Private Banking: Confident industries at crossroads

On the 6th of June 2016 Rothschild & Co announced its merger with the honorable «  «  in Maresille estblished since 1825 and specialised in Private banking and Asset Liability management. This move was witness to important changes taking place within this sector. Since the banking crisis, the private banking industry has had to face major upheavals ; Rapid transformation within a competitive market ; Strong regulatory pressure ;new technologies in which the potential is to be further studied.

A rapidly changing market

the private banking industry is in the midst of important transformations:

– Market consolidation: faster banking reconcilliations, naming for example the Pasche bank with the Havilland Bank ceded by Credit Mutuel-CIC, or even EFG international with UBI Banca International. We are seeing a trend in reconciliation with for objectives; gain a greater share of the market,increase the quality of service, target the greatest fortunes;

– Asian market influence: less impact by the current unstable financial and fiscal context, new Asian player are appearing.

For example, on the 1st of June 2016, Luxembourg calculated a score of Chinese banks which almost doubled in the space of one year. New Asian clients have equally appeared to the point that Private banks are now recuriting employees who speak fluent Mandarin and Cantonnese;

– A Change of Hub: The centre of gravity is starting to move away from Swtizerland, traditionally noted for its excellence, towards hubs in Singapour and Hong Kong. Certain banks are already broaching the subject of the end of the Swiss model with capital flight towards Asia and an increase in importance of the Asia-Pacific banks;

– Change in clients: younger and better connected clients are disrupting more and more the historical functions of Private banking. As a matter of fact, better informed, this newer generation of clients are more demanding and represent higher attrition rates.

A constant regulatory burden

Facing recent crises, regulators have imposed a series of directives for banks in order to increase protection for the investors and to reinforce the financial markets:

– Professional obligations (AML,KYC)
– Regulating the market (AIFMID, EMIR)
– Financial Stability (Basel III, CRD4, Solvency II…)
– Protecting the client (MiFID I/II, UCITS, PRIPS…)

Although, delayed until January 3rd 2018 by the European commision, the implementation of the directive MiFID, it implies a certain number of new demands which are going to significantly impact the manner in which the economic model of private banks function:

– Market structure (scope of products, introduction of OTF’s, transparancy pre and post negotiation, new reporting to the regulator);

– Reinforcing protection for the investors (reviewing suitability and appropriateness,…), building relationships, the end of commissions and fees for independant investment consulting and discretionary management.

Globally, the cost of reglementation as a whole generates an increase in workload by up to 70% according to JP Morgan.

Which strategic options?

In tackling these developments which bring into question profitability, several strategic options are presented to the managers of private banks:

– Agressive strategy: buy back competitors in order to generate a synergy and amortize costs;
– Prudent strategy: A stratgey essentially centred upon reducing costs;
– Innovative strategy: Exploiting strategies in order to build a more competitve offer and propose new services.

The innovative strategy consists of underpinning new technologies that seem today to be the most convincing:

– to offer, simultaneously alternative channels of distribution at a lesser cost;
– Targeting digital native generations or entrepreneurs of new technologies;
– Equally offering products such as investment consulting based on algorithms at lower costs.

Equally, these advances do not disrupt the business model. In actual fact, if one examines these major issues, the most important impacts are concerned with building relationships, the consultation /communication and investment consulting. Online secure communication is already the way for many banks. Forging relationships could in actual fact benefit social networks or can be done online, these new channels generate a flow of customers of which the cost of acquistion is inferior to the average cost (1600 Euros).

We are not talking about an upheaval of the economic model for private banks ; these channels add on to what already exists. Consulting and management of portfolios benefit from the usage of algorithms(Robot Advisor) allowing grant propositions to be generated on line along with the risk profile of the client. The Robots Advisor features the advantage of costing, advantageous in reducing the access to the advisory management services. However, the safety requirements pf transactions and their certification become critical. Safety requirements and identification ask more broadly the question of digital identitiy. Nevertheless Private banks are largely ahead when it comes to the idnentification of their clients using a combination of tools: Voice recognition, transaction history, family occasion…

Other important functions of private banks such as financial engineering and its succession are not directly touched by the digital transformation. It requires highly fiscal, legal and financially developed skills, as well as a certain intimacy with the client, their family context and requirments both short and long term which leaves little room for digital processing or online.

Our Conviction

Our conviction at Fairman consulting is that the real upheaval will come from the capacity to monetize historical functions within the bank in todays digital environment. In fact, regarding ongoing transformations, private banks can capatilise upon a fundamental advantage which is its ability to safe guard. Its not just about the bank’s « actual » safe but moreover its capacity to keep information long term and to guarantee confidentiality.

In todays digital world, this function ca be defined as 2 offers of services in accordance with the ADN of the private banker:

– The conservation of dematerialised valuable documents ; in the same way that physical title deeds were conserved within safes, one can imagine the conservation of important documents, digitally;
– The protection of personal data. In an environment of mobile operators, web browsers, the operators of card payment systems, exploit or commercialise user data, the private banker provides an environment where the confidentiality of data is « sacred » and whervby the confdentiality is respected.

All E-Commerce businesses know that personal information has a value and going even further, one can say that the protection of this data has a greater one. Who else could you trust this data with other than with a player whose business is all about confidentiality?


Thus, up against these radical changes, Private banks are not short of assets, the question here will consist of monetizing within the digital world, historical banking operations based on trust. By parodying Giuseppe Lampedusa’s leopard, it is necessary to « change everything so that in the end nothing changes » Digital innovations are the opportunities in which to put at the heart of the banking field , traditional functions such as value protection and the guarantee of confidentiality.

* Independant investment consulting firm establised in Paris, Hong Kong and Luxembourg,Fairman defines itself by its willingness to add value by challenging the status quo. Innovating and transforming restrictions into opportunities is at the heart of our implemented approach amongst the large financial institutions.

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