Private Banking
D. Regulatory Concerns Of Private Banking On A Global Basis
E.1. Private Banking in the Bank of
Tomorrow
E.1.1. Change: Leads the Course of
Tomorrow's Banking
E.1.2. Basic Economics of Future Banking
E.1.3. Major Trends in Tomorrow's Private
Banking
F. Important Issues For Private Banking
F.2. Wealth Of Knowledge For Private
Bankers
F.3. Importance Of Internet As A Key Channel For Private Banking
G. Current Position For The Private Banking Industry
Private Banking
Barron's
Dictionary of Banking Terms provides an excellent definition. It defines
private banking as banking services, including lending and investment
management, for wealthy individuals. Private banking primarily is a credit service,
and is less dependent on accepting deposits than retail banking. Another
interpretation can be found in The Federal Reserve Supervisory Letter
(SR97-19). Under this definition, private banking includes, among other things,
personalized services such as money management, financial advice and investment
services for high-net-worth clients.
Although
high net worth is not defined, it is generally thought to refer to households
having income of at least $100,000 or net worth greater than $500,000. Larger
private banks often require even higher thresholds before they will furnish
private banking services. Several now require new clients to have at least $1
million of investable assets. By next year, it is estimated that more than 15
million households will meet the $100,000 income test. Most of the private
banks further segment this group into the young affluent or retired affluent.
Several of the more sophisticated institutions may further differentiate their
clients by type of services they require.
The ranks
of affluent baby boomers has been growing at double-digit rates in recent
years, particularly since many baby boomers are now reaching the peak of their
career earnings. Many have little difficulty meeting the net worth test because
of their investment in company-sponsored thrift plans, rising stock prices and
climbing real estate values. One good tool to measure how this affluent group
is faring, at least in stock performance, is the Wilshire 5000 Index, the
broadest equity index, measuring the performance of more than 7,000
capitalization-weighted securities. It covers virtually every U.S. company that
trades on any major exchange. During the first quarter of 1999, this index
reached the 11,700 level, meaning that the market values of all securities were
then valued at $11.7 trillion. This represents almost a 1,000% increase since
its inception on Dec. 31, 1980, when the value was $1.4 trillion.
Using a
separate department of the bank, an Edge Corporation or a foreign subsidiary
are the most common arrangements seen in large foreign banking offices or money
center banks. Private banks may also be stand-alone entities, such as Coutts
Bank in Miami. Private banking may also take place in a bank's trust or
investment management division, a structure typically seen at large regional
banks such as Mellon Bank Corp. or Bank One Corp.
Regardless
of the structure, private banking products and services are not only confined
to a bank's domestic headquarters. These services are also frequently offered
to customers throughout any bank's global network of affiliated entities,
including branches and representative offices in any region of the world, and
offshore secrecy jurisdictions.
What
kind of products and services do these clients desire? Product offerings
frequently extend well beyond the typical commercial bank menu of deposits,
credit products and mutual funds. It is not unusual to find clients in offshore
vehicles such as personal investment companies (PICs), trusts or even more exotic
arrangements, such as hedge fund partnerships or payable through accounts
(PTAs)-deposits accounts through which U.S. banking entities provide
check-writing privileges to customers of a foreign bank.
Private
banking services almost always involve a high level of confidentiality for
client information. Lending to high-net-worth individuals and their business
concerns often takes on unique characteristics. Most private banking lending is
fully secured. Nevertheless, extensions of credit to wealthy individuals, even
if secured, should not compromise sound underwriting standards. Even if the
collateral is cash, it may be subject to government forfeiture if it came from
illicit activities.
Typically,
private banking clients want to choose from the entire frontier of investment
choices; frequently, they ask for higher-yield products. This request for a
broad portfolio balance typically includes alternative investment strategies
that require extensive portfolio optimization analysis. The most elite private
banks have invested heavily in technology to develop optimal asset allocation
models.
Investment
management (discretionary) and investment advisory services (non-discretionary)
are also highly sought by private banking clients. For discretionary accounts,
the bank's portfolio managers make investment decisions, usually based on
recommendations made from the bank's investment research committees. For
non-discretionary clients, the banks typically offer investment recommendations
subject to the client's written approval. Clients can choose to ignore the
advice given by the institution and simply make their own decisions.
Both
account types are governed under separate agreements between the client and the
institution. However, before a banker can determine the proper asset allocation
and design a portfolio, he must first identify the client's needs and
constraints. A client profile is the primary source of this information. It
will identify the purpose of the relationship and whether the client wants
discretionary or non-discretionary accounts. The client profile is also used to
determine the client's investment objectives, investment knowledge, liquidity
needs and risk tolerance.
First
and foremost, it offers high returns. Most private banks target returns on
equity of at least 25%, considerably higher than that of the average commercial
bank. Opportunities for off-balance-sheet income are an additional incentive.
Unlike depository accounts, securities and other instruments held in clients'
investment accounts are not reflected on an institution's balance sheet because
they belong to the client. However, the institution can earn substantial fees
for managing client assets or performing other cash management and custodial
services.
To
grow, private banks need to lure wealthy investors away from direct investing
in the stock markets or investing with major mutual fund companies such as
Fidelity Investments or brokers like Merrill Lynch & Co. Success is spotty,
but those institutions that provide quality service, coupled with adequate
investment performance, are doing extremely well. Northern Trust Corp., for
instance, has managed to stay well ahead of the crowd by recognizing what is
driving this market. Northern is keenly aware of the need to have a stellar
technology platform, and they have invested accordingly.
Northern
Trust also knows that clients are becoming more sophisticated and desire a
broad spectrum of investment alternatives, including tax-advantaged accounts.
The bank also recognizes the inroads that retail brokerage firms and investment
banks are making in their business. It realizes it must keep expanding its
breadth of services, and it has. Northern is now considered one of the top
providers of personal fiduciary, master trust/custody and global custody
services in the world, and is also a recognized leader in cash management.
Several U.S. banks and other entities have
merged with international banks, which gives rise to global regulatory
concerns. At least one banking regulator recently noted that an increase of
private banking exposure by their banks could heighten political pressure to
loosen banking secrecy rules. The foreign regulator is also concerned about the
systemic risk that could result from this activity. This regulator wants its
banks to boost shareholders' equity even though it is already above
international standards. Moreover, two agencies, the European Union and the
Organization for Economic Cooperation and Development, have been asking
authorities in Switzerland to loosen its banking secrecy laws.
At
its best, private banking still requires an institution to have a highly
sophisticated management information system to track all of its accountholders
globally. Private banks will also need a cadre of highly trained relationship
managers with the expertise to understand clients' diverse needs. These two
elements will continue to set high barriers to entry and serve to limit the
number of truly global players.
Investors
today are highly sophisticated and very cognizant of their investment returns.
There also appears to be a major generation shift in asset ownership by parents
that grew up during World War II, directed to their children. These baby boom
clients currently are placing a greater emphasis on equity investment styles
rather than investing in fixed-income instruments, which their parents chose.
Still others desire to have their idle cash or principal-protected deposits
work harder for them, and frequently ask their private bankers to link their
deposits to some type of equity index such as the S&P 500.
Federal
Reserve Chairman Alan Greenspan noted in his recent testimony on Capitol Hill
that "the retirement of the baby boom generation looms as one of our
nation's most difficult challenges." Hopefully, private bankers will make
this transition easier. With overall fee income skyrocketing as a percentage of
bank income, it is little wonder that more banks and non-banks want to get a
bigger share of the pie from private banking.
The
business of private banking commonly involves looking after high net worth
individuals who first and for most seek confidentiality. These individual
investors expect very attractive financial and related services and products.
They may be both within the mainland of a country or outside, e.g., an
offshore, where both banks have established corporations veiled in secrecy
laws. In this type of banking, future banking or banking for tomorrow mainly
involves ways and means of providing the required secrecy, and the methods of
compensating these high net worth clients.
The
framework for future operation of banks as related to private banking,is
provided below and the future trends in
this respectare tried to be delinated. Banks are aware of the importance of
customer data to their continued existence. In future, their ability to provide
innovative products and services to private clients will concentrate on the
issue they are most interested in: privacy.
Why
are banks changing? The momentum of change in future banking is still a surge
in significant financial innovations. The primary impetus for innovations has
been and still is introduction of new banking products that are efficient to
increase return, and redistribute risk among bank clients. Many innovations
that have past the test of time and have not disappeared have been innovations
that provided more efficient mechanism to respond to changing environment of
banking.
The
whole face of banking is changing. One of the primary reasons that banks are
changing is due to the increased competition in the industry. Banks are no
longer regulated as tightly (pre 1980) and it is becoming easier for a
collective group of investors to start a bank. Also, banks are no longer bound
by geographical boundaries, due to globalization process. This increased
competition is changing the way banks are generating funds.
