Rethinking private banking in Asia-Pacific
Rethinking the future of private banking
Responding to new market trends will require different business and service models
The shape of the future private banking model depends on its starting point. During the last three decades, private banking businesses have evolved enormously, branching into three basic models:
- Integrated banks — these are part of and supported by universal banks, … ,.
- Standalone private banks, often with Swiss heritage — these funds-focused brands, … , offer the full suite of private banking products aimed at HNWIs.
- Broker/dealer — this largely US-based investment bank/broker model includes institutions … . It survives on entrenched relationships between dealers and customers.
To survive, banks must consider how they will move from their current models to:
- Transform service models for customer needs and compliance
- Leverage digital transformation
- Change their operating models for scale and efficiency
Transform service models for customer needs and compliance
The traditional models of customer segmentation across wealth bands make economic sense, but are not customer-centric. Currently, private banks are failing to reach at least 80% of the US$1 million–5 million wealth segment, where customers have a historic reliance on transactional banking and a tendency to spread their assets across multiple banks and their own investments.
Capturing share of wallet will require private banks to use analytics to enable deeper segmentation, multichannel integration, and better lead generation and management. This will require technology investment, cultural change and upskilling, but it should result in models that enhance RM productivity and profitability.
To further adapt to customer needs, institutions should consider broadening their offering, potentially via partnerships and alliances, to include real estate, private equity/venture capital and alternative investments cost-effectively. They should also rethink how they can both serve and market their services to these customers, leveraging digital technology to create more opportunities for customer engagement.
Leverage digital transformation
As private banking digitizes, financial institutions will move from a traditional, point-to-point interaction model, via RMs, to a collaborative eco system supporting multiple touch points between clients, RMs, and the bank.
Digital transformation, or digitization, is not just online banking. It will fundamentally change how clients, RMs, staff, and the bank interact and execute business, dramatically improving business agility.
Based on the experiences of a number of Asia-Pacific institutions that have invested significantly in these foundational capabilities as a launching pad for the digital transformation, we estimate that private banks will need to invest between 1–3% of revenues to support the build out of their digital capability.
Once private banks have dealt with basic automation, they can then look at enterprise intelligence solutions to help aggregate and analyze data from multiple internal and external sources — creating a step change in value.
Already private banks are equipping their RMs with digital toolkits
Many banks are starting to invest heavily in “digitizing” their customers, focusing on their direct channels. But, for some, this is at the cost of under-investing in “digitizing” their sales force.
A sizeable portion of customers are still interested in talking to an RM — if the RM can provide added value.
Change operating models for efficiency and scale
After more than five years of very thin margins, private banking in Asia Pacific has become a volume business. Although margins improved slightly in 2012–13, they have failed to bounce back to levels that would enable smaller private banks to survive into the future at their current size. Given the market’s US$20 billion AUM breakeven point, smaller private banks must find a way to scale and grow, whether through M&A or partnerships.
Consolidation is inevitable
The inevitable market consolidation has been stalled until now, because many private banks have long been seen as a source of low-cost funding for their parent group.
But now, owing to significant capital constraints, under pressure from market forces and needing to realign strategy to refocus on their core businesses, banks are looking to divest their loss-making private operations.
Be prepared for acquisitions
In the inevitable consolidation, winners will be those who get acquisitions right. Acquirers need to consider:
- How much of an overlap will there be in the new private bank’s customer base?
- Where is the new AUM coming from? For example, if it is coming from Europe, what are the taxation and regulatory risks?
- What are the chances of post-transaction erosion?
- How will customers respond to being taken over by a new brand?
- How easy will it be to migrate to a single platform?
- Can you continue to support the product set that new customers are used to?
- How will the two sets of RMs be integrated?
- For assets used to getting HR and IT as shared services, how will this now be provided?
- How will integration be managed to ensure its efficiency and effectiveness?