Private banks are unable to create new value for their clients, but still generating good enough profit, Vega Ibanez writes in an essay on finews.first. But dreams don't last forever.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
«The problem with private banking is that is no longer creating value for clients,» my banker friend sighed over one last drink together before bars closed for lockdown last spring. For my consulting friends, rejoice! This is of course the value creation and value capture framework. What does that mean?
Private banking is living in a dream in terms of new value, but still generating profits that are «good enough». A glance at financial results confirms my friend’s sentiment.
«Dreams don't last forever and for private banks, can end in just two possible outcomes»
While the wealth of individuals is on the rise worldwide, private banks (in Switzerland) are only growing from market performance rather than from acquiring new clients. Nonetheless, they are still good at capturing value and remain a reasonable investment despite lackluster share price and dividends returns.
More interestingly, salaries continue increasing, making bankers key beneficiaries of banking (this thesis checks out with my banker friend). But dreams don't last forever and for private banks, can end in just two possible outcomes. They can continue sleep-waking into a place of low-value creation and capture: the (commodity) hell. Or they can wake up in the heaven of high-value creation as well as value capture. It may be time to set the alarm, but how?
«But what if the value is more than money?»
One possible wake-up call is delivering on value beyond money (here is where my banker-friend would now lift an eyebrow in disbelief while I continue, undeterred). The purpose of private banking is the safekeeping, transacting, and measuring of value for the benefit of clients.
Once upon a time, these services were hard to find, expensive to deliver, and lived in few financial centers. Value and benefit were expressed in money, and bankers were cherished as part of the clients’ families. They all co-existed peacefully until online banking and brokering opened investing to everyone with an internet connection and began eating into the heart of private banking. Stung, banks are still at risk of sleepwalking towards a hugely commoditized space.
But what if the value is more than money? There can be other values for banks to safeguard. Sustainability, for example: introducing social and environmental goals widen the definition of the value managed for clients and the benefit expected in return. Interestingly, it is the clients who are pushing this new definition when they insist their investment should do no harm or the least that is feasible. Banks are including sustainability in their product range and can continue expanding it to all their services.
«Private bankers are not new at providing services beyond investing, like the old concierge services»»
The idea can be taken a step further by banks: adding impact in client reports, offering a client impact profile, or impact advice, for starters. And since we’re imagining, how about other values like health, family legacy, or – my personal favorite – data?
Banks could also wake up by realizing the power of their networks. Private bankers are not new at providing services beyond investing, like the old «concierge services».
But no bank is an island, and to catch up with clients and deliver on non-monetary values, they will need to fire up those networks to create ecosystems. Back to sustainability, if banks want to report impact they will need to connect and orchestrate different types of institutions. From data collected by international institutions to non-profit projects and government action to accurately calculate and report the social impact of a family of ultra-high net worth people. Becoming safe-keepers of people data will require greater orchestration.
«As I reflect on it, my banker-friend is not fully sold on sustainable investing»
Awakening can bring banks the possibility of new ways of capturing value through different revenue streams not linked to money assets or transactions, but based instead on services people think worthy cherish and are willing to pay for.
As I reflect on it, my banker-friend is not fully sold on sustainable investing. Maybe once bars open again, we can discuss the steps to heaven instead of commodity hell over a much-needed gin-and-tonic.
Vega Ibanez is a consultant in the financial services industry, based in Zurich. Prior to consulting, she worked in business development at Julius Baer and as part of the Swiss wealth manager’s CEO office. A native of Spain, she studied literature and Spanish before earning a post-graduate degree in business. She has also worked as a strategy consultant for start-ups and helped create an online support space for people going through illness.
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