Many
new entrants and factors into the banking market provide real competition for
the established banking industry. The banking sector will become more
competitive as customers have greater and easier access to information. Since
banks will no longer be able to operate in the future as they have in the past,
there has been an increasing trend in bank mergers and acquisitions. So, a
special aspect of increased competitiveness of banks should be searched in
increased trend in bank mergers that in turn provide geographical edge to
specific banks, gives them ability to offer new products, and reduces the power
of other banks who have not grown in size. Former restrictions on bank mergers
and acquisitions have been almost eliminated.
Bigger
also means cheaper. That is because financial powerhouses, i.e., large banks,
have become master at leveraging their size and finding new ways to squeeze
profit from greater economies of scale. Bank mergers have given them a
competitive advantage over smaller sized banks. Not only do these banks have a
geographical advantage, but they also have a capital advantage. This allows
them to offer new products to their customers. This increase in capital allows
banks to make more loans available to the public. This will further increase
their net interest margin.
Nowadays,
old laws that restricted banking operations are history, and
"powerhouses" are the result. They have proven adept at expanding
their businesses beyond traditional bank services, viewing their existing
customer base as a natural source of sales for product ranges from life
insurance to mutual funds. They even go as far as not referring to their
branches as banks. Instead, they call them stores, citing retail chains as the
retailing model they seek to emulate. This is a new sales culture that has been
unique in the banking industry.
The
other main reason for change in banking industry is of course technological
advances that have reduced costs for banks today. The future of banking shall
be different from the present due to technological advances. Banks are finding
ways to increase revenues, and decrease costs by making ATM machines more
available to the public. Also, it is much less expensive for banks to set up
these machines. The average start-up cost for an ATM is much less than, say, $1
million to open a full service branch. Through innovations like automated
teller machines (ATM), on-line banking, and bill paying via the Internet, they
have been able to eliminate expensive "brick and mortar" operations,
saving billions on salaries, rent, and other overhead expenses.
The
third factor that is causing a shift in the industry is that of conveniences
for the consumer. People need timely access to banking services, and have less
time to spend at banks, and prefer the convenience of long distance banking. Of
course, society's view of what is convenient is changing. People were
accustomed to associating convenience with doing business in their
neighborhood, and not traveling to a bank across town. Now, however, society
has a different definition of bank convenience. Also, we should mention it is
directly due to mergers that banks are able to offer more full service
branches, and ATM machines. This is more convenient to the customers, and
creates bank loyalty.
Increased
use in ATM's, the growing use of home and office computers, fax machines, and
point of sale terminals allowing consumers to make transaction electronically
is now considered convenient. Thus, branch location is no longer a priority
from the consumer's view.
The
basis of the new monetary universe is a computer chip rather than a central
bank note. The advent of e-money offers the possibility of privatizing the
supply of currency, paying interest on small deposits, and making offshore
banking accessible to many individuals. In the future, government fiat money
may disappear as people choose to hold digital money issued by private firms
rather than non-interest-bearing paper money issued by central banks. These
facts have major implications for any economy, and thus for tomorrow's banking
as a whole. We need to consider the implications of the information revolution
for financial innovation and the future of money and banking.
The
transition from a paper-based monetary system to an electronic payments system
will reduce transaction costs, expand markets, and empower individuals. The
speed of that transition and the expected benefits, however, will depend on
creating a legal infrastructure that penalizes failure and rewards success. The
rules that govern the new monetary universe will have to be transparent,
equally applied, and consistent with individual freedom if people are to have
trust and confidence in cybermoney.
For
banking in coming days, we bankers are interested to know how technological
changes have affected the payment's system, making it possible to move from
government paper bank notes and coins to privately issued e-cash. We still do
not know whether this will end the government's currency monopoly, and change
the monetary standard, and our central banks could still control monetary
aggregates by controlling the monetary base, which would have lot of impact on
the way we extend our credits.
Here
is a list of what may change in the basic work of economy and its impact on
tomorrow's banking, as we bankers know:
1.
The most promising benefit of the transition to a financially innovative secure
and low cost on-line banking system is the potential it offers for offshore
banking. As soon as commercial on-line networks and Internet sites begin
offering offshore banking services, with zero or very small fees for
transferring funds, an exodus of retail banking business will begin from the
regulated onshore sector, specially in developing countries with inefficient
banking set-up to the untaxed and unregulated offshore sector. This is an
escape from inefficient domestic financial regulations of mainly developing
countries to offshore banking activities, hoping to remove inefficient regulations
at home.
2.
If e-money will significantly reduce the public's demand for currency in
tomorrow's banking era, the ratio of currency to deposits or the money
multiplier will be affected, and this has a major impact on our banks.
3. The
above mentioned changes seem to alter the concept of liquidity for the banks.
Liquidity can only be produced from a domain of trust. Trust is generated by
feedback from statistical tracking or by an external guarantor. It is true to
say that technological advances in particular in cryptography will create
greater trust and efficiency in the electronic payments system and enables
banks to provide greater liquidity. In other words, the information revolution
will create more liquidity /trust.
4.
An increased liberty of individuals using the Internet to globalize money and
commerce may end the government's monetary sovereignty, thus sovereign
individuals will construct new monetary institutions that must inherently rest
on the consent of the participants. The World Wide Web provides in the
foreseeable future a powerful new tool for entrepreneurs, provides consumers
with greater freedom of choice, and makes e-cash and electronic banking
feasible. Bankers look eagerly to this development to estimate the effects of a
change in their sovereign body.
5.
Bankers are interested to learn the role of government in financial innovation.
Banks follow government decisions on regulation, taxation, and privacy as they
relate to the financial services revolution. How does the transition to
electronic cash will shape the future of the electronic payments system? If
governments, especially in developing countries, take a protectionist attitude,
the pace of banking innovation may be hindered and banking industry bear the
costs. Government involvement in the design of new technology often deters
private alternatives. The lesson for electronic money and banking is that
consumers and merchants, not governments, should ultimately determine what new
products are successful in the marketplace. This, of course, applies to
financial products sold by banks. The trend is the movement toward greater
freedom in the provision of financial products and services as the industry is
deregulated. This trend will allow the industry to serve consumers better as
they deal with complexity and strive for greater autonomy in planning their
financial future.
6.
In tomorrow's financial system, non-bank firms' liabilities will be used for
making new electronic payment system. The question is whether they should be
treated as banks and subject to the same supervision and regulation. It seems
to many that a central authority is needed for preserving stability of the new
payments system; all firms offering liabilities used by the public for making
payments should be required to obtain bank charters and be supervised and
regulated as banks, and have access to central banks to get help for their
occasional liquidity problems.
7.
In the long run, the electronic payments system may evolve into a system of
free banking with competing private currencies based on the model of share
banking. As e-cash crowds out central bank notes, the central bank's case for
discretion will weaken. In such a situation, banks must learn to work with
monetary rules, rather than central banks' communiques, since a new monetary
standard will emerge as people shift to e-money. If banks succeed in developing
secure electronic notes, then the money will be created on demand in any
currency.
8.
In a world of anonymous e-money, which can be transferred around the globe at
the speed of light, governments everywhere will have to consider added
pressures for tax reforms, specially for a low-rate consumption tax. The more
the government, particularly in developing countries, tries to tax, regulate,
control, and confiscate, the greater the incentive for money to leave. If the
current tax system is retained, government will become even more intrusive as
it tries to stop tax evasion; it is more probable to face massive capital
outflows.
9.
Since e-money will affect the conduct of monetary policy, i.e., it will
influence the central bank's ability to control money and the price level, and
since financial innovations such as e-money will provide individuals with more
monetary freedom and make them less dependent on the central banks, all this
will have a direct impact on banks-central bank relationship. Can we predict
that e-money is likely to reduce the demand for bank reserves to near zero?
What is the impact of such a phenomenon on our operations as retail commercial
or even development banks?
10.
How e-money may affect the Central Bank's position as the sole supplier of
currency? It seems that market forces are on the side of private suppliers of
e-cash and that those forces will make a system of private competing currencies
inherently stable. In the future, what is money
will be determined by what buyers and sellers accept and use as money rather
than by government definitions.
11.
In the long run a system of free banking could evolve as e-money and the model
of share banking are widely accepted. Electronic payments and financial
innovations could allow individuals to hold all their assets in highly liquid
and divisible mutual-fund shares that reflect current market values and,
consequently, would represent economically viable exchange media. The resultant
accounting system of exchange would eliminate the problem of monetary
disequilibrium, which is associated with the present par-value monetary system
of exchange. The inherent stability of this private alternative to government
fiat money, may end the need for banking regulation. Finally, in tomorrow's
economy, while non bank providers of e-money will compete with banks, we
bankers must make sure that banks will continue to have a comparative advantage
in managing risk in the new monetary universe.
1.
