Stéphane Bellac & Louis Ghaleb (BearingPoint): Private banking, transform, or disappear
Private banking is at a crossroads. In a context of historically low interest rates where remuneration for execution and management services is between 20 and 80 basis points, industry players are under pressure. They must improve their cost/income ratios, which often fluctuate between 80 and 100%. The number of players within the private banking sector has significantly decreased over the past ten years, while overall assets under management continue to grow. Therefore, mid-size players are recommended to adjust their organisation and operating model shall they wish to avoid disappearing from the market.
"A more gradual approach is to review whether services to domestic markets can be delivered using lighter branch structures"
Could you summarise your White Paper in a few words?
In our White Paper, we present the strategic options for achieving critical size and optimising operational efficiency. The most disruptive option is to question the logic of continuing to hold banking licences in each market, whilst offering account management services that are often costly to operate. Perhaps it would be preferable to focus on higher value-added services. This model would reduce costs, but would also have consequences for client servicing offerings, particularly on the use of credit as a tool for attracting additional assets. It also places the client in the middle of multiple relationships between their manager and their bank. A more gradual approach is to review whether services to domestic markets can be delivered using lighter branch structures. This strategy makes it possible to maintain the service offering, providing that the parent company's platform invests in replicating this locally. It also enables the optimisation of the use of capital within the group, and thus enables branches to support large loans.
The operating model can be optimised via a "hub & spoke" approach based on pooling support functions in centres of expertise towards more economically attractive geographical locations. This initially presupposes having a critical AUM volume to be able to amortise the original investment, but also sufficient staff to enable this move towards nearshoring.
Players who do not have the size to undertake a hub & spoke approach can opt for an ITO/BPO option. The offering is evolving towards the rise of industrial platforms, while increasing numbers of clients are moving towards such options, as testified by several recent press announcements (e.g., Société Générale's signature with Azqore). A final trend in the sector is to gradually involve new banking clients in the construction of the outsourced platform, adding their strengths in terms of products or IT assets.
How are your clients' private banking requirements changing?
Given the need to pool resources to reach further efficiency, we observe a strong desire among international private bankers to align processes, tools, and teams. This trend is particularly visible in key processes in the wealth management sector. For instance, the processes of managing accounts and reaching out to clients takes considerable time for account managers and client services in operations and compliance. The aim of the transformation is to have an organisation with uniform processes supported by a single tool, which can deal with the sometimes-complicated requirements of various regulators. We observe the same trend in investment processes with a similar desire to harmonise and centralise governance, tools, and teams for both discretionary and advisory management.
It is likely that such a fundamental trend will spread to other key private banking functions in the future.