, aspirations, and so forth.”
Hong Kong’s new virtual banks are taking root
The new virtual banks are about to “open their doors” in Hong Kong. They have a two-to- three-year window to fully organise their compliance protocols, even if they are treated in the same way as established institutions. They appear to already be competing in the SME arena and in pure retail, implying they are targeting wealthier entrepreneurial clients to whom they can offer a larger suite of products and services.
Data is the new oil
Traditional banks and financial institutions have all the data they need to compete with the digital entrants who are using AI and machine learning to hone their offerings, but the banks struggle to mine the data appropriately and then act on it. This makes it tough for them to appropriately target the individual customer and offer personalised services. The main challenge is the current set-up in the IT system with various decentralised data resources.
Speed and appeal
The appeal of new entrants has much to do with speed – two hours to on-board a new entrant’s client digitally compared to at least 45 days in today’s private banking world. Furthermore, the banks must work on appealing to the future target markets, especially the younger generations who are inheriting or making much of Asia’s wealth.
Will data become threatening?
Fast-forward five years, will the use of data to personalise ideas become “creepy” in its accuracy of invasiveness? Or do the younger, digital-savvy populations simply care far more about convenience than privacy, which has been a priority for the older generations in Asia.
Conditions for consent need to be comprehensive
All providers must think very carefully about the legal ramifications of data usage and storage. Disclosure of information and disclaimers have to be structured thoughtfully.
Tear down and re-build?
A frightening thought for the industry - would current leaders be better off tearing down their houses and re-building from square one? China might be an indication of the future. Bill Gates’ prediction that banks as we know them would disappear before long is becoming reality. But radical moves such as tearing down and re-building are not likely as this requires slashing revenues for some years before benefits are reaped. Such a move is too risky for most global or independent private bank leaders.
End key observations
Internally banks are focusing on innovation, but also on changing their culture. “How do we take an agile approach and collect internal and external data to make better decisions that permeate through to a better customer proposition?” asked an attendee.
From the top down
“My bank’s strategy is driven from the top down, and at the heart of the bank, so it’s far more than a digital project. Understanding the BigTech players such as Google, Amazon and Netflix is part of our strategy. In fact, some of our top managers have travelled across the US to learn how we can change our work models, culture and the way we run projects. Another vital element is being really serious about the investment budget, both in terms of applications and infrastructure. We know that in the future competition may come from traditional banks, but also from newer giants such as Tencent or Alibaba, so we must be ready.”
Another guest predicts that new players in the payments’ world, such as Alipay, PayPal, WePay and many others to come, will have the banks’ business for breakfast, lunch, and dinner before they realise it. “They are starting at the low end, at the retail end, and then they will move up; they will go up all the way to offering private equity, lending, margin lending, and so on and so forth,” he warned.
Small steps will not work
Small steps to adjust models will not put off the inevitable. “We must adjust or disappear,” one expert stated. “You can’t have a revolutionary digital strategy by hiring someone, putting them in the basement and talking to them once every three months. Change must start from the top.”
A regional leader of a major global asset management and investment brand added that he sees his company as both a technology and an asset management business.
“When we look at our peers,” he explained, “we feel quite differentiated, not solely because we have our broader product offering, but because we are also figuring out how to partner up with technology clients for our key skills of risk and portfolio construction. We are not trying to be a robo-adviser, we are not trying to digitise the entire wealth industry. We are focusing on our central expertise and core competencies of risk and portfolio management; that’s where we add value. And we help major banks build scale to their advisory offering; to do that we are buying into companies that support our efforts. If we empower the advisers, ultimately by default we can empower the end customer.”
A question was raised as to why wealth management firms are aiming to empower the advisers, the RMs, rather than eliminating what is an increasingly high-cost cog in the machinery.
Combining efficiency and productivity
“If you can demonstrate that the digital tools are actually making the advisers more productive, then there is a balance there. Technology is a cost, and unless it is going to add incremental value, it is not something you want to go overboard with. If, however, you can actually reduce the overall cost, perhaps because you need fewer RMs or fewer people to oversee them, or if you are really making your RMs more productive, then with a combined perspective, it is worthwhile.”
