Private banking has undergone seismic change in the past decade, with more to come. Ian Woodhouse identifies the forces shaping the future of the industry
The 20th century was one of tumultuous change for just about every industry – from manufacturing to retail, construction to health, journalism to travel. But not private banking. This most traditional of services quietly went about its business unconcerned by the arrival of mass communications, the internet, digitalisation and more. By the end of the century we were still very much at private banking 1.0 (PB 1.0).
The financial crisis of 2007/8 changed all that. In the decade or so since, private banking has gone from 1.0 to 4.0, forced on by successive waves of regulation, consolidation and technological and social change. Each wave brought painful and difficult adjustments, with each succeeding faster than the one before.
It was a crisis that exposed bad financial products and weak banks, and prompted global regulators to draft and implement new rules to restore trust. Their aim was to protect customers and stop such devastation recurring. MiFID and its like were drafted to increase transparency and accountability. The aims were laudable, but expensive to implement. They were also potentially ruinous if a bank failed to comply.
In response, the industry embarked on a round of mergers and acquisitions to shore up balance sheets, cut risk and rebuild trust. Merrill Lynch merged with Bank of America and Julius Baer acquired Merrill Lynch’s international private wealth management business in 2012, to name but two. For the seven years of PB 2.0, banks focused on complying with new regulations.
Yet more regulation and new technology thrust private banking into PB 3.0. From 2014 onwards, private banks strove to develop new business models, restructuring and repositioning their offerings in response to the UK’s Retail Distribution Review, MiFID II and the various Basel capital adequacy rules, the erosion of banking secrecy and the rise of cross-border regulation.
At the same time, digitalisation and automation were challenging the bespoke personalised service of private banks while dramatically raising IT costs. High net-worth clients were being offered new products with lower fees, such as exchange-traded funds (an investment fund traded on a stock exchange), which were less profitable for such banks.
There was also new competition from family offices and high-street banks, which could now target underserved, affluent clients with robo advisers and investment products designed for the mass affluent market.
The response from the private banking industry has been yet more restructuring to deliver a better service and innovative products. Scale has really started to count. Between 2007 and 2017, Switzerland saw the number of private banks fall by 25 per cent as a result of consolidation and many sold out of sub scale Asian operations to refocus on Europe and scaling up.
Société Générale sold its private banking arm in Asia to DBS and acquired KB in Europe; ABN Amro sold its Asian and Middle East business to LGT and bought Credit Suisse private bank in Germany; UBP bought Coutts International; and EFG bought BSI.
All the while, the customer base of private banks has been evolving, with five new “tribes” joining the high net-worth club. The newcomers include women, who are increasingly seeking more control over their fortunes and wealth-management services tailored to their needs; emerging markets entrepreneurs; the growing corpus of rich professionals; millennials; and the modern entrepreneur. Each group looks for new and different services.
These new tribes are accustomed to high levels of service, transparency and personalisation in every aspect of their lives, and they expect the same from their wealth managers. They want access to their portfolios from anywhere in the world, 24/7. This is forcing the industry to undergo a new permutation, PB 4.0, as wealth managers put technology to use to tailor their products and services to the increasingly diverse needs of these tribes, as well as new generations of old money.
Data lies at the heart of PB 4.0. Leveraged effectively, it will help banks sell more, sell better and manage their costs. To do this they need to introduce front-to-back digital technology, and to do it well they may have to specialise in one or just a few client segments.
Yet the pace of transformation will not end there. By 2020 – just two years from now – we expect to see another seismic shift in private banking, driven by demands for transparency from customers and regulators. PB 5.0 will be all about outcomes rather than products. It will be about the ability to show fair value, comparable performance, social investing and audit trails. Think accountability.
Along with effective use of data, the core of PB 5.0 will be an ecosystem of fintechs, regtechs and service providers that will help banks satisfy their customers’ needs. This will demand new business models again and open IT systems. Private banks will become more involved by helping in many aspects of a client’s life well beyond investment. Proactive customer management and service will be the order of the day. Inevitably, there will be further consolidation.
In less than two decades, the wealth-management industry will have become unrecognisable. With so little change before that, there was certainly a lot to do. Banks have learnt fast – that they must be on the front foot, be proactive or lose out to the competition. PB 5.0 is already at our doorstep, and surely 6.0 is not far behind.