Fintech on Friday: Private banks utilise technology to tempt younger generations
With trading volumes skyrocketing during the pandemic, the proliferation of digital investment platforms offering free trading has made it easy for anyone to become an amateur buyer and seller of stocks or cryptocurrencies.
But this could prove to be an additional worry for traditional private banks. These institutions are facing the greatest wealth transfer in history, yet are typically serving elderly clients, aged 68 and over, according to a UK study conducted by Aon Consulting.
Their challenge is to continue to serve existing clients, who hold most of the wealth, while also being on the radar of young entrepreneurs and agile investors. These groups have been shaped by their experience with non-financial digital brands like Google and Amazon, and may have entered the investment world through self-directed investment platforms for the first time during the pandemic, to take advantage of market volatility.
But many private banks still lag other sectors in their digitalisation transformation and are unable to offer that omnichannel, seamless client experience that on-the-move millennials expect.
It is also a matter of trust and brand. Today, 57 per cent of millennials – those individuals born between 1980 and 1996, which make up the largest generation in history – feel financial advisers are only motivated to make money for themselves and their employer, according to Accenture.
Sixty per cent of affluent millennials would trust a robo-adviser more than a financial adviser, according to a pre-pandemic study from Deloitte.
Covid-19 has exacerbated the frustrations of the younger cohorts, who were the ones forced to pick up the bill left by irresponsible bankers, with many millennials entering the workforce in the years following the 2008 financial crisis. Now they have been among those segments of the population bearing the brunt of the healthcare crisis.
The pandemic has exacerbated the “disgruntlement” of the next generation with institutions, says Alois Pirker, research director, wealth management practice, at Aite Group. This led to “an explosion of energy” directed to the stockmarket through social platforms such as Reddit or retail platforms such as Robinhood, with social media forums becoming breeding grounds for an anti-Wall Street establishment movement.
With so many start-ups providing access to markets, and promising to be democratising finance, “banks seem to have lost their influence”, he says.
Private banks need to connect with young people, explain the value they can add, and get them to think in terms of asset allocation and portfolios. And they need to connect with their potential prospects in the right venues, with a message that resonates with them.
AI-driven social media outreach is increasingly important, says Mr Pirker, and some institutions are getting it right.
Bank of America, in partnership with fintechs, launched Socialize, an AI-based content sharing platform that enables advisers “to discover and connect with prospective clients at moments that matter on social platforms, and engage them with highly relevant content based on their preferences,” according to the US bank.
While security and safety remain key values when choosing a brand, younger cohorts are seeking an additional “wow effect”, says Silvio Struebi, managing partner, Hong Kong at global consulting firm Simon-Kucher & Partners.
“The young are very impatient; the service must be easy and fast. They must perceive that the bank already knows what they need and what they want,” he says. The ‘always on generation’ want access anytime and anywhere, options they can choose from, transparency and hate hidden fees. They want to have access to exclusive services, and want committed and competent bankers that speak their language.
Younger generations are used to a high degree of digital self-service capabilities, want entertainment and want to be able to trade. “Investments is more and more entertaining,” he adds, as the GameStop saga demonstrates.
To win the next generation of wealth, banks must optimise all the touchpoints they experience to fulfil their needs. They need to embed themselves seamlessly in their customers’ lives, because then it will be “top of mind” when they start investing, explains Alan Lim, senior director at Simon-Kucher in Singapore. “Private banks need to move into embedding themselves into the customer journey, not just when they know they have $10m in their bank account.”
A global pre-pandemic study carried out by Simon-Kucher found 60 per cent of millennials are dissatisfied with their current wealth manager, while several studies have found an overwhelming majority of children, ranging from two thirds to 95 per cent, remove their parents’ financial adviser upon receiving their inheritance.
Yet, private wealth is not a zero-sum game and there are plenty of opportunities for private banks, if they speed up digitalisation, as the pandemic has also increased the need for advice and interaction between relationship managers and clients.
Customised solutions
Digitalisation is vital to offer customised service recommendations, which younger cohorts especially value. While 53 per cent of clients are willing to pay more for personalised experiences, this figure rises to 80 per cent among millennials, according to EY’s 2021 Global Wealth Research report.
“Unlike many of their predecessors, next-gen wealth inheritors have far more exposure to the digital world, so they will naturally have higher expectations of their banking providers’ digital platforms,” says Joseph Poon, group head of DBS Private Bank
Some $68tn is expected to be transferred from baby boomers, the generation born between 1944 and 1964, to younger generations during the next 25 years, according to a 2018 study by Boston-based research and consulting firm Cerulli Associates. Asia-Pacific alone is expecting an estimated $2tn of wealth to change hands over the next 10 to 15 years. “We’re sitting on the cusp of a significant intergenerational wealth transfer wave and any wealth manager who’s serious about engaging the next-gens effectively would need to continuously invest in their digital capabilities,” says Mr Poon.
However, the drastic disruptions brought about by the pandemic greatly accelerated clients’ digital adoption – which was already on the rise prior to Covid-19 – “across all demographics and client segments”. Most of these changes will survive beyond the pandemic, and the hybrid “high tech, smart touch” client engagement model will gain further adoption, states Mr Poon.
