Ares & Co


Change or Die

Change or Die

Private Banks at the center the transformation of financial services

The recent announcement of Deutsche Bank splitting Private banking from Asset Management after having regrouped them a few years ago is a sign of the difficulty to find the right combination. As a strategy consulting firm working with financial services helping them to prepare for the future, Private Banks are most probably the ones where the upheaval is massive. Depending on the prism through which you look at them, each one of them is a reason for deep transformation: this could be the regulatory side, the market structure side or the digital.

On the regulatory side, two main types of regulations impact deeply the Private Banks. The first one is linked to the Money Laundering and the tax heaven disclosures. This attack was first launch by the US with the FATCA regulation and then by the European member states searching for hidden money, and finally it came from the OECD on the automatic disclosure of funds outside the home country. The impacts have been varied: it is communicating vessels: getting out of the tax heavens back home or in more transparent countries. The consequences on some countries, like Switzerland, are significant on the reduction of number of players and on the subsequent controls to be put in place for new money gathering. Other countries have seen a spectacular growth of assets under management (AUM). The second set of regulatory measures is the one impacting the trading and the fair treatment of customers (MiFID2, AiFMD, UCITS,etc.) with the consequences on the disclosure of the commissions of the distribution of fund, or the best execution mechanisms in the stock trading. It forces bank to rethink not only their pricing structures and strategies but also their relations with their providers of funds and trading capabilities. On some cases such measures were denting Private Bankers around 30 bp of AUM on revenues, basically killing profitability.

The market structure is slowly moving towards more concentration. Given the mentioned regulatory impact and the reduction in profitability, and the large IT investment required, some small players have to close, to sell, or focus strongly their operating model. Switzerland and Benelux are some good examples of that.

Finally the digital area is impacting the Private Banks from all the corners. First, the client expectations is to be able to define their blend of "human touch" and of online activities. It certainly varies by client segments but the need for banks to offer nowadays a complete set of tools online, like robot advisors, transaction platforms, payment platforms, video conferencing facilities, to name of few, even including virtual googles to visualize portfolio asset allocation (yes, indeed). Following are the processes; the digitalization of the client inception process has massive cost reduction potential, as well as the performance reporting tools. Finally (to keep it simplistic), the back office and the connections with providers are streamlined via digital tools and the internet architecture simplifies the interrelations. This said, the differences in the Private Banks, we believe, will still lie in the quality of the Private Bankers and their ability to manage and optimize over time their clients´ objectives, be profitability, returns, liquidity, transmission, etc.

In a nutshell every strategic and operating environments of private Banks has been modified substantially during the last decade, some have effectively tackle the maze of decision making to change (working with the right consultants, too) and grow stronger, some have simply died or disappeared.