The Covid crisis is hastening banks’ adjustment to digital. But knowing a financial client is not the same as knowing a subscriber’s TV preferences.
The digitalization of most things took another leap forward last year. That includes private banking along with other areas of financial services. “We’ve seen an acceleration of the online trend by three to eight years depending on how you look at it,” says Christian Zahn, partner and co-lead of McKinsey & Co.’s European wealth management practice.
The pandemic year catalyzed changes that went beyond shifting boardroom meetings to Zoom. Credit Suisse unfurled an app that can onboard a new private banking client in 15 minutes. Crosstown rival UBS brought in a new CEO, Ralph Hamers, who made his name building the digital brand at Dutch retail bank ING. Across the Atlantic, Morgan Stanley shook up investment management with an artificial intelligence (AI)-driven platform, Next Best Action. UK wealth management mainstay Coutts & Co. cultivated community among its clients with Coutts Connect, an internal, LinkedIn-style network.
But It Wasn't, And Isn't, Easy
“Traditional private banks have been very averse to any kind of change,” says Meghna Mukerjee, a London-based senior analyst in wealth management at Aite Group. “Whole aspects of analytics and data management just haven’t interested a lot of firms.”
There are good reasons to go slow on digital in a centuries-old industry whose essence is human trust and discretion. For all the buzz around rising millennials, the average private banking client remains solidly baby boomer, between 60 and 70, Zahn says, and younger high-net-worth individuals crave real-time attention nearly as much as their elders. A survey of 18-to-25-year-old clients found that just one-third preferred digital service to the face-to-face variety.
Private banking and wealth management are besieged by regulations, which mushroom in complexity as clients’ affairs sprawl across jurisdictions. This presents a particular challenge in Europe, where old habits—Swiss law just recently allowed electronic document signing—combine with European Union control freakery and clients’ own culture of privacy.
“Credit Suisse works with a data-aggregation firm called Canopy in Asia,” Mukerjee notes, by way of example. “They can’t replicate that in Europe because of privacy regulations.”
Covid-19 even wrought some changes that might be considered anti-digital, argues April Rudin, an industry consultant in New York. A wealthy class that was “moving at 150 million miles an hour” had to stay home and has taken stock. That accelerated an already growing emphasis on aspects of being rich that are not easily reduced to an algorithm: philanthropy, impact investing, getting family relationships right.
“Clients are interested in hyperpersonalized, holistic financial planning where the differentiator is the human touch,” says Rudin.
Change, Or Lose Out
Nonetheless, the 21st century is beckoning, and private banks that can’t raise their digital game may increasingly lose out. The lowest-hanging fruit may be the voluminous paperwork that attends the management of large fortunes, much of which was still in paper form prior to the shock of social distancing.
“A client interface that involves filling out multiple forms needs to be massively improved,” says Ingo Rauser, senior partner and head of the Swiss banking practice at Capco, a global management and technology consultancy. “It should be more like setting up your new iPhone.”
The pandemic set off a scramble to cure the headache of account opening, Rauser notes. Most banks have trimmed the process from a week to a few hours or less: no mean feat, considering the plethora of know-your-customer (KYC) and other legal requirements.
The more complex challenge has been to mobilize data to enrich and individualize investment advice. Private banks have mostly left this expertise in the hands of the Facebooks or Netflixes, which can track their users to target advertising or entertainment choices. However, bankers hold client data that Silicon Valley wizards could only dream of, detailing what their clients earn, own, trade and borrow, but most have barely begun to exploit this information lode.
Bank-to-client communications still resemble old-school TV advertising, Rauser contends. The investment office comes up with bright ideas, then broadcasts them to customers, like it or not.
“Unstructured and not personalized advice can be very counterproductive,” he says. “Say you’re telling me to buy pharma when you should know I’m not a fan of pharma.” A more bespoke touch, under current technology, would require extensive and expensive input from a relationship manager.
While investment and financial strategy should see greater “Netflixization” going forward, making it work will be a trickier task than guessing whether a subscriber favors “Tiger King” or “Queen’s Gambit,” and private banks still won’t want robo-systems to overwhelm the human bond that defines their offerings. But the right hybrid models can make clients feel more special and bank personnel more efficient.
“The RM should know in advance what you have been looking at for the last 30 minutes,” says McKinsey’s Zahn. “Then they can get on a call that may lead to a trade.”
The most urgent digital challenge for private banks in 2020 was not individualization, however, but networking. Melding clients into a rarefied community through golf tournaments or art openings has always been part of the private banker’s craft. With a pandemic physically isolating their clients, suddenly they had to maintain that cozy feeling through podcasts and Zoom-ins, and do it for an audience that was wracked by roller-coaster markets and whip-saw changes in the world at large. CIOs more comfortable parsing reams of statistics had to play at being on-camera influencers.
By and large, they were successful; clients tuned in and kept their accounts open. A few houses, like Coutts’ went further, maintaining the equivalent of cocktail chatter that lent spice to set-piece events. Coutts Connect, launched in 2018, allows the customers to hobnob without bankers’ supervision, “to offer a VC opportunity or house in the Hamptons,” Mukerjee says. “CIO videos are great, but they’re not on the client’s terms.”
New technology will require private bankers to work in new ways, and this may prove the heaviest lift of all.
“Changing technology is the more expensive part, but changing people is the more difficult part,” Zahn says. Relationship managers, who tend to occupy the same age group as their clients, are prone to ‘process inertia,’ Mukerjee warns.
Practitioners will need to develop new expertise, or else have it from the get-go.
“They have to put more digital-native people in charge,” argues Spiros Margaris, a Swiss-based venture capitalist and board member of Canopy and other fintechs.
Hamers’s surprise appointment to the top job at UBS, the world’s biggest wealth manager, is a noticeable nod in this direction. Expect more data scientists, most of them quite a bit younger than 60, to join the ranks of wing-tipped bankers there and elsewhere.
Yet, the black swan of the Covid crisis has also highlighted the traditional virtues of private banking, which those old-school RMs have been absorbing for decades: caution, a long-term outlook, and knowing and caring for the client.
“Private banking is about stability, resilience and trust,” Capco’s Rauser says. “We need to put the RMs in a better position supported by advanced technology, not replace them.”
Private banks start 2021 with some healthy tailwinds: fat trading profits from an ultravolatile 2020, a chastened clientele more inclined to pay for advice, and a reprieve from major waves of regulation like the EU’s General Data Protection Regulation and MiFID II regime. But that shouldn’t keep them from feeling the urgency.
“Ideally,” Zahn urges, “this will look like an evolution to the client, but a revolution within the bank.”