Switzerland

Details

  • Type: Press release
  • Date: 11/5/2013

Innovation - the key success factor for private banks 

This year’s private banking study by KPMG and the University of St. Gallen (HSG) shows that Swiss private banks can remain successful in the future by innovating. Besides effective implementation of new regulatory requirements, key success factors will include innovative strategies and adaptations to business models, starting with more effective segmentation techniques, an open product architecture, transparent price structures and modern distribution and communication channels.
Hardly any other industry has experienced as many changes in recent years as private banking. Times have been marked by uncertainty, volatility, dwindling margins and the increasing complexity of the core business. Now more than ever, private banks are being required to rethink their business model. The latest private banking study by KPMG and the Institute of Management at the University of St. Gallen, entitled «Success through innovation – achieving sustainability and client-centricity in Swiss Private Banking», analyzes the major, sometimes existential challenges facing Swiss private banks and ventures a glimpse forward to how the private banking industry will look in 2022.

Compensating for low profitability through innovation

Swiss private banks will be driven primarily by two trends in the period to 2022. Firstly, private banks will need to compensate for low profitability through consolidation and the related economies of scale, through international expansion and through investment in technology. Secondly, private banks will increasingly seek technology-driven partnerships in the finance industry that will open up new ways for them to position themselves in the market.

 

To achieve critical mass, many private banks need to grow substantially. Around two-thirds of the bank representatives surveyed believe that future survival will require an average two-fold increase in assets under management – firstly, because client requirements are becoming more complex and diverse and are necessitating heavy investment and, secondly, because growing regulatory requirements are favoring larger competitors. The study shows the areas in which private banks need to take action in order to remain competitive.

 

  1. Small, focused private banks, which historically have benefited from a very clear client focus and brand reputation, should continue to cultivate their advisory excellence. However, they need to pay increasing attention to their cost structure. Networking, partnerships and greater use of technology can help to compensate for smaller economies of scale compared with larger competitors.

  2. Large, diversified private banks, on the other hand, have an increasingly important cost advantage. They should continue to leverage that advantage. At the same time, however, they need to take measures to maintain and extend their client focus. Alliances and potential acquisitions should therefore be used primarily to develop a brand portfolio and address client segments in a more targeted manner.



The dual task of cutting costs while overhauling the core business will remain a major challenge for private banks. To tackle the imminent transformation necessitated by the changing environment as successfully as possible, banks need to review their strategic vision to determine whether it can withstand the disintegration of the standard industry value chain and industry consolidation.

 

Chart 1

Thirteen requirements on private banks in 2022

The private banking study examines the aspects that will be key to a successful private banking business in the next ten years and shows the related agenda for action. The 13 main findings:

 

  1. Innovation is a must: After several years of inadequate profitability, private banks face a fundamental process of consolidation. In particular, the rapid development of information and communication technologies and the disintegration of the value chain play an important role in terms of operating profitably. Private banks can either sharpen their focus on their advisory or product expertise or position themselves as a technology leader and solutions provider. Most institutions see their business model shifting towards advisory expertise, but are often aiming to combine advice and technology leadership. There are relatively few companies looking to focus on product expertise.

  2. Focus on growth markets and legal compliance: The private banking market will change considerably in the period to 2022. Despite stricter controls by foreign supervisory authorities and increasing political pressure, most interviewees remain upbeat and continue to see the Swiss financial center playing a leading role in international private banking. Going forward, increasing complexity and high costs, due in particular to a local presence, will continue to have a considerable influence on decisions on location. An additional challenge is finding suitable human resources who are familiar with the relevant foreign regulations and therefore able to ensure legal compliance. Interviewees see future markets in the BRIC countries, the Middle East, and Singapore and Hong Kong in particular. Over the next ten years, most banks will focus increasingly on clients with assets of between CHF 1 million and 5 million.

  3. Expansion of the Swiss client base: The analysis of the onshore market shows that around 60 percent of interviewees wish to increase their Swiss client base in relative terms by 2022.
    Grafik 2

  4. Information will be exchanged automatically: In an international context, there was no chance of Swiss banking secrecy surviving. However, private banks consider it important to continue to protect privacy in Switzerland without offering a platform for undeclared assets. The survey shows that Swiss private banks expect the automatic exchange of information to be in effect in three years.

  5. Client must be front and center: Private banks believe that greater transparency and highly developed, comprehensive client service are key to a successful future. Particular attention needs to be devoted to capturing client data. This requires a systematic approach and is a prerequisite for effective client segmentation. Most of the banks surveyed plan to craft tailored offerings in the near future so that they can offer clients comprehensive advice and support throughout their entire life. Comprehensive and detailed data on clients is needed in order to achieve dynamic segmentation based on requirements and behaviors.

