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26 - 27 September 2018

Banking on Change

Published on 5 June 2018 by Anna Andriyanova

Banking on Change

Technology is transforming banking

The wealth management industry is undergoing profound changes as it adapts to a digital landscape, the changing demands and expectations of clients and regulatory changes. And with fintech companies increasingly shaking-up the market, the scale and scope of change only looks set to increase. But for those financial institutions that prove adaptable, the future continues to hold significant opportunities.

Kishan Shirish, Associate Partner, McKinsey & Company, explains the key trends in the wealth management industry succinctly. “The industry is being reshaped by digital trends, shifting customer expectations, regulatory changes and the decreasing profitability of the model. Rather than a one-off event, the industry’s transformation reflects the continuous pressure to innovate through digital, which will shape customer behaviours, business models, and the industry’s very structure in the long-term.”

In terms of customer demand Shirish points to a growing desire for simplicity, transparency, “instant” delivery and improved experience, combined with security. Much of this stems from the increasing reach of digital propositions from disruptors, which has altered client expectations for banking interactions.

“Anytime and anywhere access through digital or remote channels, including outside of office hours, is no longer seen as an unreasonable request,” Shirish says. “Therefore, we expect heightened customer expectations to drive digital service functionalities. These new standards will become the norm in an integrated private banking offering.”

Shehzad Hameed, head of retail banking, Standard Chartered, UAE.

Shehzad Hameed, head of retail banking, Standard Chartered, UAE.

This is certainly a trend that Standard Chartered Bank is seeing in the UAE. Shehzad Hameed, Head of Retail Banking, Standard Chartered, UAE says there has been a definite trend in the market toward customisation and personalisation of services.

He adds that Standard Chartered is staying ahead of the curve by providing a wide range of payment plans which help clients better manage their finances including a home load which allows clients to offset their mortgage rates using money already in their bank account. “This can take years off a mortgage as compared to the traditional home loan,” he says.

The bank also offers promotional rates on credit card balance transfers to help clients consolidate and manage their debt.

Christian Hammer, Head of Platforms at Saxo Bank, can also relate to these demands from customers, especially on the transparency front. “There are really two main trends we are observing in terms of customer demand,” Hammer says. “First, those clients who want support in managing their own funds are increasingly demanding transparent and digital asset management solutions. At the same time we also see increased demand for efficient tools for investors to handle their investments themselves.”

From the regulatory perspective, providers will be increasingly discouraged from receiving commissions for selling high-margin products, according to McKinsey & Company. This trend means that advice effectively becomes the key differentiator. Providers will be under increased scrutiny to ensure independent advice solely focused on the client’s interest, with increasing cost transparency, Shirish says. “Digital will be critical to deliver on these requirements, by reducing costs and providing transparency and traceability.”

Cost reduction for customers is a pertinent point, with the industry facing ongoing profitability pressure. Shirish points out that cost management efforts have not countered the drop in revenue margins caused by the low interest rate environment, product mix and increasing price transparency. However, McKinsey expects cost management to accelerate, largely through the digitisation of processes in particular in middle and back office.

In light of these trends, Shirish says that McKinsey expects to see the emergence of “hybrid” wealth management models, where digital platforms are complemented by advisors. “This model will meet customer demand for automation, choice of channel, and insight from wealth managers, catering to both a tech-savvy millennial and a baby boomer planning for retirement. The model will equally result in wealth managers with better, more timely, and more relevant insights, which, delivered at scale, will help them create a smart, proactive investment strategy for their customers,” he says.

Having a choice about how to interact with their bank is certainly an important factor for customers. “Choice means how and when to interact with the bank, and receive more relevant information at any point of time on their investment portfolio and what can potentially impact it,” Shirish says.

Kishan Shirish, associate partner, McKinsey & Company

Kishan Shirish, associate partner, McKinsey & Company

The expectation of choice comes from clients’ experiences in other sectors, due to digital propositions from disruptors and in particular non-banking players, especially online retailers and technology companies. To deliver against these expectations, providers are building platforms that allow customers that level of choice, by giving them tools to access a given service at their convenience while enabling seamless transition from one channel to another.

This is a trend that Saxo Bank is familiar with having seen a “mindset shift” in the past 10 years whereby individuals are increasingly keen to take control of their own wealth. “It is much easier to manage your investments online now, which really empowers people to become self-directed traders,” he says.

“So much has changed since we launched our first online trading platforms during a time when trading was still done via land-line phones and paper spreadsheets. Now, everything is online with live price feeds, fast execution and increased transparency, which allow individuals to take control of their finances and investments more simply than ever before.”

While choice is important, it looks likely that AI-driven services such as robo-advisors, which use artificial intelligence to advise users in their investments options, will increasingly move into the mainstream and complement if not supplant human interaction, according to Shirish.

“We are starting to see the rise of robot-advisory. Their value proposition focuses on low cost and low investment requirements. They are a great fit for customers with basic investment needs or lower value accounts, which have been historically underserved. They also capture some existing self-directed investors by delivering a frictionless customer experience through digital. As such, these platforms are expanding the addressable pool of clients,” Shirish says.

However, these kind of services are likely to be limited to certain segments of the market which demand less complex advice and may struggle to gain more widespread use quickly. “Given their narrow scope, pure robo-advisory solutions will have difficulty tapping into the larger pool of investors and capital that have more complex needs and require tailored solutions,” Shirish says.

In terms of AI, hammer is optimistic about the potential impact of the technology for its services. “The next big focus for banking and financial institutions is the use of Artificial Intelligence to deliver superior customer service at speed and at scale. At Saxo we have been working for a few years on how best to use AI technologies throughout our business, and we have clear proof that AI is useful in developing bespoke, differentiated and high-quality services,” he adds.

Christian Hammer, head of platforms at Saxo Bank.

Christian Hammer, head of platforms at Saxo Bank.

In Saxo Bank’s experience, AI can be very effective at presenting clients with content that is targeted and relevant. “With AI we can identifying relevant information and curating this for each individual client. We have already seen that such individualised content and recommendations leads to a much higher click-through rate compared to generalised ones,” Hammer says.

Indeed, high net-worth individuals are digital savvy: according to McKinsey’s most recent private banking survey customers with more than $1 million are more comfortable with digital advisory compared with customers in lower wealth brackets. However, they still insist on human interaction for their advisory services rather than a digital channel. “Given the complexity of their affairs, HNWIs are willing to pay for professional advice across their activities. Savings and investments are prime areas for value-adding advisory,” Shirish says.

Most banks’ digital initiatives have so far been focused on daily banking self-service offerings, such as digital transactions, reporting and the provision of product information,” he says. “Capabilities in deeper private banking functionalities, such as advisory, portfolio management, or news and information, remain low. In addition, there is currently no consistent customer experience across channels, with tablet and mobile functionality exhibiting only a fraction of these capabilities – a mainly basic transactions – according to Shirish.

Future improvements will focus on processes, with the most significant advances in three core areas, according to McKinsey: digital and paperless processes (with digitisation of middle and back offices); digital interactions with client advisors and seamless integration across channels; analytical and digital support to investment advisors, allowing them to deliver enhanced service.

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