Today we wrote an opinion piece for WealthBriefing, the leading online private banking industry publication, about how wealth managers can turn competitive threats into opportunities:

Now is a good time for senior executives in private banking to have a fresh look at their business models to position their institutions for the future. Acting now will allow them to benefit from several years of near ideal market conditions, while anticipating the looming impacts of shifting industry forces, of increased competition, better-informed and more demanding clients and scarce qualified human resources in private banking.

A number of organisations have already started to reap the benefits of the structural changes in private banking by focusing on innovative business models. These examples can serve senior executives as an inspiration to help them reflect on business model innovation and act as a reminder that success through differentiation is possible in private banking.

A good starting point for business model innovation is a solid understanding of the industry structure and a vision of where it is heading. A practical tool to visualise industry structures is Harvard Professor Michael Porter’s good old “five industry forces framework”, which was re-published this year in the Harvard Business Review.

Each one of the five industry forces Professor Porter outlines has created opportunities for new business models in private banking. The forces are the power of clients, the power of suppliers, the threat of new entrants, the threat of substitutes and the rivalry among existing competitors.

The Power of Clients

The private banking landscape is now increasingly characterised by clients who have built their wealth through entrepreneurship or senior positions in corporations. This new breed of clients are better informed, often more sophisticated in their approaches and more actively involved in the management of their wealth. An organisation that has built its business model around this trend is TIGER21, a platform that allows high net worth individuals to meet with peers in small confidential groups every month, challenge each other’s portfolios and discuss various issues related to wealth.

In addition TIGER21 invites high-profile speakers to each peer event. The organisation now has over 145 members who collectively manage approximately $10 billion in assets. TIGER21 clearly filled a client need with their offer that remained unserved by banks.

Another organisation that has capitalised on the growth of this new breed of clients that actively researches banks that satisfy their specific needs is Investec Bank. Its private client business explicitly targets C-level executives in companies listed on the stock market. Investec saw an opportunity in helping this particular client segment, when they realised that many of these executives had large proportions of their wealth tied up in shares of their companies. The bank offers these C-level executives credit for the wealth tied up in the shares of their companies. In return, the clients can invest in other assets and diversify their risk.

The Power of Suppliers

The second important industry force characterising today’s private banking landscape is the current shortage in the supply of qualified bankers or relationship managers. This has given relationship managers a powerful negotiation position and has led to spiralling personnel costs on the banks’ side. The common practice of banks of poaching entire teams from other banks has only intensified this pressure.

A bank that has turned this industry force into a strength is EFG International. They built a bank specifically for and around relationship managers and their needs. To a certain extent they treat relationship managers as clients. On the one hand they grant relationship managers large freedoms in the acquisition of their clients and the advice they can give them.

On the other hand a relationship manager’s salary depends mainly on the performance of his own P&L and not that of the bank. As a consequence EFG’s business model attracts the most entrepreneurial bankers with strong client relationships and high levels of loyalty. EFG’s co-founder and chairman goes as far as saying that clients belong to the relationship manager rather than the bank.

The Threat of New Entrants

Over the last few years private banking has seen a number of new entrants. One source of fresh competition is the pressure from the bottom of the market, coming from retail banking. This is illustrated by a recent media offensive of LCL (formerly Crédit Lyonais), a large French retail bank that is heavily promoting its new private banking activities targeted at mass affluent clients. Incumbent actors should not underestimate this new trend, as traditional private banks have done when universal banks first entered the private banking arena. After all it is a universal bank, UBS, that is today’s market leader in private banking.

A second major source of steadily increasing competition is coming from the rise of independent asset managers, which have strongly benefitted from clients’ desire for independent advice.
While the business model of independent asset managers in itself is interesting, their rise has also proven to be a fertile playground for innovative business models. An interesting illustration of this is the business model of Geneva-based Sodi Platforms. Sodi is a physical and administrative platform for independent asset managers. It allows members to benefit from shared professional services to run their business and focus on client activities. Services include things such as business advice, accounting, shared receptionists and client reception space, dedicated IT and compliance services.

The platform gives asset managers the benefits of independence, while letting them draw on the advantages of a certain scale. An area Sodi particularly focuses on is providing bankers that are considering leaving their banks to become independent with start-up help.

The Threat of Substitutes

Substitutions are not a major, but nevertheless existing threat to private banking today. For example, clients may increasingly take the management of their assets in their own hands and use banks as mere custodians and commoditised product suppliers. Independent multi-family offices already substitute a range of services, which were traditionally offered by banks. In addition, private clients also increasingly have the opportunity to access investments directly from product boutiques, for example regarding alternative assets, without the intermediation of banks.

Rivalry Among Existing Competitors

The private banking landscape is still a very fragmented one. It is characterised by a growing number of actors competing against each other with very similar business models and little differentiation. A growing market currently still covers up the effects of this, but this will inevitably turn.

An actor that has taken advantage of this industry fragmentation is the Swiss Bank UBS. It has developed a product called “Bank for Banks” by turning its own banking infrastructure inside-out and offering it to small and mid-sized private banks. This allows smaller banks to focus on their core banking activities, such as client care, while drawing on UBS’s “Virtual Private Bank” function for non-core activities. The advantage for banks using this service is the direct access to the global infrastructure and product breadth of UBS, while focusing on value creation in client facing activities.

So there are a number of innovative business models brewing in the private banking landscape. Each one of them is fully embracing change to carve out its own space in the market. Senior private banking executives would be well advised to start defining their path towards differentiation before suffering the consequences of a less benign market environment. Our research shows that banks still have a lot of work to do in terms of differentiation, which can also be seen as a great strategic opportunity.

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