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Asset & Wealth Management

Private banks wrestle with digitizing account opening

Banks are investing in digitizing the onboarding of clients, but hopes for a utility solution are unlikely to be realized.

Claude Haberer, Pictet Wealth

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This week DigFin is surveying the digitization of private banking – that most high-touch of financial services. Following yesterday’s overview, today we look at one of the biggest operational challenges: client onboarding. Plus an exclusive interview with Amy Lo of UBS. The week will continue with stories on challenges for apps, how private banks are using data and A.I., and how one bank is going digital.

Top private banks expecting rapid growth in Asia are investing more to automate customer onboarding, the costs and hassles of which threaten to spoil what should be a rosy outlook for the industry.

“Onboarding is important because it’s the client’s first impression,” said Claude Haberer, Asia CEO at Pictet Wealth Management.

But that first impression is often marred by the need to document wealthy clients’ source of money, verify their identities, and go through lengthy know-your-customer and anti-money-laundering checks.

Nor does the process end with setting up an account. Any money transfer now requires documenting its source, along with various declarations. Banks are responding by raising charges (which the bigger players will eat), and by diverting more of their relationship managers’ time toward unproductive paperwork.

Automation drive

The result for clients: red tape and a much longer time required to open an account: the old norm of 30 days is now on average 40 to 60 days.

But regulation is only part of the story. In Hong Kong’s case, account opening has become harder because most of the industry’s growth in this city comes from mainland Chinese clients. Entrepreneurs there are not used to undergoing this kind of due diligence. Nor are hurdles just about culture: older clients’ property deeds may have been destroyed by war or revolution.

Onboarding is the client’s first impression

Claude Haberer, Pictet

“Clients complain that we asked them four times for the same information, or that we asked them four times for different pieces of information to do one deal,” said Kam Shing Kwang, CEO for Asia-Pacific private banking at J.P. Morgan. “It’s a nightmare for clients, especially if they don’t have a family office” to handle most of the work.

More banks are taking the initiative internally to automate what they can. Pictet, for example, is now rolling out a digital, more streamlined capability to handle digital signatures, for example – first in Switzerland, with Asia booking centers to come.

J.P. Morgan first began automating onboarding in 2016, starting in Asia, and is still working on digitizing any part of the process that doesn’t by law require a wet signature. 

UBS, meanwhile, is using biometrics such as face recognition to create a smooth process among its own branches. Currently a client with an account in Hong Kong can’t automatically open an account in, say, Singapore. Such frictions impact the client experience. 

Industry-wide solution?

There is also a growing interest in automation at the industry level, as most of onboarding is a compliance function, not a competitive advantage.

Florence Kui, managing director and chief operating officer of private wealth management at Goldman Sachs, says an industry group that she is part of is in conversation with Hong Kong regulators to study ideas around automation. This could include an industry utility for an electronic identity, or eID, she says.

It’s a nightmare for clients

Kam Shing Kwang, J.P. Morgan

Private banks aren’t the only ones holding such discussions: the Hong Kong Monetary Authority has already begun exploring the idea of an eID utility with the Hong Kong Association of Banks. But this is more of a consumer-banking project. The needs of private banks are more complex: they must ascertain the origin of a client’s wealth, which means untangling complex webs of businesses, foundations, trusts and estates.

Utility dreams

However, there are limits to what an industry utility can achieve, be it a theoretical one in Hong Kong or a blockchain project that Singapore’s government is pursuing in line with its MyInfo identity database.

Singapore’s experiment only works with resident Singaporeans. Hong Kong’s government is also introducing eIDs, but again, any bank utility would be limited to locals. This is fine for most consumer banking needs but won’t help private banks, whose clientele is overwhelmingly from somewhere else.

The essential parts are not available digitally

Claude Haberer, Pictet

And any utility or consortium will then have to face hard questions over who pays for it, who governs it, who builds it, who maintains the data, who protects the data, and who has access to the underlying data.

