Client experience key to rebuilding wealth management profit

02 August 2017

Wealth managers continue to see their pre-tax profits erode as revenues decline further, however a new report highlights that many wealth managers have finally managed to stem the bleeding. Cost reductions, as well as looking to implement digital technology, improve cost efficiency, customer journeys, and create genuine value, may be key to industry players staying afloat.

Global wealth has continued to pickup, largely due to large gains in equities in North America and the creation of new wealth across the Asia-Pacific region. In total, global private wealth in the hands of wealthy households has increased to more than $166 trillion.

Global wealth managers are, however, facing increased pressure as a period of relatively lacklustre growth since the financial crisis saw investors, and regulators, become increasingly critical of the industry and its opaque fee structure. In the new ‘Global Wealth 2017: Transforming the Client Experience’ report, the Boston Consulting Group explores current conditions faced by the industry in light of the changed conditions. The report is based on a survey and interviews with 125 wealth managers across the globe.

The study shows a relative decline in revenues over average assets (RoA) over the past decade across most regions, as various factors came to influence wealth managers. Key factors include legislation to make the industry more transparent, and competitive; the rise of passive investment vehicles; government measures to repatriate offshore assets; and the rise of FinTechs and robo-investment.

Return on Assets Globally has gradually Declined

While RoA declined on average however, the research found that wealth managers in most regions have managed to stem the bleeding in terms of profits, by focusing on cost management. Costs over average assets and liabilities under management saw relative decline in various regions.

Profit basis points across the board meanwhile fell from 33 to 23, with Norther American and European onshore institutions the hardest hit, both witnessing respective drops of -14. Asia-Pacific institutions meanwhile saw a slight increase following massive cost reductions.

Despite cost reductions, pretax profit margins have fallen substantially over the past ten years

In terms of a breakdown of pre-tax profit margins, the impact of revenue drops was cited as the most impactful, followed by impact of cost increases, resulting in a change to pre-tax margin between 2007 and 2012 of 9.2 basis points. In the years to 2016 wealth managers have again seen a revenue drop, at 6.1 points, although cost reduction efforts offset the losses at +4.7 – resulting in a total 22.4 basis points, a much smaller small 1.4 fall since 2012.

The biggest gains were noted in cost reductions in sales and front-office services, at -2.3 between 2012 and 2016, followed by central functions at -2. Asset product management saw a -1.4 drop, while operations and IT and legal & compliance saw slight increases in the period of 0.4 and 0.6 respectively.

Wealth managers are streamlining their approach

The increased difficulty of the operating environment has seen wealth managers streamline their respective approaches – with many such approaches still to bear possible fruit. For instance, in the areas of focus and front-office setup, respondents across most regions are above 50% in terms of completion within the respective domain.

Digital development

Other areas, such as offering and operations continue to hold potential for the streamlining of approaches. The latter category includes focuses such as lean end-to-end process for fast and flawless delivery and digital readiness. In terms of mindset, a mixed result is identified, with North American banks out ahead while European offshore institutions lag behind.

The research notes that various players are increasingly focused on improving customer experiences, aside from seeking to reduce costs through the deployment of digital solutions. According to BCG wealth managers are increasingly able to streamline the customer journey by creating a seamless front- middle- and back-office integrated experience – which the firm calls Client Journeys 2.0.

Client Journeys 2.0

The Client Journeys 2.0 involves a broad focus driving the client experience while integrating processes and applications to drive efficiencies. 2.0 implies, according to the firm, superior client experiences delivery with front-to-back perspectives. This is in difference to Client Journey 1.0, which is more supportive to clients navigating through wealth manager’s channels.

According to the firm’s benchmark study, various wealth managers are considering technology in their wider development towards Customer Journeys 2.0, such as big data and smart analytics, and service-oriented architecture and APIs.

New technology priorities

Daniel Kessler, a BCG Partner and co-author of the report concluded, “To create client journeys 2.0, all processes, channels, and interaction points must be designed and implemented to deliver a superior client experience, largely through the use of digital technology. At the same time, the use of digital in these journeys fosters process efficiency and robustness and reduces operational risk, offering a redefined client experience that is more intuitive, integrated, and individualised.


The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.