e-private banking in europe

The high net worth individual (HNWI) market
has never been courted so diligently as it is tod...
stephen’s cathedral chris coe
e-private banking in europe

that the Internet was too impersonal a
medium for the private banking client.
The reality is ...
e-private banking in europe

the information provided, taking into
account the advisor’s point of view only
for marginal p...
e-private banking in europe


I 1998

I 2002


Percent of Affluents with Internet Connection
e-private banking in europe







e-private banking in europe


Technology Importance


mm are
e-private banking in europe



e-private banking in europe

money and tend toward a passive approach
to managing their wealth.

A Future Brighter Than th...
e-private banking in europe

clients will have Internet access at any time
and from any place. Private banks, like
other i...
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E private banking in europe

  1. 1. e-private banking in europe The high net worth individual (HNWI) market has never been courted so diligently as it is today. Worldwide, there are more individuals in this category than ever before and the average wealth of these individuals is increasing. For this group, investment management is high on the list of needed services, since by definition these individuals have a lot of investible assets. Accordingly, investment management firms are quickly developing, acquiring, or enhancing their relationships with private banks. E-Private Banking in Europe myth, reality, and promise Gian Marco Magrini Jean-Marc Thomas 2001 E-BUSINESS Perspectives While investment management firms can and do offer services directly to the HNWI market, private banks are, and are likely to continue to be, the traditional providers of integrated financial services to the very rich. But the nature of private banks is changing. Historically, they offered only proprietary investment management products. Now, spurred 22
  2. 2. stephen’s cathedral chris coe
  3. 3. e-private banking in europe that the Internet was too impersonal a medium for the private banking client. The reality is that the Internet and related technologies offer much more than is currently realized by traditional customer relationship officers, well suited to the evolving character of HNWI clients. These clients used to seek advice and interaction only once every quarter on average; now they want increased relations with their financial services providers—more than once a month. What the Internet offers is ideal for this new, more active segment of the HNWI market. It facilitates interaction because the HNWI client can dialogue, exchange, react, and transact in a very secure and personalized environment from the location of his choice—home, office, beach, or anywhere. by the Internet and related technologies as well as competitive pressures, many private banks function almost as “extra-high-touch” portals, organizing and aggregating both thirdparty and proprietary products for the benefit of their wealthy clients. This relatively new openness creates a significant opportunity for investment management firms, whether affiliated with a private bank or not. The following pages take a look at one segment of this opportunity, the European private banks, with a particular focus on the viability of e-private banking in Europe. E-Private Banking: Myth and Reality Like virtually every business today, European private banks are looking to expand their Internet capabilities and offerings. Private bankers see the Internet as the solution, or as part of the solution, to many common problems and as the best response to certain key challenges, such as quality of service, timely advice, and performance tracking. Despite initial diffidence, e-private banking is becoming accepted as an integral part of the business, particularly in the younger, “new money” segment of HNWI. From what we see happening today in terms of services and added value to the customer, and taking into account the evolution of technology, the future looks bright for those on the playing field who have developed enough differentiation to capture a very demanding population. I I Many private bankers thought that private banking would be unaffected by the Internet; indeed, that “Internet” and “private banking” were mutually exclusive terms. These skeptics expressed doubts about the compatibility of the Internet with private banking because they believed that four important components of serving the HNWI market—the intuitu personae relationship, customization, advice, and security and confidentiality—would not translate readily to the new medium. This myth of noncompatibility has proven untrue on all four counts. I Intuitu personae. The phrase means “in consideration of the individual” and refers to the highly personal and unique nature of each client relationship. Skeptics believed 2001 E-BUSINESS Perspectives 24 Customization. Here again, skeptics believed that it was impossible to customize products and services appropriately using the Internet. In fact, database integration, statistical tools, and Web technology enable highly tailored customer relationship management and individualized products and services, since all client data and transactions are stored electronically and their analysis yields actionable