DBS has witnessed a “marked” increase in its clients’ usage of iWealth, an ‘always-on’ portal for clients to monitor and manage their portfolios digitally, including a big jump in the consumption of its CIO’s investment insights. Leveraging artificial intelligence and machine learning, applying predictive analytics, enabled the bank to deliver “hyper-personalised, relevant and intuitive insights to clients” enabling them to capture timely opportunities. This has allowed them to focus their discussions with their relationship managers on more “complex, nuanced and strategic issues”.
It is exactly this winning combination of human and machine which makes private banks seemingly unconcerned about losing millennials to fintechs.
Lyndon Subroyen, global head of Investec Digital, says that this narrative on the large wealth transfer, and how private banks may lose out on millennials as potential clients, as they are lured by low cost digital brokers and form a relationship with their brand, has been “a constant” since the mid-2000s. But so far, he has not seen that “as a permanent fixture”.
Even those clients who have started with pure self-directed investment capability, get to a point where they start looking for guidance.
“It takes a lot of work to manage money by yourself. You need information and content that help your decisioning, but we live in an information age, which means everybody is drinking from an information fire hose. But if you are not an absolute specialist in curating this content yourself and filtering through everything to make the right decision, you often make bad choices, you will jump onto fads, you will get involved in bubbles and you won’t take a holistic approach,” warns Mr Subroyen.
This explains why, over the past few years, self-directed investment platforms have augmented their service with model portfolios that meet clients’ investment risks and objectives, and giving advice. At the same time, institutions offering a more holistic service have started providing self-directed investment platforms, with curated content. “I think this blend of approaches is going to level the playing field and will produce a better outcome for the society for this group of investors.”
Investec’s ‘high tech, high touch’ proposition on the investment side extends to concierge services, ranging from estate planning, to travel management, which offer clients that exclusivity they seek. “When things are going well, you can do everything by yourself, but when things are going wrong, the ability to pick up the phone and talk to someone who would go out of their way to help is invaluable,” he adds.
Rather than the age bracket, it is more valuable to segment clients based on their characteristics and life stage, adds Mr Subroyen. Technology then allows greater understanding of clients through data, enabling a personalised experience by delivering targeted content and services which are relevant to them. ‘Propensity models’ can help predict future needs, based for example on their browsing activity.
Research shows that it is not just young customers that are driving digitalisation. Merrill Lynch’s recent survey found a stronger correlation between wealth and digital adoption. Eighty-eight per cent of its HNW customers, those with more than $10M in assets, are actively using the bank’s digital platforms, which is higher than any other asset segment and significantly higher than the overall average.
Also, “contrary to expectations”, digital adoption is largely consistent across all age segments below 70, explains Charles Liu, head of digital, private bank, Bank of America. Moreover, while clients aged seventy or more have marginally lower digital adoption, the rate of usage is growing faster than all other segments.
“Regardless of client demographics, we are focused on engaging clients in digital across the client lifecycle to deepen relationships and drive productivity across the business,” he says.
The bank’s focus is engaging the whole family, as Gen Z income will exceed millennial income by the early 2030s, a 140 per cent increase in the next five years. “We need to find solutions, both digital as well as non-technological, for millennial and younger generations, including Gen Z, who are our future clients,” says Mr Liu.
Goal-based tech
Goal-based wealth planning technology can be extremely useful for private banks to attract millennials, who span quite a wide age range. Those approaching 40, who are gaining momentum in their salary structure or inheriting money, have other priorities than themselves and need more than they get from the regular fintech, says Meghna Mukerjee, senior analyst at Aite Group.
“Those in an accumulation phase can control and work with an adviser in real time to understand how to reach their short and long-term goals and get insights. This is extremely important and keeps these clients going in, ticking the box and really pushing forward more and more of their assets with the same firm,” she says.
Platforms offering clients a holistic view of their finances and other aspects of their life, all in one place, are also a key strength for private banks. But it is also important to give clients trading capabilities in apps, as well as collaborative features with social networking opportunities, which millennials are very used to, she adds.
Digital first
Technology has levelled the playing field in wealth management, and the great wealth transfer has made it even flatter, believes Andy Ballie, regional VP Emea for US software company Seismic. The firm’s clients, including several global top 50 wealth management firms, “are especially aware they need to be very competitive in that brave new world”, he adds.
Moreover, the pandemic crisis has acted as a “catalyst” for financial services organisations to increase investments in digital-first technology, to enhance processes internally but also, importantly, improve the customer experience.
There is much more speedy delivery of digital first technology in younger firms, which are primarily technology-driven, such as Nutmeg, Octopus or Monzo.
For traditional brands, such as UBS, which can leverage the strength of their reputation to attract clients, the tempo with which they improve their digital first interaction is perhaps slightly less urgent than it is for other brands which do not have a strong footprint, he adds.
But they may face increasing competition from non-financial services providers. “Amazon, Google and some of the larger ‘all things to all people’ are growing, they have very strong brand reputation, so much so that they will be breaking some of the traditional demarcation areas between financial services and other parts of the business community,” adds Mr Baillie. “My sense is that we will see an increase in migration from traditional to non-traditional financial services providers.”
What is unknown is the speed of change, also because of regulation. “I would assume that if Amazon Wealth Services existed and they complied with all the regulatory obligations, having all the right licenses and checks and balances in certain market places, that would be a compelling option for certain demographics, just because of the brand they have built in other areas.”