Such issues are difficult to resolve just within a single bank. On paper, a market-wide service to streamline account opening represents a huge win, and if one jurisdiction gets this right, it could become a competitive advantage.

Getting on with it

But it’s hard to see a utility emerging when private banks are still coming to terms with what digital onboarding means – not just from a tech perspective, but in terms of human skills and expertise.

“We’ve begun to use surveillance technology to monitor portfolios,” said Amy Lo, co-head of Asia Pacific at UBS Wealth Management. “We need to turn our compliance people into data analysts.”

A utility for KYC, authentication and other onboarding procedures is nowhere near reality for private banks in Hong Kong; the industry has decided to wait and see what the government comes up with for consumer banks before proposing anything specific.

Anyway, there is no substituting for the degree of digging that is still required. “The essential parts of this information are not available digitally,” Haberer said. “You have to hear it from the client.”

Asset & Wealth Management

Lu Global reverses the Lufax story

Lufax began as a P2P and became a wealth manager – in Singapore, it’s adding secondary trading.

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Kit Wong, Lu

Lu Global, a wealth-management fintech in Singapore, has just launched a marketplace to enable its customers to trade the same products they bought on the company’s website.

Kit Wong, CEO at Lu Global, says the company has developed its consumer-facing business and is now selling both funds and structured products.

But it believes some clients want to get out of these positions, particularly structured notes. Instead of having to hold them to maturity, they can now see if other users in the Lu system are willing to buy them (at a discount).

Wong says the firm, which has a capital markets services (CMS) license in Singapore, serves about 300,000 customers. Some are resident in Singapore (where the business can only market to accredited investors), others are from outside, who can be either professional investors or retail.

The biggest segment of investors are mainland Chinese, who already know the Lufax brand, but there are also a lot of Taiwanese and Hongkongers, and a growing number of Southeast Asian users, Wong says.

The electronic marketplace has just gone live, so it has no volumes to speak of. Lu Global does not take positions in this secondary trading environment – it merely matches its existing customer base in case users want to make trades among themselves.

Lu Global declined to state its assets under management. Wong says the largest number of products are mutual funds, issued by the likes of BlackRock and Pimco – but the biggest volumes are in structured products.

He believes this may have to do with economic and political uncertainty in the region, which is spurring demand for products with known outcomes and terms.

But such products only pay out upon maturity – and the same destabilizing factors may be leading more investors to want to cash out early, even if they do so at a loss. But providing a marketplace not only gives them access to liquidity (assuming there’s a buyer on the other side) but also lets them sell at a better rate.

The launch of this product is a strange parallel to parent Lufax’s journey. Shanghai-based Lufax began in 2011 as a peer-to-peer marketplace for transactions, financing, and investment management. It exited the transactions and financing aspects to focus just on wealth management.

Lu Global built itself first as a marketplace for wealth products – but now it’s expanding into secondary trading, creating a marketplace for customers to exchange financial products before they reach maturity among themselves – a different kind of P2P than lending, which mainland authorities are clamping down on.

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Asset & Wealth Management

Half of Invesco’s China sales now via digital

But as the PRC joint venture learns how to distribute digitally, Invesco remains unsure of robo’s role in Asia.

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Andrew Lo, Invesco

This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. See also strategies from AllianceBernstein and BEA Union Investments. Go here for more insights into digital asset and wealth management.

Invesco is using its joint venture in mainland China, Invesco Great Wall, to figure out digital distribution.

The business now manages about $50 billion of assets, of which about 80% is retail, making it the fourth-largest Sino-foreign fund house in China. Over the past two years, half of retail inflows have come from new digital channels, as opposed to the traditional reliance upon banks, says Andrew Lo, senior managing director and Asia-Pacific CEO of Invesco in Hong Kong.

