Future business models for private banking 01 August 2016

Marco Silvani, Managing Director of Lemanik, Switzerland, will be at the Efma Affluent and Private Banking Summit to discuss how banks can achieve sustainable, profitable growth. He told us about the challenges facing the sector and how they can be overcome.

What will be the main focus of your speech at the Affluent and Private Banking Summit?

My presentation aims to highlight the inadequacy of the current banking business models to achieve sustainable and profitable growth. Several endogenous and exogenous trends are affecting private banks. It’s not easy to prioritise the threats according to the importance of the changes that are triggered by these. For example, a prolonged low interest rate environment has a profound influence on reshaping the investment time horizon and the risk sensitivity of the customer. In addition, high value advisory services on portfolio allocation, based on automated analysis or trading orders executed through algorithms on platforms, might intensify price competition and hurt bank profitability.

Disruptive innovation, pervasive transnational regulation and consolidation of the industry raise questions on likely scenarios for banking tomorrow and force evolution towards future business model choices.

What is becoming increasingly evident is that banking is no longer an integrated business. We can expect a disaggregation of the value chain and fewer cases of the ‘one-stop shop’ model. 

What are the biggest challenges in affluent and private banking at the moment?

Particularly for the Swiss private banks there is a significant backlash from the sunset of the classic European off-shore market that was particularly predominant in the past. This goes hand-in-hand with the new performers in the leading wealth management centres (mainly Hong Kong and Singapore) fuelled by the growing number of high net worth individuals in the Asian continent.

Furthermore the new regulatory framework is increasing the complexity of managing compliance with the inevitable outcome of major costs. This brings about a shrinkage in the gross margin and an upsurge of banks with operating losses.

In the face of cost and income pressure some small banks are forced to capitulate or seek large partners in order to survive. The number of banks in Switzerland has fallen continuously since 2006.

The consolidation in the market will go on in the next year. In this context quality of service, better know-how, different pricing policy, new geographic strategy focusing on core markets and asset management intelligence, among others, will have higher importance.

How are you meeting those challenges?

First of all every player should rethink the ultimate goal of their strategy: no longer follow a ‘shotgun’ approach but fix an appropriate growth target as the basis for long-term competitive success. It brings about a complete change in their mind-set. Growth should be achieved through profitability and efficiency. The enlargement of critical mass in order to preserve the market share is becoming much less important than the enlargement of value creation.

This means identifying more precisely the core business strategy, which might imply:

- Divesting marginal activities and discovering adjacent business opportunities
- Reshaping the business models with the choice between pure play business models or hybrid ones
- Cost savings driven by front-to-back productivity increase
- Turning regulation into value by adopting a more transparent pricing policy and improving clear bank-client communications. This will restore client confidence and trust
- Promoting open architecture or investing intelligence in in-house products
- Developing partnerships with new players. 

This short list could be extended according to the business model adopted.

How important is digital transformation?

As a prominent Swiss banker stated, “challenge is not regulation but digitalisation.” According to a Deloitte survey on internet penetration over half the Swiss population ordered at least one item online during 2014. E-commerce is popular in Switzerland and it is expected to grow further in the coming years. A similar trend occurs in the use of e-banking with almost half the population making online payments or using online banking services. Alongside the growth of e-commerce there is a demand for the development of easy-to-use payment options. 

Although digital investing via social media and robo-advisors in Switzerland is still in its infancy, with the increasing use of internet the forecast for market volume looks positive for traditional financial service providers to adjust their digital offerings. The latter should be aware that new providers will enter the digital advisory market. 

In a very progressive scenario Deloitte estimates that in 2020 the market volume of digital investing in Switzerland might reach 90 billion Swiss Francs. The lion’s share should be digital advisory (online wealth management with comprehensive advisory services, multi-asset investment strategies) followed by robo-advisors (automated investment process with the support of personal advice).

How is innovation shaping the future of wealth management?

Various drivers of innovation fundamentally affect the traditional way of banking: from mobile payments and mobile money to platforms that automatically collect and analyse data to enable more informed buying and selling decisions.

As far as wealth management is concerned an important feature is the new profile of the banking customer who is not so keen on financial and investment knowledge but demands services channelled through remote devices (such as investment learning tutorials or algorithmic investment tools). This will result in access to sophisticated financial services being improved through social and automated trading and automated advisory.

It should be pointed out that advanced computing power, algorithms and analytical models facilitate higher levels of automation and service sophistication. In a very highly technological environment new players can offer platforms able to:

- Build and share investment strategies and portfolio management among investors
- Build, test and execute algorithms with limited know-how and infrastructure
- Offer asset-allocation strategies at low cost based on automated analysis
- Prepare clients for investing real money through virtual trading applications
- Make use of gamification in order to build up customer financial expertise through practice in a virtual environment.

Ultimately, the new technologies offer opportunities for banks to become not only more efficient, but also to differentiate themselves from competitors.

Meet Marco Silvani. Secure your place at the Efma Affluent and Private Banking Summit in Wien on 15-16 September 2016.

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