Private banks are making top-down strategic revisions amid the protracted COVID-19 pandemic, greatly advancing the need for more efficient business models in the long term, according to industry observers.

While most private banks have experienced record transactional income growth in the first quarter of 2020 due to HNW investors seizing opportunities in a volatile market, hiring has become more selective in the last few months and some banks in Europe have even withdrawn from their prime office spaces.

“People are taking a hard look at their business, their footprint, the services they provide. and what the future looks like,” Mark Wightman, Asia Pacific wealth and asset management advisory leader at EY told Asian Private Banker.

As cost-income ratios remain high at private banks compared to other segments of the banking industry, Wightman said that firms are thinking more about productivity, especially in the areas of headcount, the support environment, technology, data spend, and real estate.

“We know the direction of where it’s heading — more digitalisation, probably more onshore servicing but it means competing with the growing onshore private banking or the mass affluent type offering, and we’re clear that there has to be increased end-to-end automation so we can save the time of RMs and improve cost to serve.”

Prior to the pandemic, private banks in Asia were undergoing a shift from a transactional-based to a more advisory and discretionary-driven model with the aim to increase the portion of recurring income. With no real end in sight for the COVID-19 outbreak and a low or negative interest rate environment looming, private banks have an even greater need to compel change and keep their businesses profitable.

“COVID is accelerating conversations. Firms are looking a lot more closely at their whole footprint in Asia and their operating model, and the ultimate question is what is profitable private banking look like post COVID? Private banks may have expanded in some markets, but if they realise that it is really hard to make money, they would consider whether they should stop now,” said Wightman.

He pointed out that some private banks are currently decided whether to entering or exiting certain markets and that the M&A activities are showing signs of revival for the private banking sector.

Recent examples in the market include the withdrawal of BNP Paribas Wealth Management from the India onshore market and a number of private banks exited Taiwan recently. Outside Asia, Falcon Private Bank announced in May that it is in advanced negotiations to sell its assets to another Swiss private bank before fully exiting the private banking business in 2021.

“M&A dried up for three months or so, but now there’s a lot of M&A conversations coming again. A few firms are looking to build a business in Asia so they are looking at what they can buy. There are a few other firms looking at whether they need a footprint in every country,” said Wightman.

“We are very lucky in Asia because there is ongoing wealth creation in the region, but at the end of the day, the bank has to have a profitable business to stay. Private banking has high fixed costs so the business model must be set up to drive profitable growth.”

Pandemic highlights the need to differentiate
One way for private banks to achieve this is to differentiate by way of doing digital right and stepping up advice.

“Looking at the digital experience, retail banks are often better. If you think about personalisation, most apps you work with are far more personalised than your banking app. And again, that doesn’t mean that private banking has to become fully digital, but it has to be relevant to its clients and it is likely to be a hybrid model going forwards,” said Wightman.

The Accenture-Orbium 2020 C-Level Wealth Management report published last month revealed that 78% of wealth managers in Europe and Asia don’t plan to make significant changes to their traditional business models despite facing increasing external threats. This would result in a loss in nearly one-third (32%) of their clients’ wealth through intergenerational wealth transfers, equal to US$40 trillion of investable assets over the next 30 years.

“If wealth managers want to survive and thrive beyond these unprecedented times, they must focus on differentiation and innovation while maintaining their core mission of safeguarding clients’ assets,” said Michael Spellacy, global capital markets industry lead at Accenture.

“Their resiliency is certain to be tested, so they must overcome organisational inertia to reinvent the client experience and products for future generations. The leaders will make customised digital interactions more personal, with wealth advisors supported by artificial intelligence, automation, and analytics to make better, faster decisions for clients.”

The firm discovered that from 2011 to 2018, banks that not only invested in technology but fully committed to their digital agendas (defined as “Digital Focused” in the chart above), tended to fare much better in their valuations when compared to everyone else — even those who invested in technology but in a more haphazard way.

“That’s no different for private banks,” shared Nicole Bodack, APAC head of wealth and asset management at Accenture. “If a private bank is really committed top-down to investing in technology, data, AI, etc, they can truly drive differentiation in the market.”

Bodack also highlighted that, for private banks, two things matter the most.

“The first one is to know what differentiates the private bank from others that invest a lot into it, to keep it or make it world-class. And the second thing is, in private banking, the advisor will remain important, and it’s about enabling the advisor to be the best for their clients.”

Bodack added that technology shouldn’t only focus on saving RMs from time-intensive tasks like repetitive administrative and regulatory routines, but also provide digital tools for RMs to help prioritise their work and provide insights to prepare for client meetings more effectively.

She said some wealth managers have already gone live with customised product recommendations from an advisory context, which firms send directly to clients. This has resulted in clients taking the initiative to call their RMs to follow up on their recommendations, even if they were less active with the bank in the past.

“It’s already happening, but the maturity of different private banks and wealth managers is very different. Some of our clients here aren’t digitally mature and are only embarking on the wealth analytics journey right now while the top players like UBS, Credit Suisse, etc have obviously invested into that for many years and have made a lot of progress already,” said Bodack.

She concluded that a challenge for some at the beginning of their digitalisation journey is the cost, especially if they are large organisations with lots of legacy technologies that make them less nimble. Medium-sized companies, accompanied by C-level commitment, however, are able to push through with digital reform much quicker, leading to a more sustainable wealth management business.