As we enter the proverbial fourth industrial revolution, technologies such as artificial intelligence, the internet of things and big data continue to disrupt several sectors of the economy. Private banks are faced with the challenge of either keeping up with the pace of the revolution or losing their position as the leading wealth management institution for Ultra High Net Worth Individuals (UHNWI) and High Net Worth Individuals (HNWI).
Banks will have to restructure their infrastructure, workforce, and priorities to align with technological changes, and they would have to invest more into the security of data. Financial institutions must rethink the very definition of ‘client relationship’ and create new approaches to thrive in a constantly evolving environment.
However, in recent years, Challenger and Neobanks alike, with their mobile-first and cutting-edge digital infrastructure, have dominated the Fintech industry. They did this without having to put up physical branches, robo advisors or digital wealth managers. Their main plan has been to disrupt and redefine traditional banking while providing innovative wealth management services to underserved market segments.
While Neo and Challenger banks continue to chip away market share in the wealth management industry, lots of start-ups are beginning to gather momentum and successfully organise fundraisers in a bid to secure their place in this fast-growing industry. Neobanks such as Revolut, Chime, Nubank, Monzo, Starling and N26 have already become household names. Meanwhile, Rosecut, a UK fintech firm, offers digital wealth management solutions to affluent next-gen clients who has liquid wealth between £250,000 and £3 million.
“We are building the service of a private bank, with the cost-efficiency and scale of digital delivery,” Qiaojia Li, co-founder and CEO of Rosecut said in a statement.
The Digital Factor
Playing their fintech card really well, today’s neobanks are using digital strategies to their maximum advantage – and it seems to be paying off handsomely. Research reveals that the challenger and neo bank industry, which was valued at $20.4 billion in 2019, is projected to grow and reach $471.0 billion by 2027 at a CAGR of 48.1% from 2020 to 2027.
Obviously, the reduction in fees and service charges has made competition stiff, but this doesn’t automatically put traditional wealth management firms and private banks at a disadvantage as long as they can restructure to adapt to the changes and service offerings erupting in the industry. For example, established private banks are shoring up their digital capabilities to improve client experiences, one of them is for BNP Paribas Wealth Management.
Playing their fintech card really well, today’s neobanks are using digital strategies to their maximum advantage – and it seems to be paying off handsomely.
“There is nothing new in the fact that clients expect innovation from their wealth manager, and we have been investing in our digital capabilities for many years. It is probably too early to say definitively how the past few months’ events will shift client expectations, but we believe that there will be a significant transformation, putting on banks a responsibility to accelerate the digitalisation of the client experience,” says Masroor Batin, CEO Wealth Management – Middle-East & Africa (MEA) at BNP Paribas Wealth Management during an interview with Global Private Banker.
“While physical interactions have always been central in our relationships with our clients, clients are much more open to digital interactions with us. This is definitely the result of the months of lockdown situations and travel restrictions.
“To answer these new expectations, we continue to enhance our client journeys, notably in the areas of advice, portfolio management and communication. We have been leveraging during the last years on digital to make the client experience smoother and more personalised,” Mr Masroor Batin adds.
For other banks, the approach could be quite different. In 2016, investment giant Goldman Sachs launched Marcus, their digital-only brand. Retaining the already reputable Goldman Sachs name, Marcus serves as an avenue for the company to diversify and delve into untapped markets. The company has also gone mainstream by introducing their mobile app, bringing their digital banking services to customers’ fingertips. In an update, Goldman Sachs said Marcus’ deposits reached $97 Billion as of end 2020 and is targeting at least $125 billion in deposits by 2024. Reports also have it that Goldman Sachs is considering acquisitions to bulk up its consumer banking unit Marcus.
Traditional institutions, indeed, appreciate the need to engage their prospects through the use of technology, but they still have lots of challenges to conquer. From constraints caused by legacy systems to issues surrounding usability and user experience, which results in low adoption rates, these traditional institutions face many drawbacks. And to top it all off, big tech is now poised to become big competition.
The reduction in fees and service charges has made competition stiff, but this doesn’t automatically put traditional wealth management firms and private banks at a disadvantage as long as they can adapt to the changes erupting in the industry.
The Big Tech Conundrum
In 2020, Capgemini’s World Wealth Report said that 93% of HNWIs in Asia Pacific ex-Japan are willing to entrust their wealth management needs into the hands of BigTechs like Apple, Facebook, Amazon, Google, Alibaba, or Tencent, should they decide to delve deeper into wealth management services.
HNWIs, millennials especially, are particularly more investment savvy than the older generations. They are always on the lookout for investment opportunities that generate higher interests. Due to the low-interest rate and high volatility of portfolio investments in recent times, investors are steadily gravitating away from portfolio investment towards investing in real companies. To survive these disruptions, banks have to strengthen their relationship with customers and review their offerings.
Strengthening their relationship with HNWI clients will set private banks on the right path to weather the storm of competition before them. New entrants in the financial industry such as Facebook, Google, and Amazon have e-money licenses, but they can be considered rookies in the financial sector. Nevertheless, these companies have access to big data concerning almost everyone’s habits on the internet, and they may leverage on this information to promote their business.
Private banks now face the enormous responsibility of taking advantage of Fintech to solidify their place as leaders in the financial services industry. As Fintech companies and already existing BigTech companies continue to disrupt the market, traditional banking institutions need to develop their technology for them to keep up with the competition.
Fintech also provides other new approaches to solidify the relationship between banks and their clients. The depth of the relationship between banks and their clients determines their competitive edge and chances of standing the test of the time in the wealth management industry.