suggestions for cross-selling. Moreover, it is a time-saver for both the client relationship officer, who can target his clients for potential sales, and for the client, who is not overwhelmed with irrelevant information, only the products and services specifically suited to his or her situation. Advice. Old-line private bankers defined “advice” as the advisory discussion between the banker and the client. Broadening that definition to “obtaining the information needed to make an informed decision,” the private banker opens the door to augmenting personal discussions with the wealth of information that is the hallmark of the Internet. The Internet is a powerful tool for pre-selling and educating the customer. The younger, more active HNWI clients typically want to make their own decisions by analyzing for themselves
  4. 4. e-private banking in europe the information provided, taking into account the advisor’s point of view only for marginal points. Further, technology that tracks customer preferences allows the financial services provider to focus on the clients that have the highest sales potential and who have expressed a real interest in a given product. I I Security and confidentiality. Many technical developments have taken place that enable infrastructures that virtually guarantee both security and confidentiality in online transactions. There is still some way to go to achieve the same level for mobile connections, although progress is being made rapidly. While security and confidentiality will always be of concern throughout the Internet world, they have not proven to be the detractors that some early observers of e-business predicted. In short, the reality is that customers in the HNWI market—at least the “active new money” segment—are embracing the Internet as an important additional channel to complement their relationships with their private banker. They like the speed, accessibility, and ease with which they can gather information to make decisions. This evolving nature of the HNWI market, which we explore further in the next section, is perhaps the most important of the factors driving the deployment of the Internet in private banks. home solar panels chris martin I 25 Geographic neutrality. The Internet reduces or even eliminates the perceived distance between the client and the financial services provider. This is of paramount importance, especially for the “active new money” segment of HNWI, which is by nature mobile. I New competition. Over the last four to five years, new, nonbank entrants have appeared to serve the European HNWI market, challenging the traditional private banking players with a more dynamic and innovative attitude that exploits Internet technology. Examples include Charles Schwab and E*Trade. Cost pressures. The Internet offers easy and low-cost transmission and exchange of information. It increases the availability of comparative information to clients at minimal cost. I There are, of course, many other factors contributing to the rise in acceptance of the Internet in the private banking arena. Many are applicable to all financial services sectors as they come online; some are specific to the private banking industry. These factors include: I Technological advances. Progress made by technology has enabled secured transactions and increased performance in terms of access, user friendliness, and response time, all of which have enhanced the attractiveness of the Internet as a customer interface. Broader reach. Tailor-made and limited-reach products and services were considered the added value of traditional private bankers. The Internet allows these products and services to be duplicated and even commoditized for sale to a broader market. Perspectives E-BUSINESS 2001
  5. 5. e-private banking in europe FIGURE 1 I 1998 I 2002 THE HNWI POPULATION Percent of Affluents with Internet Connection Percent of HNWI and UHNWI with Internet Connection (€100.000 Euro - €1 million) (more than €1 million) Source: Datamonitor, 2000. I I I Client empowerment. Clients, particularly the “active new money” segment, are increasingly empowered and potentially disloyal to their primary financial services provider. They are also demanding to have third-party products available to buy in addition to proprietary products. Private banking clients are able to “dictate” pricing and content terms to their banks. The Internet is both the enabler of this empowerment, by providing easy access to comparative information and other vendors, and the answer to retaining empowered clients, since it enables many of the services that empowered clients are demanding and allows the client to be in control. financial products sold to the customer and holds all of a customer’s assets—to new models that challenge this status quo, for example, by integrating or coordinating services from several different financial services providers. A New Breed of HNWI HNWI clients are very attractive in terms of profitability, propensity to purchase multiple financial products, and, in some segments, willingness to use the Internet. It is becoming increasingly evident in the European private banking and financial services arenas that this is the segment where the battles of the virtual future will be won or lost. Here is a closer look at the attributes of this target