Private banking, as well as wealth management more generally, has enjoyed reasonably favourable market conditions over the last few years. According to Deloitte’s 2019 Banking and Capital Markets Outlook, the sector has been the best-performing business arm of major banks for some time now. Positive macroeconomic trends, strong stock market results and maturing populations that are enthusiastic to preserve their wealth have combined to provide the sector with the fertile ground needed to increase margins. With these three trends showing little sign of slowing down, a multitude of opportunities for private banks to attract and retain clients remain open.
Despite the positive climate, there are new challenges on the horizon. The threat of a slowdown in the market could lead to a range of problems, particularly for banks that have a large clientele of middle-income customers. Another threat – or opportunity, depending on how you perceive it – is the inflation of customer expectations. Technology such as robo-advisors and low or zero-cost products – many of which are app-based – are also leading to a raft of new competitors carving slices out of big banks’ traditional market.
In many ways, Italy’s private banking sector and the companies within it mirror the global market. This is the perspective BNL-BNP Paribas Private Banking is taking as we reimagine our business. Since its establishment in 2002, the bank has grown to boast more than 57,000 clients and now has over €33bn ($37bn) in assets under management. We have cemented our position as one of Italy’s most trusted financial institutions and are now looking at how we can hold on to this position. The next several years will be crucial for Italy’s – and, for that matter, the world’s – private banking sector.
In many ways, Italy’s private banking sector and the companies within it mirror the global market
A sturdy base
Italy’s private banking market has historically been dominated by the private banking divisions of the country’s large commercial banks, alongside the Italian branch of the world’s major international wealth managers. The country’s wealthiest clients are also served by small and specialised private banks that offer highly tailored services. Unlike other European countries, Italian clients are not yet enamoured with digital wealth managers. That said, this is likely to change as younger people begin to seek out wealth management services.
A winner-takes-all dynamic continues to define Italy’s market, with the majority of assets flowing towards the country’s financial powerhouses, such as Intesa Sanpaolo Private Banking, UniCredit Private Banking and Banca Aletti. All three have achieved strong and consistent growth over the past five years. Despite this, new players continue to enter the market. A contraction of credit issuing, combined with low interest rates, has encouraged a number of financial institutions to enter the private banking market to find new sources of revenue. In particular, networks of financial advisors, such as Fideuram-ISPB, Banca Generali and Banca Mediolanum, have quickly developed, poaching private bankers from their competitors in order to quickly grow their assets. These businesses have also invested significantly in financial advisory services. All this has led to more competition in the space, as well as declining assets for Italy’s traditional leaders.
Amid these changes, a transformation of the Italian market is now well and truly underway. On the financial side, the implementation of MiFID II is forcing those in the market to rationalise their products, leading them to focus on efficient financial instruments and more refined ‘wrappers’ with simpler governance requirements. On the ancillary services side, businesses are primarily focused on building non-financial wealth advisory services. They are doing this to increase client retention by presenting private banking as particularly good value, which is especially important in light of MiFID II’s introduction. Since most of these services are offered through automated tools, market players are now trying to differentiate themselves by offering more sophisticated services through non-financial experts.
With such a dynamic landscape, there are a number of new risks and opportunities for those in the market. While younger generations are presenting a new customer base, their demands are very different from those of their parents and grandparents. With the added scrutiny being placed on the sector due to regulation, the next generation of clients will be particularly selective.
In the coming years, a huge amount of wealth will flow from today’s owners – the current clients of private banking – to their heirs. This change poses a threat to wealth managers, who presently have very little time to develop a relationship with the next generation. Naturally, both assets under management and revenues are under threat. To avert catastrophe, wealth managers should focus their efforts on supporting their clients for the journey, accompanying them and their heirs every step of the way.
A key factor in this will be investing in the financial education of clients’ heirs. Successfully doing so will mean that a private banker has a relationship with an heir before wealth is transferred to them, and that the heir is equipped with the knowledge needed to have a meaningful conversation about the future. Before this happens, wealth managers should alter their offering to include new technology in order to meet the next generation’s expectations.
BNL-BNP Paribas Private Banking in numbers
Assets under management
Unsurprisingly, these new expectations boil down to digitalisation. Businesses like Amazon, Apple and Uber have irrevocably changed what people expect in terms of service. While most financial institutions have implemented their own digital transformation strategies, Italy’s private banks have so far lagged behind. Failure to deliver exceptional experiences may result in clients switching to easier and more convenient providers.
However, developing new digital customer experiences does not mean private banks need to change their business models. Instead, they need to embrace new technologies in order to serve clients more effectively and efficiently, while still maintaining a personal relationship. Private banks should also use digitalisation to improve their internal processes, subsequently reducing costs and accelerating service delivery. Those that do all this successfully will have a healthy competitive advantage over those that do not.
Amid all this, regulation is poised to have a significant impact on the Italian market. MiFID II has resulted in the publication of all costs associated with investment services. Lacklustre performance will almost certainly have an adverse effect on client relationships and make any fees difficult to justify. Private banks will need to simplify their offerings to make them compelling to customers, focusing their core products on revenue generation above all else. Wealth managers should also not be passive in this process, and instead work to anticipate and subvert negative outcomes before cost reports are published. The sting of bad news is far less severe if a plan to correct it is already in place.
These trends of generational change, digitalisation and regulation should not be seen as separate problems since they all affect each other. The development of digital products might help private banks address generational-change issues, as well as reducing advisory costs that would now be reported under MiFID II. A broad strategy is the only way to address all these challenges at once.
In order to respond to such a complex environment, BNL Private Banking has initiated a transformation of its service models. This is led by an innovative approach to client segmentation based on archetypes – or ‘personas’, to use the jargon of Jungian theory. This informs our client-centric approach, which has led us to take three main actions.
We have shifted towards a wealth advisory approach by improving our non-financial services, such as generational planning, real estate, insurance and corporate advisory. This positions us as a client’s partner and helps us address more than just investment needs. A long-lasting relationship with the entirety of a client’s household helps us identify liquidity events and, subsequently, opportunities for new cash generation. These services will be available under a single contract, which represents the pact we make with our clients.
Our digital evolution will focus on platforms for better relationship management. These systems will help us become far more contactable for our clients, particularly those of the younger generations. Soon, they will be able to contact their banker through video collaboration, receive advice remotely and much more. We are raising the bar by creating a dedicated 24/7 service centre for clients, giving them priority access to any service they may need. For our relationship managers, this brand-new platform provides a one-stop shop for all of the bank’s services, including advice and products, thereby significantly simplifying their job.
Finally, we are also increasing our focus on positive banking. In Italy, banking can play a critical role in economic development by matching demand, such as SMEs looking for funding, with supply from wealthy individuals. BNL Private Banking can leverage its competence and professionalism to direct clients towards projects that offer a good return while also creating value for the country. As always, investments will remain within the client’s boundaries.
Between all these measures, BNL Private Banking is positioning itself as a tastemaker for the future of Italy’s private banking sector. The rest of Europe should keep a close eye on the country, as the next decade promises to be the catalyst of several new trends.