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 tomorrows 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 todays 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 tomorrows 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".
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".
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
Citigroup Merrill Lynch Northern Trust
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
Optimisation Efficiency Shifts Transformational
Cost/Income 70%+ 60-70% 50-60%
People Traditional Some up-skilling Significantly
advisers of advisers upgraded adviser
Systems Multiple bespoke More integrated Open architectures
legacy systems architectures Latest
Business Traditional/ Efficient Component based
Processes legacy processes approach,
Management Responsibility Customer and Integrated MIS
Information reporting product profit- Value based MIS
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
Bank Used (%)
Lloyds TSB Private Banking 32
Barclays Private Banking 23
NatWest Private Banking 21
HSBC Investment Bank 13
RBS Private Banking 13
Barclays Private Clients 9
HSBC Private Clients 8
Barclays Personal Investment 8
First Direct Capital 7
BoS Private Banking 3
HSBC Republic 2
Average No. of Private Bank 1.5
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
RBS Private Banking 6.3
First Direct Capital 6.3
NatWest Private Banking 6.2
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/A
Coutts & Co N/A
Granville Private Banking 158m [pounds sterling]
Kleinwort Benson Private Bank 4,800m [pounds sterling]
Lloyds TSB Private Banking N/A
Merrill 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/A
Coutts & Co 7,800m [pounds sterling]
Granville Private Banking 115m [pounds sterling]
Kleinwort 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/A
UBS Private Bank N/A(3)
Institution Number of offices(1)
Barclays Private Bank N/A
Citibank Private Bank N/A
Coutts & Co N/A
Granville Private Banking 5
Kleinwort Benson Private Bank 5
Lloyds TSB Private Banking 3(2)
Merrill Lynch 3(2)
SG Hambros Bank & Trust Ltd 3
UBS Private Bank 1
Head of private
Barclays Private Bank Robert Hunter
Citibank Private Bank Colin Woolcock/
Coutts & Co Ewen Fergusson
Granville Private Banking Chris Nevile
Kleinwort Benson Private Bank David Henderson
Lloyds TSB Private Banking Jon Dain
Merrill Lynch Michael Morley
SG Hambros Bank & Trust Ltd Stephen Hild
UBS 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
Coutts & Co Discretionary & advisory portfolio
management; alternative investment
products; brokerage; trust tax and
estate planning; precious metals
dealing; pensions; derivatives and
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
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
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 & advisory
(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