Tomorrow's private banking like
today must entail the most cost efficient manners of banking in which banks are
able to fit their customers' definition of convenience; incorporated into
private individuals new definition of convenience are reliability and
dependability. This is equal to an increase in service proliferation. Some
existing examples are point of sale terminals, bank credit cards, limited service
branches offering drive-through transactions provided by bank branches located
inside shopping centers, supermarkets, office buildings, and other stores. In
the future, sales-oriented employees will offer a full range of fee-based
services at these branches. All future bankers will be forced to convert to the
new methods of reaching their customers. The customer faced with the automated
teller machines, automated loan machines, online banking via his personal
computer, and banking via telephone, compared with the traditional face-to-face
private banking transactions taking place in a physical bank structure, will
find quite apparently the impacts of this rapid and global technological
changes on the financial services he receives. Whether these technological
changes advance exponentially, or slowly and incrementally, depends to some
extent to where the customer lives on the globe.
From
the perspective the private banking institutions, technology has made it so
that data processing has virtually eliminated the differences between bank
deposits and savings accounts, credit card advances and installment loans,
money market funds and mortgage bonds, annuities and insurance. For consumers,
the differences between financial products and the motivation behind using them
remain high. Banks may be lowering costs, and may even pass some of those
savings on to consumers.
In
future, the current convenient new way of doing banking at home, work or
traveling will continue. Bank customers or members can manage their accounts 24
hours a day. From anywhere in the world, they can check their balances,
transfer funds, or pay their bills. Financial products such as brokerage
accounts, insurance, and other capital market packages will be also provided to
private customers.
2.
The creation of "digital cash" will allow the private customers to be
their own bank branches for certain transactions. This, indeed, will be a major
trend in tomorrow’s private banking.
3.
Virtual private banking on the World Wide Web will continue to make banking
more convenient to customers. In October 1995, Security First Network Bank was
the first bank to create home page. With society's increased knowledge base of
computers and the Web, virtual banking will be the ultimate in convenience.
Even now a days, it is a common practice to refer to bank web pages where we
can find information about the bank, a description of the services offered, and
many other details about buying banking products and services via the web. At
present, most of the multi-branch banks provide home banking access via a
direct-dial PC modem connection or the Internet. It is not pure financial
motivation that is making banks move towards online banking, but a drive to
enhance customer service.
It
is not really difficult to foresee that in near
future even in developing countries a very high percentage of solidly
middle-income people will use a check card and an ATM to get cash, a PC to
check their account balances and a call center to get help with questions they
can not answer themselves.
The
premise that future private banking will be highly involved with Internet
network is well supported by viewing the astonishing numbers on this growing
trend. The experienced growth rate of banking home pages states that this trend
is the wave of the future. It is not difficult to foresee that more than 80 per
cent of retail banking within the next 15 years, at least in countries with
financial depth, will be some derivative of virtual banking. The technology
craze that began in 90's shows no sign of slowing down, and banking on the web
will continue to grow in popularity even in developing countries. The customers
will have full access to their money via Internet. Almost all banks will be
offering Internet banking to their customers/members with many features and
customizable interface such as account inquiries, secure applications, opening
new accounts, viewing detailed transactions, full statements, interactive
financial calculators, comprehensive bill payment services, downloadable items
of all sorts, cash management services, wire transfers, request and
authorizations, etc.
The
trend is so strong that all start-up banks in future will do all of their
business over the Internet, due to little start-up costs and convenience as
compared to a traditional financial institution. If this is true, then can we
expect a growth of small banks similar to early American individual banking
system along side the consolidated mega bank conglomerates?
4.
To make private banking more efficient by providing more products to consumers,
preserving bank safety and soundness, promoting investor protection, and
creating an environment in which banks can keep the required privacy of the
customer, a set of new laws are required in future to update the increasingly
archaic depression-era and antiquated laws that constrain the development and
competitiveness of even today’s financial system. Present laws no longer
reflect the realities of today's financial system.
Online
private banking holds much promise because the speed that makes the banking
systems efficient and the anonymity that makes it secure are positive
characteristics from the public's perspective as well as from law enforcement
concerned with protecting the systems from security breaches. Unfortunately,
same characteristics will make banking systems equally attractive to those who
seek to use them for illicit purposes. Increased anonymity may provide security
we bankers require for private banking, but may also impede law enforcement
from obtaining the necessary information to enable them to detect illegal
activity.
5.
The future supervisory authorities and banking organizations will develop
methods for identifying, assessing, managing and controlling the risks
associated with electronic banking and electronic money.
At
the present juncture, the development and use of electronic banking and
electronic money are still in their early stages. While providing new
opportunities for banks, electronic banking and electronic money activities
carry risks as well as benefits and it is important that these risks are
recognized and managed in a prudent manner.
The
Basle Committee has already produced documents for an ongoing review and
discussion of supervisory issues and responses related to technological
advances in electronic retail products and services. Given the degree of
uncertainty about future technological and market developments, it is important
that supervisory authorities avoid policies that hamper useful innovation and
experimentation. The future supervisory process should not drown electronic
banking in a sea of regulation, but it should facilitate the development of
appropriate supervisory approaches to the management of risks in electronic
banking and electronic money activities.
In
the area of private banking, the hottest issue is not whether the Web and the
Internet will affect the ways banks will handle their private clients, but how
far the technology can take banks into the future, and whether or not
governments at all levels will let technology lead them. Of course, there are
pitfalls, controversies and issues that must be addressed, but the bankers
believe that industry-led solutions are best in the long run. Market-based
regulations should be used to ensure successful growth of this medium while
still providing full access for all customers. I think in dealing with Internet
private banking, in future, the banks themselves would lead the Internet's
economic progression, and when government actions are necessary, banks will
ensure that they should be specific in scope and pay attention to the rapid
growth of the Internet. Banking through the Internet, i.e., the first medium to
have been born globally, will relieve banks from governments' zeal to impose
regulations and taxes that may stifle its international growth.
In
tomorrow's banking, global leaders of the financial industry will more
concentrate on what type of government regulation should be placed on the
growing electronic banking industry. I suspect bankers themselves in the
developed countries will make sure that through industry-lead regulations the
future development of electronic banking will be evolutionary rather than being
chaotic, because if the future of electronic banking does in fact become
chaotic, governments will have a much harder time protecting legitimate
financial activity from illegal intrusion.
6.
If Citicorp and Travelers Group have already created a powerhouse to become a
diversified global leader in financial services, a premier global bank, a
leading global asset management company, a preeminent global investment banking
and trading firm, and a broad-based insurance capability through their
impending merger that will serve over 100 million customers in 100 countries
worldwide, with assets of approximately $750 billion dollars, then it is easy
to foresee that the bankers of tomorrow will extend their geographical and
functional span through more combinations and alliances. The impact of these
mega-mergers between banks and other financial institutions on the banking
industry and in specific on private banking, we hope, will not be the
undesirable effect of having created a perceived need for greater government
intervention to regulate the world of finance.
Future
banking in all areas including transactions with private individuals will
include mergers and consolidations. The trend has already been prominent if we
look back to the experience of last 3 years: The bank merger of Citicorp and
Travelers Group Inc that entered into a $70 billion deal to create the world's
largest financial services, or the partnership of NationsBank and BankAmerica,
and the merger of BancOne Corp. and First Chicago NBD Corp. tell us that the
creation of mega-mergers financial institutions will likely reshape the way
banking is conducted in future.
Merger
is a general development of future, and the banking is no exception, and some
of the so-called mega-mergers of the coming years that would change again the
face of financial services will be in this economic section. A rising trend of
strategic partnerships between financial service providers is in the limelight.
7.
In tomorrow’s banking the changing nature of money is only one face of the
financial services revolution. Complexity, self-reliance and less regulation have
fostered a financial services industry that is even now essentially
technology-based. In my opinion, the forgotten side to this development is the
technological enhancements between banks and their customers that will be the
growth direction of the private banking industry in coming years.
In a business
that by definition is discreet, bankers face increased pressure to truly know
their customers or risk running afoul
of money laundering regs and here lies a huge paradox .The business of catering
to high net worth individuals who seek confidentiality is booming. Often those
customers are nonresident aliens, moving assets to locations where U.S. banks have
established corporations veiled in secrecy laws. Regulators are concerned not
only about the growth of this type of business, but they are also concerned
about issues such as compensation methods, the pressures to obtain new clients,
and the monetary rewards for those salespersons who do produce. All of these
elements combine to form an atmosphere conducive to wrong-doing.
For
example, one former private banker is about to face ten years in jail for
laundering drug money. His former boss, who helped convict him, is the focus of
another investigation by the Justice Department. And a potential witness in
that investigation, convicted recently of money laundering, faces a lifetime in
prison. Our system is sending individuals to jail-not financial institutions.
The
Government Accounting Office (GAO) has announced that it is investigating
private banking and its ties to money laundering, which could take as long as
six months to complete. So, if you are a banker, stand alerted-not only should
your institution have strong Know Your Customer (KYC) policies and
procedures-you personally had better understand and follow them.