market. Customization. The empowered client will no longer accept generic, one-size-fits-all distribution, product, and pricing strategies. The Internet and related technologies allow customized products at customized prices, at any time and in any place. From a purely quantitative point of view, the top tier (with wealth greater than €1 million) of the HNWI client population is increasing in Europe at a rate of 15-20% per annum and the affluent segment (defined as those with wealth between €200,000 and €1 million) by 4-5% per annum. Today this combined group represents approximately 8% of the total European population and 26% of worldwide wealth. Current European HNWI wealth is around €7 trillion and is projected to reach €12 trillion by 2004. New business models. The Internet is both forcing financial services companies to reexamine their business models and enabling them to change to new models. For private banks, the shift is from the vertically integrated, proprietary banking model—whereby one bank designs, manufactures, and distributes all the 2001 E-BUSINESS Perspectives 26
  6. 6. e-private banking in europe FIGURE 2 EUROPEAN HNWI CHANNEL PREFERENCE BANK BRANCH TELEPHONE INTERNET MAIL ATM OTHER payments 39% 24% 14% 10% 7% 5% investments 46% 22% 13% 8% 4% 7% credit loans 56% 19% 9% 7% 1% 8% Source: Datamonitor, 2000. technology. They are empowered and feel entitled to first-class service in every way. Attractive as these statistics are for financial services providers, they don’t tell the whole story. To usefully segment the HNWI population, private bankers need to look at qualitative attributes, what these individuals are interested in, what their values are, and so forth. This population is changing and so are its needs. For example, the “old money” segment, with traditional inherited fortunes, is shrinking, while the “new money” group— company owners or managers, often with a strong financial background—is increasing. “Old money” clients typically favor simple, straightforward products; delegate the management of their wealth; value the brand and a stable client relationship; and are loyal. They are relatively undemanding—ideal clients for a profitable private banking relationship. It is this new breed of HNWI client that is the prime target for e-private banking. Most of their demands can be met at least partially through Internet-enabled services. The Internet allows a customized approach to each client because, based on analysis of the client’s online behavior in the past, the private banker can make appropriate suggestions in terms of stock analysis, stock preferences, portfolio rebalancing, and other services. The Internet also facilitates contact with clients in the sense that it is available on a 24x7 basis and removes many communication barriers. As a result, e-private banking is becoming the preferred channel for many services in the “active money” segment of HNWI. Some studies predict that it will become the preferred channel even for personalized advice in the very near future. However, they are gradually being replaced by clients who favor tailor-made, best-ofbreed products; want to participate actively in their wealth management; value a strong international presence and innovative products; and are less loyal and more price sensitive. They also want consolidated and readily available information; ready access to advisory services such as tax, legal, estate, and trust; and easy access to the right person at the right time for the right service. They are entrepreneurial, aware of what is going on in the markets, and highly focused on New Business Models Emerging to Serve HNWI A successful e-business banking business model depends in part on correctly segmenting the target market and meeting the needs of each segment. The “old money” vs. “active new money” is one approach to segmentation and provides useful insight into 27 Perspectives E-BUSINESS 2001
  7. 7. e-private banking in europe FIGURE 3 Technology Importance E-PRIVATE BANKING WEB SITE MATURITY d ise dit o : mm are Co ure-w s ing fer tion: of lta d e-mpan ngs ex fferi o e v ad namo-on dy ne-t o u ns me co al ti re push (alerts, news) and pull (analysis, simulation) personal financial planning online portfolio management product selection tools broker access, stock exchange access market transactions account follow-up online high level asset allocation performance tracking who are we what do we do links with countries media releases Content Richness activities and those that are in countries where private banking is still in the early stages of development, such as Italy, France, and Portugal. To address the needs of the validators, private banks have enhanced their initial sites to include transactional facilities (through internal or external systems), asset allocation facilities, and more or less personalized filtered advice (through push-pull techniques and the use of technology partners). Perhaps the biggest challenge is to meet the needs of the soloists, who manage their wealth on their own and generally have accounts in various institutions. For this group, the major issue from the bankers’ perspective is their lack of loyalty: they like to switch banks and cherrypick their products and services. To serve them, private bankers are concentrating their efforts on several fronts