The BigTech companies will undoubtedly become threatening competitors. “Their biggest challenge is not even regulation,” said one attendee. “It is the fear of letting down their customers if they have a negative experience. They might be offering money market funds, but nobody loses money on those. If, however, they offer broader risk portfolios at scale, the potential for losses definitely increases.”
He explained that they know they are not going to be the engine to make the investment products, so in opening their access point to third-party financial products on their platforms, there is a significant brand containment issue. “Because for sure, the clients will lose money in some shape or form, at some point or another,” he remarked.
Another attendee commented that, “Bill Gates, once said something along the lines of” ‘banking will exist in the future, but it won’t be conducted by the banks.’ “We are a traditional fintech and sell robo-advisory technology to financial institutions. Our view is that some banks are really gaining momentum in the client service space, while other banks are only superficially aware of this drive towards customer-centricity. And it is very tough to convince these banks to invest and to make major changes.”
Find and deliver your value proposition
“Just like the airline industry, the financial industry will move to multi-tariffs and be forced to be more customer-centric,” said another attendee. “The digital entrants are not serving the entire market; they are picking out some segments, but if you are a major bank and want to keep all your clients, you now have to be more specific in terms of value proposition, finding the right product for the specific segment. That is a challenge for many banks.”
Another guest added that the attack from some of those new digital players will be inevitable as they cherry-pick the product range that retail banks are providing. He commented “if you are pricing this too high and have poor delivery, you are setting yourself up for somebody to come to and disintermediate you.”
Said another, “at the end of the day, margins and revenues on a product level will go down, while the market itself increases in size. So banks must understand they need to lower their prices, but it is also important to have the right discount models in place, to target customers who deserve those price concessions, who deserve incentivisation.”
Segmentation is therefore another associated factor. “Some clients will not gain access to certain services and information because they pay less, and the industry has to learn that,” he said. “If you fly economy, you do not get lounge access. Banks will understand this more and more, just like the hotels and airlines.”
And even if a customer is in a certain segment, for example, has modest account balances, they might want and be prepared to pay for access to other services.
Tailoring with a vision
“At our bank we have different segments of clients all based on AUM and the proposition is tailored differently, but there are other ways to segment your client base; for example, according to their level of sophistication, their need for involvement in the decision-making process, their age and aspirations, and so forth.”
The discussion turned towards compliance. The Hong Kong regulator treats new virtual banks the same way they treat traditional banks, with all of the standard AML regulations applied and all the normal rules in place. “There is, however, probably a two-to-three-year settling in period in the cycle where the virtual banks are treated more leniently compared to the established institutions,” an attendee noted.
In terms of segmentation, she questioned why virtual banks would need to apply this protocol. She explained that as a virtual bank they have direct access to their activity and their behaviour, so can easily use the data to sell relevant products and services. They are also targeting SMEs, not only individuals, thereby creating a nice circle between the individuals and the businesses they own. In short, they are definitely trying from the bottom up to replicate a model that's used in banking here in Asia, even from a wealth management perspective.”
Mining nuggets, converting to bullion
She added that although traditional banks have all this data, and more, they still struggle to access the relevant data and then act on it. “As we see it, the banks are not appropriately targeting customers individually, not making them feel special, and the whole process is too slow. For example, private banks take 45 or 60 days to on-board a client, whereas a business such as Alipay, only needs two hours or in some cases two minutes. That is where your lunch is going to get eaten.”
Another guest remarked that investing in content is not enough as banks and other providers must invest as much in appeal as in content. “The power of players like Grab that are applying for bank licenses and coming into the industry, is they have the appeal that makes people want to be a part of their experience. It’s like Facebook is now seen as old-style, for older people; young people use Snapchat or Instagram. Along with their expertise in handling these areas, this makes these new entrants powerful competitors.”
What’s more important? Convenience, or privacy
“I wonder,” pondered another guest. “How will all this look in five years when the data on individuals using these new providers’ services is so good it actually starts to become creepy? Customers will start getting presented with contextually relevant material, but whether they find it truly relevant or whether it is a misreading is unknown. Perhaps they’ll feel like they’re being watched all the time. Maybe the younger generations just care about convenience, but judging from the older generations, they prefer not to have all their assets and all their activities with one bank, one firm.”