What
do private bankers really need to know about their customers? The Federal
Reserve has yet to issue its long awaited KYC regulations. (We now expect them
sometime in 1998.) However, the Fed has been directing many resources at
reviewing private banking activities at numerous institutions. These reviews
have been conducted to both enhance the Fed's knowledge base and also to assess
institutions' ability to recognize and manage the potential legal and
reputational risks.
On
June 30, 1997, the Fed issued a Supervisory Letter (SR97-19) on private banking
activities, which includes a paper prepared by the Federal Reserve Bank of New
York entitled "Guidance on Sound Risk Management Practices Governing
Private Banking Activities." The paper describes certain essential
elements that would be associated with sound private banking activities. The
Fed's review will result in a new private banking examination manual which is
now in draft. The lessons learned through the targeted review will also be
incorporated into the promised Know Your Customer regulations.
The
controls the Fed will be emphasizing center on 1. management oversight, 2.
policies and procedures, 3. risk management practices and monitoring systems,
and 4segregation of duties, compliance, and audit.
The
New York Fed's guidance resulted from a review the regulator undertook of
approximately 40 domestic and foreign banking organizations in the Second
District. Examiners focused on assessing each institution's ability to
recognize and manage the potential reputation and legal risks that may be
associated with inadequate knowledge and understanding of its clients' personal
and business backgrounds, sources of wealth, and uses of private banking
accounts. The review resulted in a sound practices paper that provides guidance
to bankers regarding the basic controls necessary to minimize reputation and
legal risk and to deter illegal activities such as money laundering. While the
paper is not regulation, it is certainly guidance on the types of controls the
Fed will be looking for.
Guidance already exists:Treasury
Department's FinCen regarding KYC guidelines is still being waited. However,
other requirements such as suspicious activity reporting already mandate that
institutions know their customer.
Any
issuance by FinCen will be in line with the suspicious transaction reporting
requirements which stipulate that banks must "know, suspect or have reason
to suspect" that a reportable event has occurred. The commentary that
accompanied the FinCen final rule on suspicious activity reporting provides a
good idea of Treasury's direction.
It
is rumored that the new Federal Reserve regulations will provide some
flexibility for institutions and allow individual institutions to decide the
appropriate measures for them to know their customer. However, that is not to
say that certain basic requirements will not be mandated. It is expected that
the Fed's requirements will consider a sound KYC program to require:
The
FDIC issued guidelines on money laundering in July, 1996, requiring that banks have
a know-your-customer program in place, while the Office of the Comptroller of
the Currency issued its new examination guidelines in November, 1996. In June
1997 the OCC formed an internal 11-member task force, the "Anti-Money
Laundering Task Group." It serves as the focal point for the OCC's efforts
to address the risks posed by money laundering. The OCC also is chairing an
interagency effort to develop training programs for examiners in all the
agencies. The curriculum will include elements on the Bank Secrecy Act, money
laundering law, and laundering schemes. Factors that the OCC considers in
determining a bank's laundering risks include: geographical location, strength
of KYC policies and procedures, adequacy of BSA compliance and money laundering
programs, unusual or high-volume activity, history of BSA violations, incidence
of references to the institution in suspicious activity reports, currency
surplus position, information received from enforcement and intelligence
agencies, volume of off-shore accounts, existence of private banking and trust
departments, and maintenance of "payable through accounts."
The
Fed has developed enhanced risk-focused BSA examination procedures, which are
contained in a newly revised and released BSA examination manual. The
enhancements include procedures that are more specifically directed at
anti-money laundering compliance. Examined more closely will be such issues as:
Has bank senior management included anti-money laundering procedures in all
operational areas? and Does the current know-your-customer policy serve as a
preventive measure to deter and report any suspected money laundering
activities? Additionally, examiners will have to determine whether manual or
automated systems are in place to identify unusual or suspicious activities as
they relate to cash transactions, exemptions, sale of monetary instruments, and
funds transfer. Audit testing requirements and staff training will also be more
closely looked at under these enhanced procedures.
It
is important to remember that the burden on the institution is not to prove to
the regulators that every transaction has been checked, but to demonstrate that
there is a system in place to group abnormal transactions-which requires
customer knowledge-and to ensure that there is a system of internal controls to
test for ongoing compliance.
The
OCC issued new guidelines in November 1997 for its examiners when reviewing
Bank Secrecy Act compliance and money laundering controls in banks over $1
billion. These guidelines cover all areas of the bank, including private
banking, international, fiduciary, and discount brokerage units. Expect OCC
examiners to:
Testing will also
be performed on currency flows; large cash transaction reporting; currency
transaction report exemptions; wire/funds transfers; OFAC requirements; and
recordkeeping, reporting, and record retention.
The
British Bankers' Association has produced a private banking report which it
hopes will become an authority on legislation, globalisation and product
development for those serving the high net worth market
"THE
PRIVATE banking industry is fiercely competitive. Almost daily, institutions
are being drawn to participate in this growing industry," said Tim
Sweeney, director-general of the British Bankers' Association (BBA), in his
foreward to Key Issues for Practitioners. "The issues facing them are many
and varied. Our desire to share comment about those issues was the motivation
for the publication of this book."
The
report covers every conceivable issue confronting the private client manager in
today's increasingly scrutinised wealth management arena. "The private
banking market is highly fragmented," writes Sally Scutt, deputy
director-general of the BBA, in her introduction, "and so the forces of
change affect the players in different ways".
"However,
the burden of compliance with new regulations, domestically and
internationally, will face them all. And yet, technological change will
increasingly blur the distinction between the two. The traditional drivers of
wealth mobility -- cross-border diversification of political risk, anonymity
and international diversification -- may change and the influence of domestic
government policies and international regulation -- such as EU directives, and
OECD work on taxation and banking secrecy -- will reinforce that change."
Scutt
adds: "For clients, their needs are also changing. There is a shift from
old, inherited wealth to newly created wealth. With that shift comes a demand
for new services and products. The source of wealth creation often defines what
that demand might be and providers must be able to manage the more `active'
approach of new money and the delivery of more complex products in a tougher
regulatory environment."
Chapters
from the report are featured below.
Money
laundering regulations and their impact
The BBA
has brought together regulator, consultant and lawyer to discuss the shape,
scope and impact of regulation on the UK banking sector and to fit into the
wider global effort to stamp out financial crime.
George
Alford, senior adviser to the Financial Services Authority (FSA), outlines the
newly created regulator's role with regard to financial crime. "The three
main types of financial crime which the FSA will play a significant role in
trying to prevent are money laundering, fraud or dishonesty, and criminal
market misconduct which includes insider dealing. The fraud type is now
understood to include financial e-crime."
Sue
Thornhill of MHA Consulting gives the situation a banking perspective. "On
the face of it, money laundering prevention and private banking have never been
easy allies. The overriding characteristics of client confidentiality and
discretion that are so vital to the private banker in dealing with the
financial affairs of high net worth individuals can also provide significant
advantages for those who wish to hide their wealth from the authorities,"
she says.
Add
to that the offshore trusts, special purpose vehicles, and the financial
structures that are often necessary to provide efficient tax management for the
wealthy, and you have the perfect scenario for a complex money laundering
operation.
"However,
it is patently obvious to those who attempt to understand both sides that no
respectable banker would willingly, or knowingly, assist in laundering the
proceeds of crime," adds Thornhill.
John
Rhodes of law firm Macfarlenes injects a global note of realism into the
proceedings: "My own view for some time now has been that whilst this
academic debate is still interesting, it is really irrelevant so far as the UK
and its overseas dependencies are concerned because the present UK government
has made it so abundantly clear that it supports the wider interpretation of
the law. If, therefore, the courts were ever to find otherwise, it would just
change the legislation."
Data
protection, direct marketing and e-commerce
Joanna
Elson and Christopher Rawlins of the BBA examine the impact of EU data
protection on the ability of private banks to market both existing and
potential customers.
"Europe
is moving toward a culture with far more privacy and data protection rights,
both than it has had in the past and than that outside Europe, notably in the
US. Recent directives, and those in the pipeline, take data protection far more
seriously than it has been taken before."
Most
notably, access to the electoral roll in the UK for the purposes of marketing
will be substantially reduced in the near future.
However,
the pair point out that the advent of datamining software has and will enable
to more accurately define their most profitable clients, with the inference
being that the less profitable or even not profitable can be weeded out.
Datamining also allows for a more targeted and therefore less annoying direct
mailing of existing clients.
The
authors go on to outline UK and EU legislation that could lead a bank into hot
water with both its clients and regulators, if overlooked.
Taxation
and banking secrecy
This
highly contentious and emotive issue was tackled by Paul Tipping, director of
the BBA's tax panel.
"Cross-border
investment has always offered opportunities to defer or escape tax and,
inevitably, provides a focus for actions by tax authorities. In continental
Europe, it has not been just the wealthy who have sought to seek a confidential
home for their savings outside their country of residence," Tipping
explains.