to provide a “one-stop shop” portal. Some of these efforts are: personalizing the service to keep customers coming back; providing a trusted environment that responds to their needs and advises them more reliably than a human clerk; offering a rich array of best-of-breed products, including those of competitors; providing transaction capability; and providing efficient, self-service facilities to help clients manage their wealth effectively, To meet the needs of the delegators, who completely trust their investment manager to manage their wealth, private banks have developed sites that provide information and electronic reporting. Most private banks are still at this stage today because they think the Internet is not the right channel for wealth management. This is especially true for banks that have more offshore than onshore Perspectives – – – – – – – – the attributes of the HNWI population. Another, related approach that is perhaps more useful to developing a business model is to identify the clients’ preferred approach to handling their wealth. There are three categories: the delegators, who hand everything over to the private banker; the validators, who make their own decisions but discuss them with the private banker before implementing them; and the soloists, who do everything themselves. The results of one study, depending on the countries involved, show that HNWI in Europe comprises 50-70% delegators, 25-35% validators, and 5-15% soloists. Some private banks have decided to adapt their products and services to this current mix of clients. Others have decided to anticipate future client behavior and begin developing a model to serve the expected future mix. Whatever the model, the Internet has a role to play for each of these groups. 2001 E-BUSINESS access to nonfinancial partners life-style management real estate offerings family office – market quotes and news – global research – online reporting h oc br atic st Source: PricewaterhouseCoopers research – – – – – – – – – d se ali n rso Pe ice: ic, n: tio ac ns mic tra na dy gs rin : ffe iator o ed ed 28
  8. 8. e-private banking in europe FIGURE 4 CURRENT E-PRIVATE BANK POSITIONING Collaborative THE PRIVATE BANKING MALL THE PRIVATE CLIENT ALLIANCE Advanced Bank e-Trade CITIBANK Crédit Agricole Crédit Suisse ABN Fidelity Rabo Robeco Commoditized Products Charles Schwab Fortis E-Banking Barclays BBVA BNP-Paribas Kleinwort Benson Dexia Banque Transatlantique Customized Products Julius Baer Dresdner Deutsche Bank Merrill Lynch HSBC UBS THE RETAIL PRIVATE BANK Pictet THE PRIVATE BANK Proprietary Source: PricewaterhouseCoopers research through real-time balances, automated alerts, and advice systems. wealthiest clients are easy to see on paper, most of the European private banks have followed an incremental approach toward implementation. Only a few have taken a radical approach to set the pace in the arena of e-private banking. As of today, there are no examples of completely virtual models, although this might change in the future if some interesting projects to develop a pure online private bank come to fruition (such as the LUMH ZeBank, which launched in February 2001). Online private banking is thus the ideal means to attract new customers, both in the top tier HNWI market and the next tier down, the “affluents,” particularly in the segment of active new money which is emerging in both these tiers. Why is online the answer? I It is perfectly suited to providing “one-to-one” marketing and bespoke services (personalized alerts, market information, portfolio advice, and simulations). I It responds to the needs of active clients, whose growth potential is higher today than that of traditional clients. I It provides the opportunity to both trade online and receive tailored information and advice, based on client preferences and risk-return behaviors. I The chart above illustrates how European private banks have addressed the opportunity that e-private banking offers for revisiting their strategic operational models. They are differentiating themselves based on their positioning along two main axes: the proprietary/vertical model versus the collaborative/alliance model, and commoditized, relatively simple products versus customized, complex products. Perhaps most importantly, it does all of the above at a cheaper cost than traditional methods, which makes previously marginal clients viable and thus increases the potential market for private banking services. We also see a clear distinction in Europe between the private banks chasing new clients and the private banks focused on retaining their existing clients. New clients tend to be affluents who have new money and are active in the management of their wealth, while existing clients are typically the higher-tier HNWI who have more “old” than “new” While the advantages of Internet services in attracting, engaging, and retaining the 29 Perspectives E-BUSINESS 2001
