Strategies for Success in Wealth Management – A Panel Discussion
I recently participated in an industry roundtable discussion on aspects of Wealth Management. The panel consisted of a large international bank, an online neo bank, a FinTech and myself representing Temenos, so the opinions given varied considerably.
We were asked our views on a range of questions. The first one was whether we saw the wealth management industry using technology to innovate and re-create a differentiating gap in service to distance itself from the mass affluent market or did we see it more as looking to leverage technology to innovate and provide economies of scale?
This question concerned the difference between traditional private banking and the mass affluent segment. There are high net-worth individuals on one end of the scale and, at the other, the mass affluent sector. The rest of the panel’s opinions revolved around the best approach for banks in these sectors.
All of the panellists agreed that the mass affluent sector was increasingly important and are all trying to target it. The panellist from the FinTech world said that is their business model – their software helps financial institutions progressively turn retail customers into educated investors who do not keep their money just sleeping in current accounts. Online and larger banks are keen to serve the wealthy, but they also want to put more resources into serving the mass affluent sector in the future because their domestic market is essential to their growth strategy.
However, I wanted to nuance this approach, since that might be the correct way for a bank to focus on its domestic market, but Temenos perceives some of our clients as doing the opposite. They want to minimize clients with small portfolios because they are not profitable enough!
Different strategies, same platform
Imagine a bank has a customer who wants to invest $500,000 but also has someone willing to invest $5m or more. The bank will earn more revenue from the bigger deal in the short and the long run. So, some of our clients, primarily large international banks, prefer to impose high thresholds. Contrary to what my fellow panellists were experiencing with lower thresholds that enable more people to join the private or premium banking segment, there is a natural tendency in pure-play private banks to maintain or increase their high entry thresholds. Onboarding a customer with limited investment money and high expectations will not be profitable for all banks. This strategy works if you have 1) a large domestic market where you can grow your client base and 2) top-notch technology, software automation and digital self-service channels to lower your operating costs. At Temenos, we happily support both models, but it is important to recognize the diversity of approaches and strategies.
The next relevant question was about regulation, and everyone agreed that, while it is a burden on any organization, it can also be an opportunity to develop new services and innovate around them. Here, my opinions were not different from the others. I just needed to mention that, at the onset, any regulation is meant to improve matters. Usually, it helps protect citizens, consumers, and companies. So yes, regulation increases the cost of compliance and puts a dangerous strain on small and mid-size institutions. One might argue that it sometimes stifles innovation. Yet, in the long term, well-designed regulations are good for business when they provide stability, predictability, and fairness among participants.
Regulation – like it or not
In Europe, there is a strand of opinion that says we’re over-regulated. For instance, MiFID, born in the wake of the 2008 financial crisis, is disliked by individual investors – the same people it is meant to protect! When you want to open an investment account in Europe, it forces you to answer dozens of questions about your wealth, your knowledge of financial markets, your attitude towards risk, etc. People hate that: it feels intrusive and takes a lot of time, and you must go through that same process every year. Yet the intent is to ensure financial institutions propose investments only when they align with the client’s profile. My fellow panellists concurred that banks still have room for improvement in educating their customers.
It was also noted that regulations in the payments area (PSD2, Instant Payments) forced a revolution amongst market participant’s content so far with the status quo. In the securities area, CSDR in the EU or T+1 settlement in the US are also forcefully driving significant transformations – to be dreaded or welcome, depending on one’s state of readiness.
The final question was about core banking replacement – is it as dangerous as it seems to be? The panel chairperson described core banking replacement as sometimes referred to as a ‘CEO killer’. Well, Temenos has helped many banks replace their core systems and none of them have been terminal. But the perspectives are very different between a software vendor who sees one client go live every day on average and bankers who experience such a transformation once in their lifetime!
The risk of change – and of not changing
Let’s bring some nuance again: many banks can live with an old core system. For instance, the core can be insulated from modern real-time systems via a solid data layer, increasing its lifetime. The initial investment is long amortized, and the maintenance cost is usually low. One problem, though, is operational risks, e.g., retiring experts or software going out of support. Another problem is change: maintenance costs are low as long as the money is spent on “keeping the lights on”. Any significant change to the core, a new regulation, for instance, can prove to be incredibly expensive and time-consuming – assuming it is feasible at all. Then, an old core system gets in the way of compliance, growth, time to market, or all of them. This is where technology companies like Temenos can help. During the panel I also took the opportunity to highlight the role of the cloud in wealth management and how larger firms embrace it faster than others.
For the private wealth industry, the type of scaling offered by the cloud may be less relevant than, say, in retail banking. Still, a cloud architecture gives firms an edge in agility, interoperability (think Open APIs), resilience and security. Cloud platforms can also support AI initiatives with powerful off-the-shelf capabilities. Then, for banks who need more preparation or are not willing to implement these new technologies themselves, Software as a Service may be the right approach. We believe it is the next step in core transformation when, instead of running and upgrading complex IT platforms, banks can focus on their clients and their business.
Although Artificial Intelligence did not feature on the agenda of this particular panel, it was the main topic of discussion in other sessions at the events, with banks sharing some of their early experiences and the initial lessons learned. I am sure there will be many other opportunities to write about this exciting topic in future.