Entitled The Future of Swiss Private Banking – Turning Regulation into Value, this latest private banking study conducted by KPMG and the Institute of Management of the University of St. Gallen (HSG) analyzes the major challenges, some even existential in nature, faced by Swiss private banks. It examines aspects which will be pivotal to the success of private banking activities in the near future while also identifying areas where action needs to be taken as a result.
These are Swiss private banks’ ten most important challenges for the future:
- Implementation of transnational regulations is vital for survival and promotes private banks’ ability to compete: The implementation of transnational regulations will help Switzerland be recognized as a clean place to do business. This will enhance the reputation of its financial center and level the playing field. Since Swiss private banking services are an export, they are forced to adapt to transnational regulations, particularly as a result of the more stringent cross-border provisions, in order to remain internationally competitive and even gain access to foreign clients in the first place. What’s more, proactive implementation of the new provisions will raise the quality of the services, improve client protection and thus also increase banks’ credibility vis-à-vis their clients. Regulation will lead to a higher standard of quality which, in turn, boosts efficiency and client satisfaction.
- Implementation of these regulations should be geared toward a principles-based approach: According to those surveyed, the implementation of transnational regulations should be principles-based, not rules-based. In more concrete terms, this means that regulators in Switzerland decide what should be regulated and that banks decide how they intend to adequately implement FINMA’s regulations. The majority of those questioned consider a differentiation according to certain criteria, such as business model or size, to be essential. They feel that a lack of differentiation would impede future developments in the industry. Most of those surveyed are of the opinion that the greater transparency achieved by the Federal Financial Services Act (FFSA/FIDLEG) will be significantly beneficial to clients. Nearly half of the respondents, however, agreed that the automatic exchange of information and client data confidentiality (CDC) will be of very little benefit, both to banks and clients.
- The regulations’ top priority is to protect client assets: The upcoming regulations primarily protect clients. They create transparency and help clients make investment decisions. However, the regulations are also intended to protect banks and client assets rather than just protecting clients from the bank. A proactive implementation of the new provisions will boost the quality of the services and thus increase banks’ attractiveness. A majority of the banks believe that the regulations’ implementation is not pragmatic enough and patronizes clients. What’s important is that regulations alone will not necessarily lead to an increase in clients’ confidence in banks or greater client satisfaction; the client advisor’s expertise and quality of the advice provided are key to reaching this goal.
- Regulation forces banks to refine their business model and generate sustainable growth. Smaller banks will largely become niche players: In light of the increasing complexity and demands of growing regulation, many banks are forced to focus on individual markets and products for compliance and cost reasons. Our survey reveals that most private banks have begun a consolidation process that is still underway. According to the poll, pending regulations will make it necessary for private banks to have CHF 10 billion or more in assets under management in order to be profitable. The business model will also be a key factor in determining a bank’s minimum required size, whereby outsourcing will play a major role. It will be necessary to automate and digitalize processes and controls. One option hardly ever considered is that of surrendering the bank’s banking license in conjunction with a transformation to an asset management company or family office.
Banks must establish a clear strategic position:
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- Cantonal banks (CB) benefit from a higher degree of industrialization which is made possible by their private client business. Due to technological innovation and their proximity to clients, cantonal banks display a high degree of differentiation, as well.
Purely private banks can be broken down into two categories:
- PB1: Banks have chosen a purely differentiation-based strategy and do not intend to industrialize their processes. Smaller banks, in particular, fall into this category.
- PB2: Banks in this category have chosen a blend of client-based differentiation and technological differentiation.
- Larger Swiss banks with global operations as well as the Swiss subsidiaries of foreign banks (GPB) have the size they need to benefit from economies of scale related to both technological advances and differentiation. They concentrate on select key accounts and client segments.
- Greater efficiency through the digitalization of operational tasks: According to the survey, banks will have to invest in the automation of their core processes and the necessary technology which will enable them to become more efficient and provide better service quality. Investments in digitalization are also needed to comply with regulatory requirements. Proactive cooperation with technology firms is recommended so that they can carve out an advantage over their competition.
- Big data is needed to meet regulatory requirements: Enormous quantities of data, including client data, risk profiles and information on investment behavior, must be collected to fulfill regulatory provisions. This data will also permit dynamic client segmentation as well as an improved understanding of clients’ needs. The poll revealed that individual banks are also considering drawing on the expertise of non-bank specialists for help on structuring their data. The ability to fully digitalize all of this data by means of an intelligent IT system, however, will be imperative. Even greater investments will still need to be made in this regard.
- Adopting clear, transparent pricing models: Performance is a vital factor when it comes to private banking, yet not the most important one at the moment. Clients are extremely price sensitive, particularly in terms of transaction and portfolio management fees. Banks need to clearly disclose their prices, then clients will also be willing to pay a higher fee for non-standardized services if they see the benefits they bring. Apart from that, a majority of the bank representatives surveyed felt that clients would agree to pay a performance fee.
- Boards of directors and executive committees play an important role: Boards of directors and executive committees are responsible for the timely implementation of new regulations. Due to the vast number of these regulations, however, clear strategic objectives are required as well as a project group at the executive committee level which will handle their implementation. Moreover, it is essential that client advisors are trained to correctly apply regulations and view them as an opportunity rather than a threat or obstacle.
- Communication changes through digitalization: Today’s clients demand more real-time information. A majority of those surveyed expect an increase not only in interactions with clients but also the use of digital devices during meetings with clients in order to present various analyses, simulations and product information related to the portfolio. Whether or not personal meetings will play a diminished role depends on the client and his or her needs. The role social media plays in the exchange of information will grow in private banking, as well.
- Role of and demands on client advisors are undergoing a major transition: Since banking is and always will be a business based on trust, client satisfaction has to take top priority: open, transparent communication, ethical behavior, fair prices and assured data protection are pivotal. Client advisors must understand the regulations in their entirety to protect the bank and its clients against damage; non-compliance is not tolerated. The banks also see that client advisors will have to offer services that extend beyond those traditionally associated with banking such as support on questions related to real estate or family matters. Despite the automation of the advisory process, time with clients needs to be put to optimum use in order to improve the quality of the advisory services provided.
Philipp Rickert – Head of Financial Services and Member of the Executive Committee – summarizes the most important insights from KPMG’s latest private banking study in this video interview and highlights the current challenges the industry faces.
The full study is available by clicking the following link: Clarity on The Future of Swiss Private Banking