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Private banking is a people's business and will always be one, says Jan Quensel, associate partner at McKinsey. He was discussing the challenge from neo banking, digitization and job losses in the industry in an interview with finews.asia.

There are two strong trends emerging from the quarterly reports of Swiss private banks: a surge in trading and stagnation of assets under management. Is this the new normal in the business?

Client activity will be one of the main sources of revenue in the coming years, amid an environment of lower macro-economic trends, for instance of interest rates and equity yields. The trading volume on the stock exchange is still above that of a year ago, but significantly lower than it was in March when it had reached a factor 2 or 3 of the normal level.

What's your take on this?

Private banks are trying to maintain the momentum from the crisis. The improvement of e-banking and active relationship managers are the driving forces behind this. Those are activities that are meant to offset the effects of the macro-trends. The growth of wealth will return to normal levels in the medium- to long-term.

The latest McKinsey Private Banking Report showed that the profits of German banks for instance has halved since the financial crisis. Will Switzerland, with its high price level, be able to beat the trend?

The pool of profit has mainly fallen due to the revenue margin; wealth growth hasn't been enough to offset this decline in margin. The German industry is strongly focused on the domestic market and very competitive thanks to the high number of savings and popular banks as well as foreign banks. This is further bolstering the effect.

«Costs had no strategic priority with private banks until the end of 2018»

Compared with the German market, the Swiss business profits from a strong degree of offshore-banking with a risk premium as well as more complex products. But even the Swiss market can't fend off the erosion of margin.

Costs become a more urgent aspect when margins and growth are absent. Will the high wages of relationship advisers come under pressure or will banks tend to cut jobs in the back office instead?

At the majority of private banks, costs had no strategic priority until the end of 2018, with growth being the priority. Private banks were trying to compensate for the pressure on revenue through growth, mainly through net new money, but also market performance.

As assets under management corrected over the past months, costs have become more important. The costs at the front are a significant issue, having increased the most over the past three to four years with almost 3 percent. But, over the same period of time, costs have also risen in the back office; the question is how much of it was caused by the increase in regulatory demands.

Where will the banks save first?

We believe in a front-to-back cut in costs along the main process lines of a bank, supported by a reduction in complexity, for instance in the areas of markets and products.

In uncertain times, the relationship with the client is gaining in importance. How much value did private banks create for their clients during the corona-crash of March?

There's no clear answer to that. Of course, banks had contacts with their clients during the crisis, but our research shows that one-third of all clients weren't contacted by their banks.

Clients felt neglected?

For the concerned clients if will have had a dampening effect on the future of their relationship. We have received positive feedback from where there was interaction. Those clients reacted to the advice with a reallocation of assets, mainly from stocks to cash. This means that clients saw an added value in 0 percent interest or negative interest over volatility.

«Whatsapp is often the main instrument of communication with the best clients»

Private banks, therefore, have to consider how, when and with which product that can entice their clients back into investing in securities.

Bankers were sent home and the client relationship became digital during the crisis. Will the clock be turned back after the end of the pandemic?

Private banking is a people’s business and will always be one. Having said that, many of our human interactions have been moved over to the digital channels, partially or completely. Whatsapp is personal, and yet digital, and often the main instrument of communication with the best clients.

Whatsapp won't suffice though?

We are seeing a wave of investment into digital interaction at private banks: video-chat tools, document exchange, digital signature, online onboarding. All in all, we believe that the physical interaction will gain in importance again, but a substancial amount of interactions – mainly of transactional nature – will remain digital.

Bank managers are asking from more automation to give them more time for individual contact with clients. But won't advisers become surplus to requirement when online services are increasingly popular?

No. Advisers will remain a key element for a majority of clients. Our research shows that only 25 percent of private banking clients wish to have a purely digital interaction. More than 70 percent prefer a hybrid interaction with physical advice and digital interaction. The importance of an adviser in a hybrid relationship is shifting.

«In the segment with assets below 1 million francs, neobanking stands a greater chance»

The order over the phone is losing in importance but is keeping its role in asset allocation. The personal verification of assets will remain relevant for a substantial number of clients, a majority of whom are 60 years or over.

Neobanks and rivals from outside the industry are slowly making inroads into wealth management via the payment systems. How much time is left before private banking will be reached?

We have to distinguish: in classic private banking with assets of more than 1 million francs, such attacks remain a peripheral phenomenon. We don't see a significant change over the coming three to five years. Which doesn't mean that private banks shouldn't further develop their service model – in particular with a view to the imminent period of wealth succession, where private banks can learn from the new rivals.

So Revolut and others are posing no threat?

The business with assets of less than 1 million francs is more exposed to competition due to its lower complexity. That's where neobanking stands a chance. Emerging rivals are managing small but growing assets. The price is the key argument, which makes profitability a challenge for those players. Partnership agreements with established players will help new rivals lower acquisition costs and improve their profitability.

Compared with other segments, wealth management is seen as stable. Will this make European private banks into sought-after takeover targets?

Depending on the market, the industry is indeed in consolidation, because private banks too have a certain amount of pressure to generate a profit. Small private banks in particular are facing an increasing challenge in relation to their profitability and may be taken over by bigger rivals. Most universal banks already have a private-banking division – they can buy smaller players. But the focus, simplicity and risk have to be right.