"The
globalisation of markets and the freedom to move substantial funds at the touch
of a banker's button have multiplied the opportunities for investors.
Inevitably, but not exclusively, tax havens are a principal target of tax
inspectors. Private bankers and investment managers will need to bear in mind
future risks of co-ordinated international action against tax avoidance and
mitigation through any cross-border transactions. They will need to be
especially mindful of the penalties for assisting tax evaders."
Tipping
goes on to place the current situation in the context of the differing
historical tax reporting systems of individual countries and examines the
cultural differences which are hampering the drive to a common European
approach to tax evasion.
London
as an offshore financial centre
Frank
Canosa, branch manager and head of private banking at Julius Baer & Co in
London, begins by tracing the origins of London's birth as a financial centre
back to the British empire.
"The
word `offshore' normally conjures small islands of varying climates, from the
windswept Isle of Man to beachy Cayman. In its simplest and most correct
definition, offshore refers to a location outside the borders of the
individual's point of reference, normally his country of residence. Under this
definition, New York is as much an offshore centre to a UK resident investor as
the more familiar Channel Islands."
Canosa
explained how Switzerland, the US and London are the largest recipients of
offshore funds in today's private banking marketplace. "Private wealth is
conservative and looks to a pedigree of experience and historical maturity, as
well as to financial expertise. Switzerland and the UK lay claim to half of the
world's wealth that is maintained offshore in testimony of that fact."
Domestic
private banking
Richard
Madeley and Peter Verbaas of UBS Private Banking examine the scene for UK
domestic private banking.
"The
domestic private banking industry is currently going through a period of major
change in the UK and elsewhere.'" First, private wealth creation is
growing more rapidly than could have been anticipated, particularly as
entrepreneurs embrace Internet technology and all that it touches," they
assert.
Madeley
and Verbaas identify two other key changes. "Second, the markets are
becoming increasingly international and sophisticated," they say.
"Third, a number of new entrants, particularly the large global investment
banks, have started focusing on the high-end private market, marrying the large
capability with corporate finance expertise, global research and alternative
asset distribution. The investment banks are further attracted by the potential
to smooth their volatile earning streams with annuity income and each bank
brings with it a different background, history, competence and proposal."
Investing
in `alternative' assets
New
estimates put the proposition of a client's total investment portfolio invested
in alternative assets at between 12 and 15 percent. But many relationship
managers -- not properly abreast of the various investment opportunities that
exist within this class -- are not proactive in introducing them to clients.
Tim
Bell of UBS Private Banking in London takes readers through the alternative
investment market:
"In
times past when the focus was more on traditional assets, the private bank
would often endeavour to manage the entire wealth of their clients in-house,
with the private banker acting as the asset manager.
But
it is obvious that much of the thesis behind investing in alternative assets is
to find the best of breed in their specialist market and to select the right
investment management styles that will complement an investor's portfolio. The
role of the private banker in this respect is changing, and with regard to alternative
assets might be broken down as follows: strategic asset allocation; education
and client suitability; manager evaluation and distribution."
Bell
goes on to explain in a clear format the basics of both hedge funds and private
equity.
The
control environment
The
evolution to many and diverse private banking products is explained by Jonathan
Davies and Bruce Watherill of PricewaterhouseCoopers. More importantly, they
examine how this diversity affects the role of the private banker in advising
his client.
"Increasingly,
we are seeing greater scrutiny of the performance of trustees [both individual
and corporate] in the selection and management of investments. This issue is
exaggerated by e-business where there is and will continue to be much greater transparency
of performance measurement," they argue.
“below shows us private bankers have
no boundries and are leaving no stone unturned to get the very wealthy to
bank exclusively with them”
Rajiv Shah, a Mumbai-based industrialist, on a visit to Jaipur finds some
interesting write-up in a newspaper. He calls up his banker in Mumbai for help.
By noon, his banker lands in Jaipur with the relevant analysis and documents.
Or sample this -- Deepak Vaswani is a non-resident Indian who shuttles between
Singapore and Nairobi in his own private jet. His banker is based in Singapore.
On a trip to Nairobi, following the global market meltdown, he zeroes in on a
local company which looks attractive at the current valuation. He calls up his
banker to fix up the loose ends such as getting a solicitor to do the legal
work and a merchant banker to take care of regulatory compliance. After the
deal is signed, both of them go off on a safari. The banker flies back after
two days.
Left wondering why your banker does not do this for you -- like coming to your
home, leave alone visiting you in a different city?
Simple, Shah and Vaswani belong to a different breed. This class of customers
may never visit the bank, on the contrary bankers approach them.
Rajiv Shah makes more than Rs 25 crore a year, owns an entire floor in a
sea-facing apartment complex at Worli in Mumbai, flaunts a fleet of cars and
goes off for a vacation twice a year to some exotic locale. The same goes for
Deepak Vaswani as his personal net worth is at around $500 million.
In the case of such clients, the bankers’ motto is “Thy wish is my command”.
Enter the world of private banking, created only for the rich and famous.
The major players in the arena are Deutsche Bank, BNP Paribas, HSBC, Citibank
and HDFC Bank. Investment banks DSP Merrill Lynch, JM Morgan Stanley and Kotak
Mahindra, too, have dedicated teams to service the very high net worth
individuals.
Bankers tend to differentiate the private banking product as two steps superior
to normal retail banking. At the next level is priority banking, which perhaps
entitles the arriviste to jump queues at the normal teller counter. Some banks
may even make him feel important by setting up a counter for him. But the creme
de la creme of services is reserved for the private banking customer, may be
even a separate entrance opening up to the main driveway!
Sarvesh Sarup, global consumer bank head, Citibank, puts it thus: A
relationship manager in the priority banking group deals with between 100 and
150 clients a day, while his counterpart in the private banking group deals
with five on a normal day, and perhaps a maximum of 20 customers a day.
Says HSBC's manager, private clients India, Vijay Venkatram, "Priority
banking is essentially top of the line banking where the focus is on services.
The additional factors which are thrown in for the clients are relationship
management and certain added benefits -- exclusive meeting places, dedicated relationship
manager, no queues, cash delivery and pick up. It is aimed at making the
banking service more enjoyable."
"On the other hand, the focus in private banking is on wealth management.
Top of the line banking services are implicitly assumed. The customer is
offered not only these services but is also helped in managing his wealth
through investment services, advice, review and research," he adds.
And, how these bankers typecast you. To qualify as a self-employed private
banking customer -- the employed perhaps are ruled out! -- you need to have a D
or E segment car, at least two residential properties, at least two or three
annual trips abroad which would include vacation trips, be very knowledgeable
about the art and party scene, be financially savvy enough to understand the
jargon, and have an affinity for premium products. In other words, you got to
earn private banking privileges! "He is also ready to pay a greater
premium for premium services," says Sarup.
Banks look at these people as "wealth creators" and would typically
include the self employed such as doctors, lawyers, entrepreneurs who have a
successful business (not related to finance) and chief executive officers at
multinationals.
The salaried class may qualify, too, but then the entry point criteria would
include a high-flying post graduate degree and a fantastic designation in the
company which would probably suggest you are one of the fast track employees.
Around 99 per cent of the customers come in through referrals.
Everything around these customers is different. They may rarely keep cash with
them. They rarely use their ATM cards. What they have probably is a wallet-full
of credit cards.
"These customers do not need to keep any cash with them. All their
day-to-day affairs are taken care of by their offices, like petrol bills among
others. Even the drivers of these customers have a mobile phone to keep in
touch with their bosses. They mostly never use their ATM cards," says an
industry observer.
Adds one of the bankers, “Customers would like to flash their cards in front of
their peer group. However, even that may not be needed as most of these
customers are members of one or the other exclusive clubs in the five-star
hotels."
Why would clients need the services of these private bankers? HSBC's
Venkatraman answers: "A surgeon or a lawyer has a very tight schedule.
They wouldn't have the time to manage their own wealth. Private bankers such as
HSBC take care of all their portfolios."
Explains BNP Paribas’ head of private banking Sharad Sharma, "Individuals
have wealth to manage. They are behind any successful venture and they would
also need someone to look after their wealth."
However, there is one main point in selecting the customer. The customer's
money has to be perfectly legit. Not wanting to get entangled with various laws
relating to money laundering and tax evasion, bankers shun the business of that
class of people or industrialists whose income is more through cash. As one
banker noted, almost apologetically, "That rules out the film crowd,
though it would be very good for the business."
That typecasting rules out the class of people called "wealth
preservers" in the industry. These are typically retired individuals, no
matter what wealth they may be sitting on. For, the entire game is about
selling him a premium service at a super-premium price. If the person has
little use for the service, it is unlikely that he will bite the bait and pay
for it, too.
"For a retired individual, there may not be enough value proposition that
private banking could offer. These customers would have the time to speak to a
lot of people from among brokers and research analysts, look up research
reports, newspapers etc," adds HSBC's Venkatraman.
