At least since the sales of the non-US business of the oldest Swiss private bank, Bank Wegelin & Co., to the Raiffeisen Bank (under the brand Notenstein Privatbank), should it be clear that the landscape in Swiss private banking has changed. But what does that change mean? And especially how should private banks cope with it?
In this post I describe some of my thoughts on the topic. My goal is to challenge rather than to know. Therefore any comments and different opinions are highly appreciated, not only by me but by anyone who deems reading this post.
The two pillars of Swiss private banking’s competitive advantages
Private banking is defined as providing personalized financial services, especially with respect to managing wealth, to high net worth private individuals. According to a study the Boston Consulting Group Swiss banks and asset managers manage about 27 percent ($2.0 trillion) of all global offshore wealth in 2009. This success is essentially built on two areas of competitive advantage:
- With a long tradition, Swiss private banks, offer services that are perceived of high quality by high net worth individuals and thus offer a feeling of trust.
- Swiss banks were able to attract wealthy clients because of political and regulatory differences between Switzerland and the client’s home country, notably with respect to neutrality and tax handling.
Recent events questioning competitive advantages
Recent events in financial markets have started questioning these two competitive advantages. Although service quality is still very high in Swiss private banks, investment performance has been deteriorating, especially with respect to achieving absolute positive return. But this is not a Swiss specific issue. It has nevertheless shown up predominantly because of the importance and size of Switzerland’s private banking market.
But what is more critical is that Switzerland permanently loses its competitive advantage with respect to regulatory differences. Indeed, many countries are no longer willing to accept these differences, especially for their own citizens. The most notable case is certainly the United States suing Swiss private bankers and their employers for helping American citizens to evade tax paying. In addition, new regulatory frameworks like MiFID, FACTA, AML, Basel III, etc. have increased the cost of doing business.
The naïve consequences
A first step often taken to address the deteriorating situation is to try to cut costs. What is surprising to me is that private banks are still able to cut costs without significantly deteriorating product quality. Especially as the banking business model is a fixed cost model. Cutting costs only alleviates the pain of losing competitive advantage, it does not help at regaining it (it could if the private banking industry were price rather than quality driven).
In parallel, many private bankers focus on making deals, or more precisely, have politicians close deals with countries that want to impose their regulations and laws on Switzerland’s private banks, at least for their citizens. A goal of these deals is to “wipe out the past” and allow Swiss private banks start anew. Unfortunately these deals do not solve the loss of competitive advantage problem either. In addition, as more of these deals are signed, more countries become interested in such deals to protect their interests and the negotiating power of Switzerland decreases.
Finally nearly all private banks have been heavily investing in solutions, allowing them complying will the regulations imposed on them in conjunction with serving foreign domiciled clients (cross border regulations, client suitability frameworks, withholding taxes). But these investments are backward rather than forward-looking.
Of their possible future to take care
It is highly unlikely that the existing business model build on the Swiss banking secrecy will prevail in the future. Therefore it is important that private banks adjust their business model. This means they have to answer the question how to differentiate themselves from their international competition.
Although private banking builds on stability and trust, innovative approaches satisfying client needs which are aligned with international regulations must be developed. Implementing regulatory requirements should be turned into competitive advantages. I have addressed one such an approach in my post on “Turning client risk profiling into competitive advantages”.
Despite competition increasing, private banking will remain a quality driven business rather than a price driven one. This is especially true as the foundation of most private banking products and services is trust. Therefore, to excel in quality at a reasonable price, private banks need to focus their business model on client segments and products for which they own the necessary skills (both on the production as well as on the servicing side) and are able to leverage the required investments (taking advantage of economies of scale).
In addition it is important that private banks continue to manage and increase the perceived produce and service quality, expressed by the trust of clients. In a separate post called “Gaining trust through innovation”, I have illustrated the relationship between trust and the components of a private bank’s value chain.
And what it means
Swiss private banks should take advantage of the edge they have gained throughout the last century with respect to servicing high net worth clients. Standing still, will allow private banks in foreign countries to close the gap. Therefore it is important to invest in quality of products and services through
- solving clients’ issues and satisfying their needs rather than selling products,
- hiring bright people that foster innovation and change rather than being afraid of, and
- increasing efficiency through focusing on specific client segments and business areas and relying on technology.