The most recent indication that they are headed in this manner is provided by market leader JPMorgan, which recently informed the German business daily Handelsblatt of its aim to first enter the German market with its private banking and Chase platform before moving on to other European markets.
The UK’s financial industry, however, has experienced enormous changes since Brexit and pushed many of its key players to reevaluate their plans. Up until this point, the banking behemoth has mostly concentrated its efforts on the UK. It is important to note that JPMorgan now has the title of “best wealth manager in the world” according to the most recent Euromoney report.
Until now, the banking giant had focused its efforts mainly on the UK, whose financial sector, however, has undergone significant changes since Brexit and forced many of its major players to reconsider their strategies. It is worth noting here that JPMorgan carries the title of “World’s Best Wealth Manager” from the latest Euromoney ranking.
Private Banking: visible growth but also visible challenges
The US financial giant’s strategy matches market trends that PwC captures in its research: “The most successful private banks have been quick to enter new markets, expand in their core segments – for example, ultra-high net worth clients (UHNW´s) – and explore their pricing power while broadening their offerings, such as alternative asset classes and sustainable investments”. According to the consultancy’s data, the average annual growth in assets under management (AUM) between 2016 and 2019 amounted to 8.6% globally.
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Challenge 01: Expansion
However, there are significant differences in the performance of different players in the market. While for the top 5 banks, the growth is almost double at 16.2%, at the other end of the ranking, we even have a decline of 1.2%. In other words, the market is highly fragmented, and not every player in it is benefiting from its growth.
A key success factor in the main regions of the world considered—Europe, North America, and Asia-Pacific (APAC) and Switzerland (considered as a separate region) – is scale—the larger the clients private banks attract, the faster their assets under management grow on an annual basis. Thus, medium and large banks are seeing increases of 9.5% and 9.2% per annum, while smaller banks are making do with 6.2%.
If we look at Deloitte data over a longer period, however, we find that profit margins declined by 40% (CAGR of -3.2%) between 2000 and 2015. Thus, although the market is experiencing momentary growth, in the long run, it faces a serious challenge.
Challenge 02: Financial Growth
Against this backdrop, natural business logic says that profits should also trend upward. In this case, however, due to some market peculiarities, they are under both visible and serious pressure.
The situation is worst in the North America region, where there has been a 16% decline. The best-performing market is Switzerland (considered as a separate region), but even this has seen a 4% decline. The global market is down 12% and the European market is down 11%.
“Multiple factors have combined to squeeze private banks’ profitability, including falling interest rates (which cut returns on lending), regulatory changes (which for example eliminated commission payments from asset managers in Europe), and the advance of lower-cost digital models (which are increasing price transparency and fueling competition)”.
Challenge 03: Cost Efficiency
To this challenge, we need to add another: labour costs. It would not be an exaggeration to say that employees are the biggest asset for any bank, and this is even more true for private banking.
Attracting new private banking clients in the high-net-worth (HNWI´s) and ultra-high-net-worth (UHNWI´s) segments requires the expertise of expensive professionals, the cost of which puts additional pressure on the balance sheets of financial institutions.
Challenge 04: Digital Transformation
If there is one thing that bankers see as a bigger challenge than those listed so far, it is digitization. In the survey, it was ranked first with 65% of the respondents’ votes. This compares with a growth rate of 59%.
Again, there is a very interesting trend here: while universal banks are making significantly more investments in digitalization than pure-play private banks between 2018 and 2020, the forecast at the time of the report’s release is for a reversal of the trend in the near future—something that is already happening.
Digitalization has the potential to provide a solution to perhaps the biggest challenge facing the industry, namely closing the gap between declining profits and a growing market.
Deloitte’s research points out that the profitability of European Wealth Managers has been in constant decline in recent years, with profit margins falling by 40% between 2000 and 2015. During the same period, the market size for Private Banking measured by the bankable assets of European millionaire households, has grown by more than 60%.
This increasing gap between profitability and market size shows that Wealth Managers are failing more and more to serve clients successfully with their existing business models of an integrated value chain.
Private Banking 2.0 or FinTech change
At the same time, digitization is transforming fintech firms that are disrupting traditional wealth management services into new competitors.
The FinTech industry is one of the fastest expanding in financial services history. According to latest research, its market value is estimated to reach over $332.5 billion by 2028, with a CAGR of 19.8% to 25.18% from 2022 to 2027.
According to one Forbes report, the average investment in FinTech by financial institutions has increased from $2.3 million in 2019 to roughly $10 million in 2021. This demonstrates how serious, serious, and time-sensitive the company’s difficulties are.
As these FinTech firms enhance their private banking services and introduce new products, they are expected to become even greater participants in the private banking market, placing pressure on incumbent banks to innovate or risk becoming obsolete.
The private banking sector is at a crossroads in a rapidly changing world. To succeed in the future, it must embrace digital transformation and incorporate the finest aspects of FinTech into its operations. Traditional banks may not only survive, but also prosper in this new age of financial services provided they adapt and employ a Private Banking 2.0 model that blends technology and a client-centered approach.
Finding a balance between the trust and knowledge that conventional private banks provide and the simplicity of use and fresh ideas that FinTech innovators bring to the table will be critical to success. Finally, organisations that successfully blend tradition and technology will determine the future of Wealth Management.
