Digital revolution in private banking

Blue open-neck shirts, jeans and blazers – rather than the usual grey suits of the city – are in abundance among consultants and portfolio managers skulking around the Level 39 technology “incubator” centre, at the heart of London’s Canary Wharf.

These visitors from across Europe are here to take part in the FinTech Challenge, sponsored by French software house Dassault Systems, during which six new start-ups pitch to the audience. The aim is to find an innovative, technology-led platform which can transform the backward wealth and asset management industries.

Each pitcher takes part in a speed-dating format, where small groups of highly sceptical, tech-savvy potential clients huddle round for intensive 10-minute Q&A bursts.

For the participants, coming from countries including Germany, Poland, Switzerland, Russia, India and the US, the pitch, electronic vote and final countdown mark the end of seven weeks’ intensive dialogue with banks, asset managers and technology developers.

Hovering uneasily among the geeks, techno nerds and frequent Euro travellers, who regularly fly between the continent’s financial capitals carrying just a laptop case, Mike Chochon, CEO of PrairieSmarts, looks something of an oddity.

His checked shirt, chinos and mid-Western drawl set him apart from his rivals in the dragons’ den. Mr Chochon, who has always worked “where the financial industry and the internet converge,” plans to use this to his advantage when marketing his cloud-based risk calculator to performance-obsessed wealth managers.

“We are getting away from the New York-centred world of standard deviations and modern portfolio theory,” says Mr Chochon, referring to banks explaining risk and return with complex formulas and ethereal “alpha” concepts rather than in dollar or euro terms.

What Mr Chochon soon realised was that the wrestling match with data was the toughest to win. Rather than just provide a series of numbers and ratios to his users, his platform shows each client how much of their portfolio is at risk at any given moment and how much they can potentially lose.

“We can do this by bringing better math and better technology to the table,” he says, having invested more than $1m (€780,000) to make sure the “model is robust, scalable, sustainable and tailored to the space.”

Like many technology innovators and private bankers, he is convinced the time has finally come to inject this industry with the latest digital formats, algorithmic formulas and messaging services.

“More than 70 per cent of smaller Swiss wealth managers are still using Microsoft Excel to analyse their data,” says Zurich-based Sebastian Manthei, co-founder of Datanext, another FinTech finalist. “We want to help them with cloud-based solutions. Success will now be a matter of innovation.”

The theory is that digitalisation allows not only improved access for private clients, but a much more efficient and cost-effective way for banks to use their resources.

Unlike other areas of banking, where regulation is a key innovation driver, allowing faster trading in over-the-counter markets, the changing face of private banking is driven by a secular, behavioural shift within the core client base.

According to the World Wealth Report, 65 per cent of rich individuals expect to manage their wealth digitally within five years.

“Today there are clients who have never stepped into a bank branch or office,” says MatteoCassina, head of business lines at Saxo Bank. In order to maintain a high level of engagement with these clients, private banks need to make sure the quality of technology introduced matches expectations.

Rather than fearing disintermediation, the banks should embrace the opportunities which innovation offers them, says Mr Cassina. “Technology can enable banks to increase their customer base, improve margins and grow revenues,” he says.

Technology platforms will change the entire business model for private banking, claims Damian Handzy, CEO of risk analysis firm Investor Analytics. “Private banks must transition from the premise where they wanted to control all of a client’s assets to a relationship where they charge for coaching services and advice.”

A further, potentially greater transformation will occur when the tech giants such as Google enter the fray. “When I came to Wall Street in the mid 90s, a lot of banks were hiring physicists and mathematicians, as they did not have the expertise in-house,” says Mr Handzy, speaking in his office in the shadow of New York’s haunting Ground Zero, former site of the ill-fated Twin Towers.

“Google has both the technology and the resources. All they need is to hire private bankers with the right mental attitude to create a new model for high net worth investors – there is nothing stopping them.”

Rather than compete with this looming threat, private banks need to partner with tech firms entering their business to preserve their own customer relationships, says Mr Handzy.

Latest developments, spurred by “huge breakthroughs in computer science,” leave customers unable to tell whether they are interacting with humans or computers. “The computer will replace the human and the implications of this for private banking are enormous,” he says. “The banks must embrace these changes.”