But for banks, all this market segmentation and marketing effort is great
business. Citibank's Sarup says, "In Asia, 60 per cent of the retail
deposits comes from priority banking. There is a big emerging class of new
wealth in Asia."
Says BNP's deputy head (private banking India and head, NRI services), Arpit
Agarwal, "Globally private banking forms a very important profit
contributor of around 23 per cent. Private bankers follow not only the cradle
to grave concept but also provide for the future generations of the
customer."
According to BNP Paribas' Sharma, "Banks are on the learning curve on the
concept of private banking in India. Wealth management in India is yet to get
embedded. A lot of high net worth individuals (HNIs) still prefer speaking and
taking advice from their chartered accountants, brokers, personal friends etc.
But private banking service contains not only all the banking products but also
investment advisory, execution capability, and transactions support. People who
have relied on their own sources are beginning to change to professional
advice, specially in this downtrend. The need is being felt for more credible
advice than ever before."
"In the domestic market, everyone round the corner from the stock broker,
the merchant banker to his personal banker, tries to tap the HNIs. This gives
him a sense of power, a feeling of superiority," says an observer.
These customers demand a high standard of service. Says U Raghunath Rao, head,
personal and private bank, India, Deutsche Bank AG, "It is like going to a
5-star hotel. However, their demands are not unrealistic."
Adds country head of Equities and Private Banking, HDFC Bank, Abhay Aima,
"There is no 'no' for these customers."
Puts in another banker, "They have a big pampered ego: I, me and myself.
These customers feel that they own the bank and they expect that level of
service. The bank also tries its utmost to strengthen this view. The element of
trust and recognition is very important for these customers."
The threshold level for private banking services in India varies from Rs 50 lakh
to Rs 3 crore. The threshold level for BNP Paribas and Deutsche Bank is Rs 50
lakh, while for HSBC it is Rs 75 lakh. Citigold's threshold level for priority
banking is Rs 30 lakh per household. A high net worth individual would be
anyone having more than Rs 25-30 crore.
Private banking for HDFC Bank is measured in a different way. "It would
depend on how much the bank makes through the customer -- the non-banking
revenue, fees or services. The key concept is profitability in any form. The
level of customisation and attention would depend on profitability of the
customer. The minimum profitability should be over Rs 1 lakh per
customer," says Aima.
"We find out the objective, the risk appetite of the customers and match
them in terms of the available avenues and work out a combination of debt and
equities,” he adds.
There is also a difference in the way the players charge their customers. Some
banks do not charge their customers an upfront fee. As these customers use the
bank's services, they pay as per use. Other banks charge anywhere from 0.75 per
cent to 1.5 per cent of the wealth entrusted as fee. "Also as customers
have a higher minimum balance in their account, banks also benefit from the
float funds," says BNP's Sharma.
Adds another private banker, "You cannot pay the price of an Ambassador
and have the comfort of a Mercedes Benz. There is a price for the brand, the
image which has withstood the test of time. Processes and systems do not come
free."
Private banking is offered by most players only in the metros -- Mumbai, Delhi,
Kolkata, Chennai, Bangalore, and Hyderabad. However, Mumbai comes out as the
biggest market for all the players.
"Mumbai is the hub of the economy. The awareness is much stronger
here," says Aima of HDFC Bank. The bank has around 5,000 customers, of
which Mumbai alone accounts for around 50 per cent of the total pool. In Delhi,
BNP is concentrating on the exporter community, while in Mumbai it is targeting
large corporates.
The Reserve Bank of India (RBI) does not allow banks to offer portfolio
management services. This means that as a customer you cannot give your money
to your private banker and ask the relationship manager to invest it on your
behalf depending on your profile and the views of the relationship manager.
The banker will therefore will have to call you every time and get your
confirmation whenever he makes any deal for you. However, the bar on
discretionary services is only for banks.There is no bar for other players in
the market such as DSP Merill Lynch, JM Morgan Stanley and other investment
banks.
However, there is a difference in the way private banking is done overseas.
According to BNP's Sharma, the markets overseas are not as tightly regulated as
they are in India. So, customers can place a particular amount with a fund
manager who will do the rest for you.
Also, there is a possibility of using derivative products to either hedge the
downside risk or even make money on the upside. Also, portfolio advisory is not
restricted to financial instruments. It could be anything from real estate to
gold and vintage cars.
HSBC is also considering other services. Says Venkatram, "There are many
more things one can look at for private banking customers. The bank could go in
for a partner with some property service agents for this service. For example,
if real estate prices in Hyderabd are going up, a customer could invest a part
of his liquid cash there. Customers at present invest in property which would
be close to them or their relatives so that someone can check on their
properties once in a while.
Adds Aima, "The scope of diversification into other activities is
tremendous. It will evolve as the market improves.”
Despite all the bankers' penchant for "ifs", "but",
'hitherto" and "whereas"--which can put off the strongest of
mortals -- the fact remains that business is booming. The "assets under
advice"-a jargon for wealth under management with HSBC -- is Rs 1,100
crore. For most of the players, the market is growing at a compound growth rate
of 25 per cent per annum.
Says an industry observer, “The size of the market is still not clear.
According to a report in 1998, around 1,000 Indians were earning more than Rs 1
crore per annum. This is a four-fold increase from the 1996 level, the report
said, adding that the figure would grow to 5,000 in the next two years. That
is, by 2000.”
"There is a very strong emerging upper middle class and private bankers
will be targeting these customers," he said.
Says Aima, "These customers are very profitable for the bank. Going ahead,
there is a tremendous potential." Citibank's Sarup says the bank already
has now around 5,000 households in the super-premium Gold segment and this is
one of the fastest growing segments. He wants to increase the customer base
10-fold to 50,000 in the next five years. "Salaries have gone up
considerably in the last four years.
Internationally, the threshold level for private banking is between $500,000
and $3 million. If the threshold level of $500,000 is converted into Indian
rupees, it could be around Rs 2.5 crore.
When HSBC started private banking in India, the threshold level was Rs 50 lakh
which was subsequently increased to Rs 75 lakh. And, it is looking at the
merits of increasing the threshold a bit more.
Innovation is not only in financial services, it is in anything that will
attract the customer and grab his mindspace. Of course, there is nothing better
if it adds value to the client's soul.
So it is that banks have got into the act of getting their clients premium
seats in social events. Citibank bought over the entire tickets for the first
two days of the play-50 Day War. It also booked the tickets for the premier
show of Lagaan both in Mumbai and London.
Apart from the regular wine and cheese tasting evenings, Citibank has an annual
sell-out series wherein global leaders come down to talk to the Indian
intelligentsia. They have had Margaret Thatcher and Collin Powell in the
series. Says Sarup, "These events have to be exclusive and classy."
In March and April this year, Deutsche Bank invited its clients for a Bharata
Natyam recital by Vani Ganapathy, who, through her dance explained the holistic
approach to wealth management in a dance rendition of the Hindu scriptures.
Says Rao of Deutche Bank, "We recognise excellence in all fields."
To celebrate Anil Kumble's historic feat in the 2nd Test match between India
and Pakistan, when he took all 10 wickets on February 7, 1999, Deutsche Bank
sponsored an event titled "The Perfect 10". "Events were held in
Chennai and Bangalore to celebrate this feat and all our clients were invited,”
Rao says.
In November last year, the bank celebrated 20 years of its presence in India
with a recital by Ustad Vilayat Khan, at which all clients and business
partners were invited.
HSBC organises supper theatre events at 5-star hotels where a dinner service
follows the performance. Also, after the annual budgets, the bank organises
analyst meets where senior people from the industry are called in to discuss
the implications of the budget proposals.
Clearly, of all the businesses around the wealthy, private banking is doing the
best, spreading the cheer and in perpetual celebration of contemporary wealth
The
wealth Web wonders: although the dot.com boom is long gone, the Internet has
been established as a key channel for private banking. So, what wealth managers
have created the most compelling, robust online offering? AMERICAN EXPRESS,
Citigroup and Deutsche Bank emerge among the group of private banks with the
most impressive Internet website offerings for their wealth management
operations, according to an in-depth study by the Lafferty Group.
Merrill
Lynch, DBS of Singapore, Northern Trust, Credit Suisse and HSBC were also found
to have real strength in online wealth capability.
The
study was carried out in the third and fourth quarters of 2002, using as its
base the private banking websites of 20 of the world's best-known private
banks. The exercise was part of the service provided to members of the Lafferty
Private Banking Council. In a competitive positioning exercise, Council member
websites were included alongside a number of international competitors, chosen
for their strength in private banking.
Lafferty
analysis, as a result of the study, suggests that "there remain great
opportunities for competitive differentiation in the private banking website
offer."
Table 1
(below) shows the sites which were awarded the highest scores in each of the
key categories of content, interactivity, navigation, speed and design.