  6. Growth through cooperation with independent asset managers (IAMs): Two-thirds of the private banks surveyed see IAMs as a strategic option for further growth in their area of business. By pursuing this option, the institutions hope to reach new clients and achieve economies of scale. To reduce emerging compliance risks, however, rigorous due diligence must be performed on both existing and new IAMs. For their part, IAMs must ensure that the bank in question is a suitable fit for the end client, thereby enabling a long-term relationship to be built.

  7. Open product architecture: In future, private banks will increasingly offer their in-house products and services in an open architecture, that is to say make them available to other providers. Of the banks surveyed, 84 percent wish to improve their independent advice and their services by 2022. In doing so, certain institutions will specialize in the abovementioned product expertise along the value chain. Here too, innovation is crucial to being able to keep pace with trends in client behavior and demographic change.

  8. Increase in digital communications: The distribution of products through electronic and mobile channels will also change markedly. Many clients, particularly the younger generations, are keen to use digital channels more and more. Interviewees expect mobile and internet-based solutions to be a greater differentiator among the individual banks in 2022. It is therefore essential to accept clients’ digital requirements and promptly adapt one’s service portfolio.
    Chart 3

  9. Flat fees and fee-based advisory models: Future price models are currently the subject of intense discussion. Banks believe that price models need to be very open and transparent. Developments with regard to the reimbursement of trailer fees also indicate this to be the case. One possible trend in pricing could be toward flat fees. In addition to these all-in charges, increasing consideration is also being given to advisory fees based on the work involved. A few years ago, such a step would have been considered unrealistic. However, banks expect their models to be increasingly understood and accepted by clients as a result of the price structure being clearly communicated.
    Chart  4

  10.  Growth through new business models and minimum level of assets under management: Private banks agree that cost reductions alone bring only short-term success. Rather, the institutions need to concentrate on fundamentally rethinking their future business models. Besides costs, client advisors will also have to give increasing thought to the bank’s gradual transition to new, viable market positions. Interviewees agree that this also requires the bank to be of a certain size. According to the survey, the private bank of the future should, at a minimum, have assets under management of around CHF 10 billion.

  11.  Examining the possibility of outsourcing: Private banks see huge potential to cut costs in outsourcing certain activities such as IT processes, capital market research, product development and legal affairs.

  12.  Drops in salaries: According to the survey, most private banks expect a downward shift in employee compensation in the coming years, with drops of between 15 and 25 percent. Only 15 percent of interviewees believe that employee remuneration in 2022 will be either higher than it is today or unchanged.

  13.  New regulation both a challenge and a competitive advantage: Cross-border and regulatory requirements such as Basel III or the Swiss Financial Services Act (FSA) currently under discussion pose considerable challenges when it comes to implementing new strategies. Some interviewees consider the new rules to be harmful or even a threat to the existence of smaller banks. However, the new regulations could become a competitive advantage in their efforts to differentiate themselves from banks under foreign control. The interviewees therefore agree that there must be a sharp to very sharp increase in the number of compliance staff and other executive bodies with oversight responsibility. Higher costs can be kept manageable through standardized processes and controls. Thus 85 percent of interviewees also believe that the compliance programs in their bank will be fully automated in 2022.

 

The challenges facing Switzerland’s banking industry are well-known. In the course of the current process of consolidation, small and medium-sized banks in particular will need to hold their ground. Nevertheless, Switzerland will remain an attractive financial center for private banks, thanks not least to its unique stability, professionalism and service quality. Private banks agree, however, that these aspects require continuous work on a daily basis. The Swiss private banking brand must be strengthened in order to meet the expectations of international clients, as these will be prepared to pay a premium for «Swissness» in the future too. To a greater extent, support from supervisory authorities and the political establishment will also be required to ensure that «Swissness» is still a selling point for private banks in Switzerland in ten years’ time.

Methodology

The study entitled «Success through innovation – achieving sustainability and client-centricity in Swiss Private Banking» was conducted jointly by KPMG and the Institute of Management at the University of St. Gallen (HSG). It is based on a combination of interviews and an online survey and covers 39 banks. Interviews were also conducted with ten IAMs. Switzerland’s two biggest banks were not included in the study. SPAN>

 

Simone Glarner

Simone Glarner

Head of Media Relations

+41 58 249 55 71

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