Consultants agree that 2014 really is a watershed for digitalisation of private banking. “Even in 2013, the conversation did not revolve around digital or innovation,” says AloisPirker, head of research at Boston-based consultancy Aite Group. “But during the last 12 months, European banks have realised you will no longer have business as usual unless you turn things around. The clock has started ticking.”

Many banks feel innovation is about inventing website tools or iPad apps, but these players are failing to address deeper issues, believes Mr Pirker.

“We are talking about changing the whole culture and processes to innovate the business model and introduce something unique to differentiate you from the market,” he says. “If you don’t have the mindset, an iPad app won’t do it for you.”

Aite Group’s extensive study of wealth managers’ use of technology and digital solutions, conducted together with PWM for this story, reveals those banks, which are leading the pack.

“The likes of Citi have done a tremendous job. They have changed from underneath too.” says Mr Pirker.

The secret lies in finding a “fixonomy” to combine trading ideas, in-house research and data from external sources such as Bloomberg and marry them to client holdings and interests.

Every Friday, three of the highest ranking managers in Citi’s private bank HQ on New York’s East 53rd Street would sit down and review every single piece of client feedback. This would lead them to continuously revise the client interface of their newly established Inview website, rather than just having a once and for all launch and leaving it be.

“If users don’t like the experience, you are back to square one,” says Mr Pirker. “You can’t have it all singing and all dancing from the first day.”

Warmly greeting every staff member and client who passes through Citi’s reception, CEO Peter Charrington outlines the challenging role which technology will help private banking players to carve out.

“This has always been an exciting business, but a tough business to play in,” says Mr Charrington, who has seen Citi exit both the brokerage and asset management spheres to concentrate on stewarding assets of the world’s wealthiest families in the $25m (€20m) plus bracket.

This is a market he expects to consolidate as cost-income ratios continue to further challenge banks’ management teams.

“It is very important to have a platform with the latest technology, but you still need a team to deliver this and a client will want to meet that team,” he says.

“The first rule is to look someone in the whites of their eyes and ask ‘do I believe in these people? Do they have integrity and interests of my family at heart?’ Machines will never replace people, but what is the client experience like after the face-to-face meetings? It is our aim to use technology to make this client interaction as smooth as we possibly can.”

One particular focus at Citi has been “on-boarding” newly acquired clients. “The highly regulated, multi-jurisdictional environment has made the on-boarding process much more challenging,” says Mr Charrington. “We want to create an experience for the client that is as impressive as possible, right from the kick-off.”

Successful use of technology should follow the lead of carriers such as Singapore Airlines, renowned for customer service. “As soon as you log on, they know who you are and have an idea of your preferences,” he says.

Citi also scored ahead of rivals in that they immediately realised the importance of managing data. “Banks have tended to struggle with this data aspect,” says Mr Pirker. “Everything else is there, but they need to get the data under control.”

He also commends Singapore’s DBS, Brazil’s Itaú, Holland’s ABN Amro and Northern Trust of the US for efforts in the digital space.

Asian banks are “streets ahead” of Western markets, realising their limitations as well as having clearer visions of how they will deploy innovative technologies.

“DBS are at the tip of the iceberg,” he says. “But these guys soon realised that whereas data is plentiful, it is meaningless without interpretation.” 

The balancing act which banks must play between a marked move towards digital while maintaining the personal touch is much more apparent at the higher end of the wealth spectrum.

Many bosses believe mechanisation is more acceptable and desirable in the retail space, but needs to be limited further up.

“As people accumulate substantial sums, it is more difficult to tell them to put their wealth into an algorithmic model and that they don’t need advice,” says Northern Trust’s CEO Steven Fradkin.

“If you have $10m to $50m of wealth, would you really want to make all your decisions based on a strong tech platform on your iPad? Would you really want to give someone $50m without a strong sense of who these people are, what they have done for other clients and how they might deal with a particular stock concentration? We think it is too simple to say it will all be digital. There is room to play for everyone.”

Despite spending much time in both his New York and Chicago offices, Mr Fradkin is taking another office in Silicon Valley, which he calls “one of the most dynamic wealth creation centres on the planet,” to keep in touch with the rapid innovation taking place in California’s new technology industry.

