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The new differentiator for private banks

This week’s survey of private banking says why, and how, the ultimate in high-touch financial services is going digital.

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Private banks catering to the ultra-wealthy have been slow to adopt digital technology.

There are good reasons for this. Private banking is one of the apex businesses in financial services, along with investment banking and private equity. It is run on relationships.

Private banks offer more than just investment advice for rich people. They provide many services, from estate planning to advice that blends corporate and investment banking; from helping people establish philanthropies to working out sticky disputes among family members.

The complexity of this service, and the demanding nature of super rich clients, means private banking will remain a high-touch business based on trust and privacy.

It is also a business that is slated to enjoy strong growth, especially in Asia. Singapore has become the new Switzerland. Not only is its private-banking industry huge, managing $2.6 trillion of high-net-worth client assets, but it has become the global booking center of choice, with most of its clients hailing from Europe, the Middle East and North America.

Hong Kong is experiencing even faster growth, and its private banking industry manages $1 trillion, as of 2017. This number is expected to double by 2022, according to the Private Wealth Management Association, an industry body. That’s thanks mainly to the rise of mainland Chinese clients.

The old-school client

So private banking’s future looks secure. But which players are likely to win the lion’s share? This is where technology is playing a bigger role.

DigFin spoke with two family offices in Hong Kong. One represents Korean and Chinese families. The head of this office said, “My portfolio managers are old-school guys, and I like things done the old-fashioned way.”

The next generation doesn't want to talk to RM's

Family office founder

He’s keen on tech that reduces his paperwork, but doesn’t find much use for apps showing him house views. “Banks are trying to scale and push more information to us, but when they follow up on trades, it’s a person.”

But, he said, “The next generation wants to use apps for data and information, and don’t want to talk to R.M.s.”

The tech-ready client

A second family office represents a Westerner’s personal wealth but is now scaling into a multi-family manager. The director said private banks must now serve information digitally, so he can see it when he needs to, rather than wait for paper statements.

He also welcomes private banks’ R.M.s using data to provide him with useful interpretations of data. But it doesn’t always work: “There’s variation in terms of banks’ capabilities. It takes money and time to implement, and it depends on the quality of the R.M.”

He also notes that digital can worsen a relationship if it saddles him with annoying passwords. If banks are collecting data on clients, they need to find the right balance between U.X. (user experience) and security, because the more data they have, the juicier a target they become for hackers.

But this individual believes the industry is digitizing no matter what: banks must digitize how they gather client information and what they do with it, because the volumes are escalating beyond what humans can manage. 

“The regulators, by forcing banks to ask us for more private and personal information, are creating new risks,” he said. Therefore prosaic things like customer onboarding are going to turn into a competitive edge for private banks.

Tech's contested role

Private bankers like to think their high-touch world is removed from the digital revolution, but that view looks increasingly untenable. Tycoons use mobile phones too; their children may be mobile-native. And structural changes, such as the launch of virtual banks in Hong Kong, open the door to internet giants to compete for wealthy, digital-savvy customers.

Even the most progressive private banks aren’t prepared for this new world, as executives admitted to DigFin. This is especially true when it comes to catering to younger entrepreneurs.

Banks are therefore shifting their I.T. budgets to focus more on client-facing apps and other innovations. Although big players like J.P. Morgan and Goldman Sachs offer digitalized services in the U.S. to the merely rich ($2 million to $10 million, such as tech-industry executives), global banks tend to focus exclusively on the “ultra” segment in Asia.

Therefore there’s not yet a desire to use tech to address the lower rungs of the high-net-worth world in this region. Therefore banks have been slower to roll out digital architecture in Asia.

Moreover, most bankers view tech as “hygiene”, that is, necessary but vanilla. Only a handful view it today as a competitive differentiator.

Examples might include UBS introducing its “health check” service to its app, alerting clients when they veer away from their goals-based allocation; and Credit Suisse partnering with Singapore fintech Canopy to aggregate client portfolios.

Tech favors the big

Rivals concede these provide an advantage, but for how long before they become generic?

The answer may lay in size. Smaller banks will struggle to keep up. Only top-tier banks will have the I.T. budgets and expertise to copy each other’s best ideas. J.P. Morgan execs aren’t shy about touting their bank’s $11 billion I.T. budget.

Other factors are already making the big even bigger, such as regulation that is prompting banks to raise onboarding or transaction fees. As account opening becomes more expensive, Asian clients (notorious for using multiple private banks) may reduce the number of banking relationships.

Now tech is becoming the next factor to spur consolidation. One is about costs. As fees increase, bigger banks are in a better position to absorb these. Another advantage for the big is client data. Universal banks with investment- and corporate-banking arms have the chance to pool more data about clients and their holdings.

Job killer or savior?

Finally, digitalization has big implications for people working at private banks. The relationship managers are the most wary of being replaced by robots.

This fear is probably misplaced. The R.M.’s job is going to change mightily, but private banks will continue to need good R.M.s. The best R.M.s will realize that digitization, if done right, will give them the information they need to sell ideas to clients. Artificial intelligence turns data into pitches.

Few R.M.s are familiar with these tools: they’re sociable, sporty salespeople, not computer nerds. The ones that tap their inner geek are more likely to succeed.

The jobs most at risk, other than operational roles, are analysts and investment professionals, either in the banks or at their asset-management arms. A lot of the vanilla investment ideas and execution will go robo, even at private banks. It’s the non-investment related aspects of private banking (estate planning, etc) that will need human direction.

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The new differentiator for private banks