This is in keeping with a broader trend in the global mutual funds industry, which is shifting from one based on products to one focused more on investment solutions. “There’s an emphasis on designing outcomes for clients, such as through asset allocation or structuring,” to combine types of risk and asset classes.

That’s driven both by client demand as well as market volatility and challenges to active fund houses to deliver alpha (outperformance) on a net-free basis, compared to ultra-affordable passive investments tracking a benchmark.

Reaching retail

That’s been an emerging story for the funds industry over the past decade. But on top of that is a new wrinkle: the ability to use technology to speed up operations and to reach more people.

“Technology is now changing the distribution landscape,” Lo said. “In China, it’s having quite an impact on reaching retail investors.”

For now this has been a story unique to mainland China, where existing bank channels (which dominate funds distribution in most Asian markets) are not well developed, and where regulation favors digital disrupters like Ant Financial.

The power of digital was evident in Ant’s success with money-market funds (under an affiliated fund house, Tianhong Asset Management), but it has now extended to equity and quant products onshore – products that Invesco’s J.V. now sells through fintech channels, including Ant, East Money Information, JD.com (Jingdong) and Snowball Finance (Xueqiu).

This has not been straightforward, however. Fund management companies are designed to cater to bank distributors, and are built on old-fashioned tech.

Still learning

“We learned how to do digital marketing,” Lo said. “It’s very different to traditional distribution. It’s iterative, it changes fast, and you have to listen to customer feedback.” Partnering with digital channels has also required a different sense of product design, and to rebuild the company’s operational process to support round-the-clock digital sales and support.

Lo says the experience will be increasingly relevant as other markets digitalize, although they may need to be tweaked, depending on local regulation, client behavior and distributor demands. “Some things we can learn and apply elsewhere as the world goes digital,” Lo said.

The onshore funds market manages about Rmb14 trillion (almost $2 trillion) in total assets among 135 asset managers authorized to sell to retail clients, of which are 44 Sino-foreign JVs.

But most of these JVs are run by the local partner, with foreign shareholders having less influence. They are limited to stakes no greater than 49%, and local partners are often banks or other powerful institutions. One analyst told DigFin that local fund houses are not particularly bold when it comes to digital channels; and even if they are, the lessons don’t flow to the foreign partner.

But Invesco Great Wall’s case is different. Both Invesco and Great Wall Securities own 49%, with two other shareholders holding another 1% each. Given that Great Wall Securities has its own in-house funds business, it has been willing to let Invesco drive the business. (Beijing has recently permitted J.P. Morgan Asset Management to take a 51% stake in its funds J.V.) Invesco Great Wall is also among the oldest funds JVs in China. It is today led by Shenzhen-based CEO Ken Kang Le.

Robo reservations

In China, Invesco is leading the way in digital opportunities. Elsewhere it seems to be running with the rest of the herd. In the U.S. and the U.K., it has made digital acquisitions: Jemstep, a B2B robo-advisor that services U.S. bank distributors, and Inteliflo, a British platform to support financial advisors.

“We haven’t found the right use case in Asia,” Lo said. Onboarding a digital B2B (of B2B2C) platform needs scale, but Asia is fragmented, with each market requiring its own business and compliance needs.

“Digital transformation is still evolving,” Lo said. “My guess is it can be like it is in China, where it’s a real thing that has become a major part of the industry.” But what that looks like elsewhere remains hard to know – or at least hard for justifying a business case.

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Asset & Wealth Management

New China distribution not just for money-market funds

Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.

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Rex Lo, BEA Union Investment

This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.

Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.

China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.

Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.

It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.

But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.

MMFs: less big

Lo thinks this is changing, however.

The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.

Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.

Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.

“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”

In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.

Accessing the mainland market

BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.

This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).

Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.

Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.

“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”

The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.

New ways of doing business

Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”

Marketing was not the only part of business that had to adjust.

“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.

There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.

GBA play?

Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.

BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.

It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).

This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.

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Private banks wrestle with digitizing account opening