In the
case of each bank, it was the specific private banking pages, publicly
available, that were assessed. These pages would provide the first view of any
prospective customers to the banking service. Also, the public pages are the
most frequently accessed by regular users as their way into the service.
Therefore, they give the abiding impression of the bank's service.
The
high scorers in this category were judged to have excellent content, with very
close targeting to the knowledge level and expectations of the private banking
client. Individual strengths also showed in the clarity of the site structure
with DBS, and good instructions with ABN Amro, Bank Julius Baer, Merrill Lynch,
Northern Trust and Rabobank. Interestingly, sites focusing on the personal
relationship between private banker and the client, such as HSBC Republic,
deliberately did not include FAQs, in order to encourage the client to ask the
relationship manager. Though the level of knowledge of the private banking
customer should be high in terms of financial products, the same assumption
cannot be made about their use of the Internet. Additionally, more complex
products call for more sophisticated FAQs. Some site copy was more oriented to
typical retail customers, as in the case of DBS.
This
section of the Lafferty scorecard assesses the range of functions truly
available online, from broking, fixed income trading, IPO participation, to
fund transfers and trust services. It also rates the amount of interactive
support for decision-making.
Strong
functionality across all sites was noted for e-mail alerts to customers,
broking and basic transaction handling. Weaknesses were in the offering of
trust services and estate planning.
This
section showed the widest spread between highest and lowest scores. Most sites
offered open access to mutual funds. Bank Julius Baer, Coutts, HSBC Republic,
Lloyds and UBS had shortfalls here. However, only four of the 20 sites rated
offered online access to insurance products.
In
terms of distribution locations, all private banks rated offered investment
centres for clients to get advice. However, 24-hour call centres and the use of
interactive TV are less common, as this analysis shows.
Strong
interactivity overall was noted at ABN Amro, American Express, MeesPierson,
Citigroup, DBS, Deutsche Bank, Merrill Lynch and Morgan Stanley. Bank Julius
Baer, BNP Paribas, Coutts, Goldman Sachs, HSBC Republic and Lloyds TSB were not
rated highly.
3. Navigation/Ease
of Use
The
spread here was wide. Four of the 20 sites covered did not have an effective
search facility. Two sites did not have site maps. Click counts were generally
good, though JP Morgan was assessed as "poor". Bank Julius Baer, Citigroup,
and Northern Trust were highly rated for navigation. The Northern Trust site
navigation was assessed as "effortless".
4. Speed
The
early assessments of website performance had to focus on the speed of the
website itself. Lafferty still assesses this, both in broadband and dial-up
environments.
Tests
are repeated at different times to avoid drawing conclusions from isolated peak
load circumstances. It is still possible that freak loads might distort the
findings.
With
the development of the Internet and the beginning of the spread of broadband
access, Lafferty rates speed of support response and emails as more important
than simply downloading.
Thirteen
of the 20 sites were scored at the maximum for the speed of website response.
Five sites, however, were rated as slow: ABN Amro, Citigroup, Credit Suisse,
IntesaBci and JP Morgan. It is recognised, however, that a private bank website
is often involved in downloading more information than a classic retail site.
Call
centre accessibility was rated almost uniformly high, with BNP Paribas and
Rabobank being exceptions. Some sites, American Express, for example, would be
improved if the contact numbers were closer to the site's home page. The actual
speed of the help itself was not good either, with 12 sites rated poorly in
this category.
This
rating did not extend to Deutsche Bank, but its website was noted as
particularly "rapid and professional".
5. Design
These
criteria seek to determine how the creative design of the site serves to
attract and hold the target customers.
Specific
logotypes, and the use of images and colours, each carry with them predictable
responses from target groups.
For
established brands, the extent of previous customer experiences in, say,
customer service will carry across to the use of that brand on an Internet
site.
The
methodology recognises that the relationship between a private bank and its
client should be deeper than that of a retail bank. More wealth is invested,
the product range is more complex, and the client may well be more demanding.
For
an established client, the good values of the "bricks and mortar"
experience need to be carried across, but enhanced by the values of personal
Internet access.
In
general, sites were rated as good at engendering trust through the judicious
use of established brand values. All but IntesaBci were given full marks on
this. Much weaker was the development of a sense of community by the use of
images creating links between clients, their perception of other clients of the
same private bank, and the bank itself. Ten sites were rated as not having used
imagery, colours, and text designed to strengthen this community feeling.
Credit Suisse was rated strongly in this factor.
6. Overall
assessment
As
a result of the study, the Lafferty research team concluded that private
banking as a whole still has great strides to make in fully exploiting the
power of the Internet. Key points to emerge are:
*
Private banking websites are insufficiently differentiated from mainstream
retail banking websites.
*
The richness of the private bank "bricks and mortar" offer is not
reflected in website design and functionality.
*
The spread between the ratings of the best and worst websites for private banks
is wider than the spread for retail bank websites.
*
There is a mismatch between the private banks that earned the highest web
ratings and those private banks' operations ranked by assets under management.
Michael
Lafferty, Lafferty Group chairman, said: "There remain great opportunities
for private banks to differentiate their services through the Internet.
He
continued: "The Internet has not emerged as a `same-for-everybody'
channel. It is seen by the organisations in this study as part of a
multi-channel strategy, though certain of the organisations place much more
emphasis on retaining personal contact than enhancing such contact through web
services. Thus, the web has not disappeared from strategic importance."
So
important were the findings of this exercise that Lafferty has developed new
website ratings standards for 2003. They are designed to test the relevance and
effectiveness of websites for the increasingly sophisticated financial service
and Internet user. This new benchmark will be used to identify the next
generation of winners.
TABLE 1: LAFFERTY'S TOP WEBSITES Content Interactivity Navigation Speed Design American Express Citigroup DBS HSBC Credit Republic Suisse Citigroup Merrill Lynch Northern Trust Deutsche Bank MOST CHIEF executives of UK
private banks and wealth management organisations did not foresee the bearish
stock market conditions or that they would persist for such a long period of
time, according to IBM Business Consulting Services research.
Compounding this, many were
ill prepared to face such challenging times as they had been aggressively
investing and hiring in the period prior to the onset of the bear market
conditions. Many also had traditionally complex, and costly operating models,
but heady revenue grown in the bull market era had masked these inefficiencies.
The impact of the changed bear
market conditions has thus had a major effect on institutions. Many have been
caught in a severe margin squeeze as revenues declined and costs have risen.
It is clear that managing in
the "post bubble era" is no easy challenge. The actions taken vary
depending on each institution's existing position and results as well as the
resolve of the leadership team to address the issues. IBM Consulting research
indicates that all participants are taking actions on three broad fronts. It
terms these as internal optimisation, efficiency shifts and transformational,
depending on the level of cost improvement that they are seeking to achieve.
These are summarised in the table.
All the private banks and
wealth managers have undertaken some form of short-term internal cost
optimisation with the onset of the more difficult market conditions.
These "quick wins"
typically cover areas like headcount reductions, internal project
rationalisation, market data rationalisation and other areas. As the benefits
from these short-term actions have now largely been realised, management is now
increasingly turning attention to the next level of cost improvement.
For some organisations the
urgency of the situation requires a need for radical transformational shift,
rather than an incremental move to improved efficiency. These are harder to
implement but deliver more sustainable improvements.
The initial emphasis has been
on improving the level of cost transparency and management information through
implementing activity based management which enables management to more
proactively manage their business performance through better client, product,
adviser and team revenue and cost allocations.
With such transparency,
further areas of attention have been in improving the efficiency of the key
front office and the back office operational processes.
The third main area of cost
improvement is more fundamental and is concerned with revising the traditional
operating model, This encompasses significantly upgrading customer segmentation
to focus on the most profitable ones, in better-targeted delivery of revised
private banking/wealth management offers, reducing some elements of the
customer proposition and outsourcing noncore business and IT processes. This
reflects the need to upgrade the value delivered to clients and reduce business
operating costs.
The trend to open product
architecture in asset management products has also been a feature of some of
the new models as private banks and wealth managers seek to quickly diversify
into specialist, better performing asset classes including hedge funds.
Different
models face different pressures. For example, in the UK, the traditional
private client stockbroking model based more on transaction income has been
particularly badly affected by the bear market environment and several players have
been actively migrating their traditional operating models to a more annuity
type private banking type model.
Some UK
participants have found the challenges too great. They have decided to exit or
refocus and have recently sold part or all their private client businesses
often where they could not improve an uncompetitive position.
This
reflects the issue that transforming the operating model takes time and
resources. Several UK players are in an interim stage where they have only
partly migrated to their desired target operating model as they seek a
fund-as-you-go approach; by staging the migration they are seeking to better
manage risks and compliance aspects involved in changes of this nature.
Despite the
near term pressures for cost improvement and the requirement for change to
traditional operating models, the medium term marketplace prospects are very
attractive as both the number of high net worth individuals and their need for
advice is set to grow in the medium term.