The legal angles
A guest picked up on this point from a legal perspective. “We deal with a lot of data privacy issues, and whether it is our Hong Kong data privacy ordinance or the more rigorous GDPR in Europe, banks need to carefully consider how they obtain and use data. The terms that the banks present to the clients for KYC and on-going data collection are really important, they need to think about consent, whether they can be transferred within a jurisdiction or even outside. Where is the data stored? For how long? These are all issues that have to be ascertained at the start.”
Another guest agreed, stating that it is highly likely that interactive home apps such as those provided by the BigTechs or mobile phone apps, are listening in and relaying information. How you can be sure that banks and private banks stay private?
Another expert surmised that within a decade everyone will have their own digital identity manager. “You will have one secure chip holding all the information related to your identity and that you own,” he remarked.
“The idea of having your own data as your possession may be a solution,” said another guest. “People can then choose the businesses and institutions they trust enough with their data.”
It all starts at the beginning
An expert noted that there is a core problem at the start of the client journey with KYC. “The online players are addressing this very differently,” he reported. “You can open an account with PayPal in two minutes. If, for example, someone receives payments from 10 different people in their retail account, the bank will often shut down the account because it can’t cope with the transaction monitoring. But PayPal can receive money from and make payments to 100 different people; the customer then uses PayPal to transfer funds to and from their bank, which is no problem. In short, the banks are focused on addressing their own problems, not their customers’ needs.”
“I think every large international bank nowadays thinks about collaboration, the ecosystem and monetisation,” came another voice. “Regarding data, we are really right at the beginning in using machine learning algorithms to cluster client profiles and understand when it may be the right time to call somebody, for example, to talk about a new mortgage or other product. In a few years we will see banks bring some very interesting solutions to the market as this scenario develops.”
China – intimations of the future
A senior banker with a global brand stated how sobering this type of conversation is. “Looking at China, the traditional private banking model will be an increasingly tough sell for the younger, entrepreneurial and very wealthy generation. What Bill Gates said would take place in 10 or 20 years is actually starting to happen now.”
“Younger generations most value convenience,” he continued. “Traditional banks simply can’t seem to make a few tweaks and adapt. Sometimes, I almost think we need to tear down the house and re-build it, but that means accepting we are going to cut our revenue in half or by two-thirds for the next two years and lose half of our AUM. Focus has to be on re-building something very different, more robust. But of course, that is very tough to do, especially for a standalone private bank because that’s your entire business. And if part of a global universal bank, then you have to sacrifice earnings.”
I tend to agree,” said another expert. “After a career in banking, I attended Harvard where I learned that traditional companies wanting to go digital have to break down their business and re-build it from scratch. The major challenge for the CEO and the board is therefore that in the first year or two, revenues just collapse and you need the support of your board and shareholders. You really have to believe in what you’re doing because by the time revenues start to pick up, most of the time you would have already been fired. But, if you can hold on and apply the right strategy, revenues can rise quickly.”
Break and build risks too unpalatable
The risks of this approach to the institution and to individuals’ careers and remuneration are so significant that people are afraid to take these steps. “Traditional bankers are smart people, but they do not fully understand what a digital bank truly is or how to move in that direction, they simply don’t have those skills. This is why they continue to play the music when the Titanic is sinking.”
However, he said that there are great opportunities for those who take the risk because the digital banks, the new entrants, lack the skillset of the traditional banks. For example, a Chinese client might put up a chunk of USD2 billion of equities and want loans of say USD200 million against that, but an app can’t handle that request. The same Chinese client might want to buy a building in New York, not just an apartment, and want a loan of USD100 million. Again, the app can’t do that. We need relationship managers for top-end services, for the 10 to 15 percent of our clients who have such needs. However, there is no doubt that for the majority of our clients there is a lot we can automate and perhaps build an app that reduces costs and makes the RMs more cost-effective.”
Ultimately, the philosophical, strategic and practical visions of the future of wealth management need to be carefully and thoroughly combined if the private banks and leading wealth management firms are to compete with each other and with the tech-enhanced, smart new entrants at the gates.
More from Dr. Silvio Struebi, Simon-Kucher & Partners