“Only the paranoid survive in this business,” smiles Mr Fradkin, glancing theatrically over his shoulder through the window of his boardroom, 21 storeys up. “We are seeing an uptick in robo-advisers, being built from the tech angle, not the banking and investment space. Some industry pundits are saying this development will take over the world, others say it won’t.”

Such digital propositions, while efficient for mass market customers needing portfolio management, tend to become unwieldy at the higher end, where clients have upwards of €25m to invest, adding complex holdings and trust dealings.

They are also trickier to build for larger banks with a strong legacy of infrastructure investment. “Being part of a big bank like Citi, you are bound to certain in-house technology platforms, which you are now allowed to bypass,” explains Aite’s Mr Pirker.

He gives qualified praise to banks such as Credit Suisse, which are creating new digital organisations rather than upgrading obsolete systems.

“Digital private banking will be huge for us, we will have a big role to play in that space,” confirms Bob Jain, CEO of asset management at Credit Suisse. “Unlike our competitors, who have their own brokers, we have no distribution channel conflict.”

Digital wealth management players, including Nutmeg and Fidelity’s Betterment, have the ability to build Greenfield projects without the internal politics. “They can do what Citi is trying to do, but much faster and cutting out the complexity,” adds Mr Pirker.

The same is true for technology firms to whom many wealth management firms outsource their reconstruction. Zurich’s Crealogix, which specialises in building software for banks, is a case in point.

“Crealogix say they can build from scratch in three to six months,” says Mr Pirker. “But if you are adding the platform into an existing infrastructure for a private bank, you are suddenly talking about three years.”

Problems have also arisen where some global players are trying to implement private banking software supplied by a group such as Zurich-based Avaloq in the majority of jurisdictions, while several centres within the bank may be continuing with a rival system from the likes of Geneva’s Temenos.

Whereas banks have been spending extravagantly for many years on back office enhancements, it is now simpler to outsource maintenance of the nuts, bolts and plumbing apparatus and concentrate on enhancing customer facing technology.

“Today’s firms want to get rid of the back office,” says Mr Pirker. “It represents a big cost and they want somebody else developing and spending there. Innovation now is at the front end, but we are still in the process of this shift.”

This is part of a latent trend to slim down infrastructure and outsource technology, investment management and asset servicing, although not all banks are following this path.

Rather than biting the bullet with radical changes, many banks are resisting customer clamour for digitalisation by preserving too much bricks and mortar infrastructure, believes New York-based wealth marketing consultant April Rudin.

“Who wants a bank branch these days? Your IP address is more important than your street address,” says Ms Rudin. “Having a branch makes you look ridiculous and creates expensive infrastructure, which a bank has to fund. There are banks which try to tell me they are ‘technology companies’. I tell them ‘give me a break, you’re a bank!’”

Unlike banks, Silicon Valley companies do not create infrastructure, says Ms Rudin, preferring to work with best-in-class providers.

“Banks do not need to build technology and infrastructure in-house,” she says. “They need to retool to become a conglomeration of service companies with a thin bank in the middle. But they don’t think about this, they throw bodies at the problem, create departments, infrastructure and bureaucracy, hurting both clients and shareholders.”

Many stuck in this uncomfortable status quo will be hit by competition from unexpected places, she predicts. “UBS will tell you their competition is HSBC or Citi, but where they’re looking is not where it’s happening. They are so busy, they will miss it.”

She and other consultants send stark warnings to those banks which introduce a handful of apps and label themselves “innovators.”

“Technology has become a commodity,” agrees Ray Soudah, founder of Zurich-based strategic consultancy MillenniumAssociates. “All the banks have fancy apps and their clients can see their portfolio online. It is hugely expensive, but what does it actually do for people? Despite all the money being spent, millions of clients of major banks have still had their personal details exposed. Where is the security?”

Even bankers will not deny these sometimes unpalatable home truths. “Everyone is investing in technology and in the end it is not differentiating,” says Philippe Wallez, general manager of ING Private Banking in Belgium. “Success lies in the combination of digitalisation and personal advice. Technology is a just a facilitator, enabling you to be more and more precise, more pro-active and faster.”

Like some fellow travellers, ING is not keen on total digitalisation of wealth management. “Pure electronic trading is not a private banking service,” asserts Mr Wallez. “Even if certain services will become more digital, we must keep our holistic approach of listening to clients and offer a service according to their needs.”

For others, radical change cannot come fast enough.