There is
plenty of scope to growth both market share and profitability in a fragmented
UK market as has been demonstrated by some recent shifts in market share. The
winners are likely to be those that can most effectively transition operating
models to take advantage of the changing industry trends.
THE THREE BROAD FRONTS OF ACTIVITY Internal Optimisation Efficiency Shifts Transformational Cost/Income 70%+ 60-70% 50-60% People Traditional Some up-skilling Significantly advisers of advisers upgraded adviser capability Systems Multiple bespoke More integrated Open architectures legacy systems architectures Latest technologies Business Traditional/ Efficient Component basedProcesses legacy processes approach, outsourcing non- core activities Management Responsibility Customer and Integrated MISInformation reporting product profit- Value based MIS Expense ability allocation Source: IBM Business Consulting Services
Current Position for the private banking ındustry
Big Six UK banks falter on domestic private
banking.(according to market research)
BRITAIN'S LARGEST banks are
failing fully to penetrate the nation's rich with their private banking
services and investment advice, new research shows.
While virtually every one of
Britain's wealthiest 300,000 households has a relationship with at least one of
the country's biggest six banks, less than half use the banks' private banking
services.
And worryingly, only one in
eight private banking clients use their bank for investment advice despite
current huge markets turmoil, according to findings by specialist wealth
consultancy Tulip Financial Research.
The firm polled a sample of
the 300,000 richest households in Britain--homes averaging 1.7 million [pounds
sterling] ($2.67 million) in liquid, marketable assets, and regarded as the core
market for Britain's private banks and top asset managers. Ninety-nine percent
of these households have a banking relationship with one or more of the Big
Six.
The single most-used private
bank in Britain is Lloyds TSB Private Banking, with a total market share of
nearly one-third. Coming up close behind are Barclays Private Banking and
NatWest Private Banking, in second and third places respectively. Also ranked
are HSBC, Royal Bank of Scotland, HBOS and Abbey National.
In terms of "total ownership
relationships", RBS is in the lead with 48 percent, which can be explained
by its ownership of NatWest, Coutts and RBS Private Banking. Barclays lies
second with 40 percent, through Barclays Private Banking, Barclays Private
Clients and Barclays Personal Investment Management.
Fewer than half of clients--45
percent or just 135,000--use the private banking services of all these Big Six
players.
The poll attempted to find out
why the rich use these private banks. The main driver is not, as is often assumed,
their investment skills but customer care--"a need for a close personal
relationship with a large international bank offering a wide range of domestic
and offshore financial services," Tulip managing partner John Clemens
commented.
Only one in eight (17 percent)
of private bank clients use their private banks for investment advice, a lowly
penetration reflected in the rankings for Table 2, showing Coutts and Barclays
well in the lead. This largely reflects their "first rate customer care"
of the rich, Clemens said.
Although only a minority of
private bank clients use their bank for investment advice, more might be well
advised to do so, Clemens said.
Tulip compared the spread by
investment value allocation of the portfolios of those not taking professional
advice, a self-reliant segment which has recently been increasing fast, with
those taking advice from private banks.
Table 3 shows this comparison
and, in Tulip's view, the private bank-advised portfolio is better suited to
today's difficult markets.
Investors not using a
professional adviser had close to 60 percent of their assets in equities, and
just 11 percent in fixed interest bonds or gilts.
Those using a private bank for
advice had cut their equity investments to around 40 percent and had nearly 20
percent in bonds or gilts.
In addition those advised by
the banks had three times the level of the self-reliant invested in alternative
investments like hedge funds, commodities and gold or gold funds.
Thus, "the private bank
advised spread of investments looks safer, more innovative and better geared to
the current state of the markets," Clemens observed.
"In these days of
investment uncertainty, when our results indicate that private bank investment
advice is well worthwhile, the current need for advice should be a good
commercial opportunity to grow their client bases."
Tulip's final conclusion is
that private banking may have to use more active and informed marketing
"both to attract the many rich non-users of private banks and to widen the
uses made of the private banks by their clients."
Table 1: The Bıg Sıx
Prıvate Banks Used By
Brıtaın's Wealthıest
Households
Bank Used (%)
Lloyds TSB Private
Banking 32
Barclays Private Banking 23
NatWest Private Banking 21
Coutts 14
HSBC Investment Bank 13
RBS Private Banking 13
Barclays Private Clients 9
HSBC Private Clients 8
Barclays Personal
Investment 8
Management
First Direct Capital 7
BoS Private Banking 3
HSBC Republic 2
Average No. of Private
Bank 1.5
Relationships
Base: All wealth owners using
a private bank
Table 2: The Wealth Owner
Prıvate Bank Ratıngs
On a scale from 1-10, where 10
is excellent
and 1 is poor
Bank Average
Score
Coutts 8.0
Barclays 7.0
RBS Private Banking 6.3
First Direct Capital 6.3
NatWest Private Banking 6.2
HSBC 6.3
BoS Private Banking 5.7
Lloyds TSB 5.7
All Private Banks Average 6.4
Base: Users of each private
bank
Table 3: Prıvate Bank Advısed
Vs Self-Relıant Portfolıos
Value Allocation by Investment
Category
Use Private Bank No Professional
as Adviser Adviser
% by Value % by Value
Equity Investments 43.7 57.5
Mixed Funds 9.1 5.8
Bonds & Gilts 18.1 10.8
Property 12.0 10.0
Other Investments 5.9 1.7
Cash 11.2 14.2
Base: Britian's wealthiest
households
Table 4: UK Private Banking Statistics
Institution 1998 AUM Barclays Private Bank 1,241m [pounds sterling]Citibank Private Bank N/ACoutts & Co N/AGranville Private Banking 158m [pounds sterling]HSBC N/AKleinwort Benson Private Bank 4,800m [pounds sterling]Lloyds TSB Private Banking N/AMerrill Lynch 845m [pounds sterling]SG Hambros Bank & Trust Ltd 5,990m [pounds sterling]UBS Private Bank N/A Barclays Private Bank 17,996m [pounds sterling]Citibank Private Bank N/ACoutts & Co 7,800m [pounds sterling]Granville Private Banking 115m [pounds sterling]HSBC N/AKleinwort Benson Private Bank 4,300m [pounds sterling]Lloyds TSB Private Banking 9,000m [pounds sterling]Merrill Lynch 752m [pounds sterling]SG Hambros Bank & Trust Ltd N/AUBS Private Bank N/A(3) Institution Number of offices(1)
Barclays Private Bank N/ACitibank Private Bank N/ACoutts & Co N/AGranville Private Banking 5HSBC N/AKleinwort Benson Private Bank 5Lloyds TSB Private Banking 3(2)Merrill Lynch 3(2)SG Hambros Bank & Trust Ltd 3UBS Private Bank 1 Head of private Institution bank Barclays Private Bank Robert HunterCitibank Private Bank Colin Woolcock/Coutts & Co Ewen FergussonGranville Private Banking Chris NevileHSBC N/AKleinwort Benson Private Bank David HendersonLloyds TSB Private Banking Jon DainMerrill Lynch Michael MorleySG Hambros Bank & Trust Ltd Stephen HildUBS Private Bank Richard Madeley Institution Product and services
Barclays Private Bank Discretionary & advisory portfolio management; foreign exchange; trust, tax and estate planning; traded options; pensions; warrants; offshore funds; alternative investments Citibank Private Bank Art advisory; derivatives & futures; trust, tax and estate planning; real estate advisory service; discretionary & advisory portfolio management; execution-only brokerage; corporate finance Coutts & Co Discretionary & advisory portfolio management; alternative investment products; brokerage; trust tax and estate planning; precious metals dealing; pensions; derivatives and options Granville Private Banking Discretionary & advisory portfolio management; trust, tax and estate planning; pensions; gilts HSBC Online dealing; pension, ISAs, unit trusts & SIPPs; discretionary & advisory portfolio management; growth & income bonds; gilts; alternative investment products Kleinwort Benson Private Bank Pensions, ISAs & unit trusts; custody services; gilts; alternative investment products; discretionary & advisory portfolio management Lloyds TSB Private Banking Unit trusts, ISAs, SIPPs, pensions & life insurance; credit cards; alternative investment products; discretionary & advisory portfolio management Merrill Lynch Alternative investment vehicles; unit and investment trusts; discretionary & advisory portfolio management SG Hambros Bank & Trust Ltd Discretionary & advisory portfolio management; credit accounts; derivatives & futures; nominee services; tax, trust & estate advisory; pensions; brokerage; alternative investment products; precious metals advisory UBS Private Bank Online dealing; precious metals service; tax, trust & estate planning; nominee services; foreign exchange; brokerage; discretionary & advisoryportfolio management
(1) includes Jersey, Guernsey and the Isle of Man;(2) Merrill is opening
two further branches, one in Leeds and one in Manchester in the near future;(3)
UBS launched an onshore UK operation in July 1999.Source: Lafferty Business
Research