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For private banks, I.M. is a pain in the app

Security nightmare or business opportunity? Private banks in Asia diverge over instant-messaging apps.

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This week DigFin is surveying the digitization of private banking – that most high-touch of financial services. Following Monday’s overview, yesterday we looked at client onboarding, and profiled Amy Lo of UBS. Today we examine the great question in client experience: using WeChat and WhatsApp. Tomorrow we conclude with another CEO profile, while also exploring how private banks are using data and A.I..

In financial services, the usual pattern is that ideas, technology and standards emerge in the U.S. or Europe, and then find their way to Asia.

That’s not the case anymore. In private banking, the new wave of digital engagement with clients is being driven by Asian client demand. And what they demand is to converse with their bankers via WeChat, WhatsApp, Line or another instant messaging service.

Banks initially built online communications around the desktop and email, which fit into their existing compliance and security I.T.

But IMs are external environments. This is raising a host of concerns around safety and probity.

This is the biggest issue that banks are grappling with

Kam Shing Kwang, J.P. Morgan

Some private banks believe they have no choice, especially in Asia. Too many people leapfrogged landlines and desktops in favor of “super apps” like WeChat, and mobile phones.

“Clients want information via social media,” said Kam Shing Kwang, Asia CEO for private banking at J.P. Morgan. “This is the biggest issue that banks are grappling with. But it’s important also because of the sheer penetration of social media.”

But can it scale?

Others are more cautious, and prefer to guide clients to use the bank’s own app. And they think in the case of WeChat, rich people might agree.

“Does a wealthy individual want to operate outside of our system, and be in China’s system, under surveillance?” mused one executive. “Do they fear our bank’s compliance more than they fear China’s tax authorities?”

Several private bank executives told DigFintheir apps can’t compete with the likes of WeChat, so they are looking at ways to work within these “walled gardens”, as one put it. But U.S. and European banks also need scale, and U.S. banks in particular tend to run single platforms run out of New York.

For European banks like Credit Suisse and UBS, Asia represents a relatively bigger portion of their wealth businesses. For American banks, the region is important but not big enough to dictate technology projects.

From this lens, WeChat is only relevant for China and Hong Kong, and requires local-language inputs. “This is a niche market,” one executive at a U.S. private bank said. “It’s not scaled. We need to leverage our global platform.”

Against that caution is the desire by people – rich people as well as the rest of us – to enjoy the convenience of super-apps. And banks fear that if they don’t find a way to work with WeChat and WhatsApp, they’ll lose the millennial generation, and not just in Asia.

Here’s a roundup of how some private banks are tackling the super-apps.

Credit Suisse

Credit Suisse rolled out CS Chat last year, claiming to be the first bank in Asia to enable communications with WhatsApp. “Our ambition is to be relevant to the way people communicate,” said Francois Monnet, head of private banking for Asia Pacific.

This follows the launch of its Digital Private Bank, an app for disseminating portfolio and investment information. It already allows clients to apply for orders, but not execute themselves.

Although the bank is working on a WeChat version, it began with WhatsApp using Apple Pay, so there is no Android compatibility yet. “We found 90% of our clients are using Apple devices,” Monnet said.

For the bank, this is not just about meeting client demands. It is also a way to address ballooning costs of compliance and operations. As per DigFin’s story yesterday, private banks are trying to automate the onboarding process and the paperwork that goes with routine transactions. Now CS users can upload images of, say, a new proof of address when buying a product.

DBS

Last year, DBS became the first bank in Southeast Asia to let RMs converse with clients via WeChat and WhatsApp. DBS worked with a fintech, Singapore-based FinChat, to build the capability.

Clients using WeChat or WhatsApp can plug into DBS’s own app. They first must apply, and then their RM will set up a private chat room. DBS predicts by letting RMs and clients converse this way, it will save 10,000 manhours of RM labor per year. The bank intends to introduce limited transaction capabilities later this year.

J.P. Morgan

The bank last year set up a corporate WeChat account for the public, and for its clients to follow its latest activities and information. “WeChat is one of the key social platforms to communicate with our clients,” Kwang said.

More significantly, the bank is planning to deliver further capabilities on WeChat enabling two-way instant messaging with clients. “We’re still developing the two-way messaging,” Kwang said, noting that providing a compliant messaging channel between RMs and clients via social media is a priority, along with ensuring client information is protected.

Pictet Wealth Management

Claude Haberer, Asia CEO, says the bank is under a lot of pressure from clients to let them communicate via WeChat or WhatsApp.

“We cannot forbid bank staff to communicate with clients this way,” he said.

Pictet’s stance is that its RMs are expected to honor a code of conduct. They can share information and discuss trading ideas. But there can be no instructions for a transaction. Those must be placed the traditional way, via email or a phone call, with callbacks from Pictet as a security measure.

Could this change? “We will continue to monitor how WhatsApp enhances the encryption around its messages,” Haberer said. But for now, the bank’s relying on the training of its RMs and its conventional security methods.

UBS Wealth Management

The bank introduced in October advisor messaging on WeChat for Android and Apple users, allowing communications and messaging on a UBS business account. To allow this outside a bank’s internal tech stack is an innovation.

“It was considered a total no-no in the industry,” said Amy Lo, co-head of private wealth for Asia Pacific. Therefore UBS began this project in the regulatory sandbox at the Hong Kong Monetary Authority. Even so, it took some time to evaluate different fintech vendors and get the project off the ground.

UBS monitors WeChat conversations on its internal systems

The bank set up a marketing page (or “account”) on WeChat in 2016, when it opened a wealth-management branch in Shanghai.

Now it is considering whether to allow clients to execute trades via WeChat. This is a complicated decision, given the additional security and regulatory considerations, but Lo expects it to happen.

 “We’re restricted on our social-media compliance,” Lo said. “Trading is the direction this is taking,” she said.

Asset & Wealth Management

Lu Global reverses the Lufax story

Lufax began as a P2P and became a wealth manager – in Singapore, it’s the other way around.

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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 peer-to-peer 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 as a peer-to-peer marketplace for loans, a business it has since exited, before it became a wealth-management provider.

Lu Global built itself first as a marketplace for wealth products – but now it’s expanding into P2P trading.

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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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For private banks, I.M. is a pain in the app