  9. 9. e-private banking in europe money and tend toward a passive approach to managing their wealth. A Future Brighter Than the Present: The Promise of E-Private Banking The private banks optimally positioned to attract the new HNWI clients are in two groups. One group includes those banks that have truly challenged their former model and have fully exploited the potential of the Internet as an enabler to build strategic alliances: Initially seen as just an additional distribution channel with only marginal potential for most HNWI financial services providers, the Internet is emerging as an important relationship channel for a large proportion of this market and will be a significant differentiating factor. The Internet is also creating new roles for private bankers. For example, e-private bankers must now add to their role that of being an information filter. The profusion of information available via the Internet requires someone to assist in separating what is useful from what is not. I With technology partners, to offer online transactions (examples are ABN and BBVA). I Between distributors and producers, to offer a wider range of sophisticated services (examples include Fidelity and Credit Suisse). I The potential to exploit the Internet to provide new, interactive services and learning technology is almost limitless. HNWI clients want competent advice with the right information at the right time. They want faster access to more and better information that is relevant and easy to understand. Interactive applications, therefore, are a critical element in delivering better value to these clients. One possible service is the provision of interactive With other banks or financial institutions, to increase and diversify their client portfolio (examples are Merrill Lynch and Charles Schwab). The other group of banks courting new HNWI clients are those that have clearly moved toward providing more commoditized products to individuals who are at the lower end of the wealthiest tier or have the potential to become part of this tier. They have focused more on the reach than on the richness of their products (examples include most of the retail private banks like Société Générale, Deutsche, Dexia, and ING). Some banks have offered their affluent clients services like fund asset allocation on the Internet. Doing this, they increase client loyalty by offering something that looks and feels tailored, but they do not incur higher production costs. construction walkway peter wilson The private banks whose focus is on retaining existing clients are the ones who have successfully implemented the Internet as an additional channel to provide increased availability and tailored information. And, because the population of existing clients includes a fair proportion (very roughly 30 to 40 percent) of “new money” types, private banks have also enabled self-directed transactions to appeal to those who demand more ownership of their financial transactions. At this point, nearly all private banks have developed e-private banking services. 2001 E-BUSINESS Perspectives 30
  10. 10. e-private banking in europe clients will have Internet access at any time and from any place. Private banks, like other institutions, will need to assess how their message plays on these other media and be prepared to take advantage of them. demonstrations of portfolio performance based on different assumptions and risk parameters, which can be modeled on screen to suit the client’s investment profile and risk tolerance. Another might be a “learning” technology that enables the system to tailor its on-screen offerings to each client, based on the accumulated information that it holds on the particular individual. Gian Marco Magrini, based in Luxembourg, is a partner in our Management Consulting Services The purely “virtual” model, however, does not seem to be the solution. For the moment, at least, it’s the “bricks & clicks” approach that has proved to be the one with the most potential for the HNWI market. In the United States, the example of Charles Schwab buying U.S. Trust, a New York-based private bank, is evidence that in order to tap the richest clients, you need to have bricks and mortar and the traditional comfortable fixtures of private banks. Things might change if anyone actually launches a purely virtual e-private bank successfully, but the time is not yet ripe for “clicks only.” group who specializes in private banking. He can be reached at (352) 49 48 48 4011 or gian.marco.magrini@lu.pwcglobal.com. Jean-Marc Thomas, a Management Consulting Services manager also based in Luxembourg, specializes in private banking and customer segmentation. He can be reached at (352) 49 48 48 4119 or jean.marc.thomas@lu.pwcglobal.com. While it’s unclear whether “clicks only” will ever gain currency, there are several future trends we can highlight with reasonable confidence: I Co-opetition. This is coined from “cooperation” and “competition” and refers to the necessary alliances among brands in order to achieve the highest market share as a group. I Customized portals. Private banks, or possibly a new competitor in the field, will develop e-private portals tailored to specific communities or even individuals. I Nonproprietary products. All financial institutions, including private banks, will need an infrastructure that supports the sale of not only a bank’s own tailor-made products but also products offered by competitors. I Mobile access. As the Internet becomes increasingly available on devices other than the PC (e.g., interactive digital television, mobile phones, and personal digital assistants such as the PalmPilot™), more and more potential private banking 31 Perspectives E-BUSINESS 2001