Asian banks rethink growth strategy
While income has recovered since 2011, banks are facing a challenge to make the transition to become trusted advisors to an increasingly demanding clientele. March 28, 2014 | ResearchWith the Asia-Pacific region on its way to becoming the biggest wealth market by population, the competition for client assets is increasingly dominated by domestic banks in key emerging wealth management centres such as Singapore, Hong Kong, Australia and Shanghai. The exit of international wealth players since 2009 from the region—such as ING, Credit Suisse and, more recently, Societe Generale to reduce costs globally to adapt to tougher banking rules under the Basel III framework—offers local banks the opportunity to take advantage of their stronger balance sheets, stability, better brand equity and trust in an already familiar home market. Yet, while local players have sought to expand their wealth management business on both sides of the wealth spectre, they have also been challenged by lower productivity, thinner advisory teeth and product-centric financial planning. Local banks do not have the global portfolio strategies and expertise of international banks to meet complex high-net worth (HNW) requirements, or have their access to worldwide capital markets or range of products and information but they can win in the race for onshore and increasingly offshore assets under management (AuM) if they improve their products, services and client segmentation capabilities and expand their local, regional and global wealth management networks and alliances. The increased challenges firms face today, coupled with evolving industry-wide trends, are slowly but surely creating stress on wealth management practices, not because Asia is a contracting market but because there is too much wealth that is growing too quickly. Domestic Asian banks are being forced to rethink their growth strategies. We observed that banks vary widely on capabilities that matter to wealthy clients. Some have superior products though their service might be lacking, while others make up for a lack of product differentiation with great service. Some have a model that enables them to under-price their competitors. The critical question then is: where is a bank’s competitive advantage? Market segmentation As banks strive to maximise revenue growth at a lower cost, choosing the right methods will be essential to tapping the wealth of the affluent segment and grow their AuM. Asia is expected to have more than 65% of the world’s middle-income earners by 2030, up from the current 28%. To meet the financial needs of these rising rich as well as the already wealthy, banks have, since 2009, developed a segmented approach to managing consumers’ wealth. They have created new segments such as the super affluent or emerging affluent, sandwiched between the core mass segment on the one hand and private banking on the other. Through these segments, banks aim to offer end-to-end wealth management and advisory services that will engage customers through their entire wealth growth journey. On hindsight, the financial crisis revealed that business practices were dubious and built around the fiefdoms of powerful relationship managers (RMs) who had little interest in sharing client information with the financial institutions they worked for, or cared for the long-term sustainability of the institution. Needs-based advisory services were often bypassed and traded for strategic products. The trusted advisor and consultative relationship model was an aspiration rather than a reality. The system was, if not broken, deeply flawed. Regulators have since intervened, taking a hardnosed, rules-based approach. After Lehman, regulators introduced restricted know-your-client rules. The number of compliance and new rulings banks have to adhere to today have forced all banks to increase manpower in this field. Between increasing service costs and rising customer expectations, banks need to rely on a high level of creativity and operational efficiency. Bank KPIs include sales per RM, wallet share and customer feedback, often based on a net promoter score which has become widely used in the wealth management business. The adoption of a private banking model by commercial banks was partially driven by restrictive regulations for the affluent and emerging affluent segments. Bank have since, in some countries such as Hong Kong, been quietly upgrading their most profitable affluent clients, even though they do not meet entry AuM requirements, into private banking which resulted in the relaxation of certain “retail banking” restrictions. The focus of banks in the initial stages after the crisis was on how to differentiate its sub-segments in the wealth portfolio and how to map the sales and advisory processes to those segments. This issue has become critical in the wealth business below private banking, as has the cost to serve, talent management and building a specialist platform with a differentiated team of portfolio advisors who can be selectively applied to the most active and profitable affluent portions. Banks are also providing better communication on investment risk concepts and real time market information. Equally, they are re-building their wealth risk management infrastructure and introducing robust MIS/CRM and analytics platforms. The emerging affluent market For top-tier domestic banks, income contribution from wealth management, excluding deposits, ranges on average between 5%–15%, and is often heavily skewed towards treasury with contribution up to 40%–50%. Banks re-evaluate and re-assess their business models to manage client AuM more effectively Figure 1. Evolution in wealth management strategies Please click to view enlarged image Customer growth on average in the region in the affluent segment has been steady at 15% y-o-y in 2013 with similar growth rates for AuM, while the emerging affluent segment has been seeing growth above the 30% y-o-y mark. Growth figures have been particularly strong in Hong Kong and Singapore. But it is the emerging affluent market that banks have their eyes on. Banks have been under severe pressure to increase profitability since the crisis. They hold large portions of their core segments which were historically core drivers of revenue, but which have now become marginally profitable at best. And the HNW segment in private banking for local banks is often too small to contribute to the balance sheet. Mass affluent customers in Asia, on the other hand, are typically four to seven times more profitable than the mass segment. They also generate 40%–60% of total customer profits for retail banks even though they make up only one third of their customer base. Traditionally, this emerging affluent and affluent segments use banks primarily for low-margin, low-growth transactions and savings relationships. To capture a greater share of wallet, banks need help the mass affluent with their higher-margin investments. Outside the top tier domestic commercial banks, it is not uncommon that up to 95% of top line sales in the affluent and emerging affluent originate from deposit and loan products, while less than 3% is derived from real investment and insurance. This, however, often masks the fact that investors in Asia use lending products for real estate investment. Banks have been trying, with uneven success rates, to onboard those segments. Those with a well-diversified bancassurance proposition or more tailored differentiation across the affluent segments such as waived payment fees and credit card reward schemes may have an advantage in wooing its mass affluent bank customers to bring over their investment portfolios. Fee income is still a small part of the overall business and domestic banks need to nurture it seriously for them to move into the ranks of a Citibank or HSBC. This suggests ample room for growth and ambitious targets by banks to expand that business to create a new pillar of income. Quality of advisory and trust While income has recovered since 2011, it masks deeper issues of customer disillusionment with products and services. Banks have been facing a challenging transition to become trusted advisories. They continue to overhaul their financial systems by introducing wholly-standardised sales processes, stricter risk and process controls and centralised monitoring. In the initial stages after the crisis, banks had to decide how to differentiate its sub-segments in the wealth portfolio and how to map the sales and advisory processes to those segments Figure 2. Banks have to decide which customer segments they plan to strategically build up their service capabilities in Please click to view enlarged image The competitive focus of the wealth management sector is changing, with customers putting an even higher premium on trust, stability, communication, expertise and product selection. Customer expectations have also been changing. Bank boardroom discussions have been filled with how to respond to customer demands for greater control of their assets and for more transparency, while at the same time requiring the same level of planning and support. Also, what customers are increasingly looking for is some investment guidance, but not intensive support from investment specialists under a genuine long-term sustainable relationship rather than a transaction-based service provision. We thus believe that the importance of advisory relationship in the mass affluent/affluent segment is over-stated and that access and support capabilities, reporting quality and to lesser extent, the fee structure are more critical levers in client engagement and retention. The shift of investor behaviour from “Manage it for me” to “I will manage it largely on my own” in the affluent segment forces banks to fundamentally review their relationship models. HSBC Global launched its overhauled wealth management model in early 2013 to build a holistic and fully-integrated wealth management framework on needs-based selling. Core to this change is an improved consultative selling process and new quality assurance standards to train, guide, measure and manage RMs according to the five-step model in which needs-based discovery is essential, putting a much more structured approach to the RM-client wealth discussion. “RMs are the relationship anchor between the bank and our customers and it is critical to us how they engage the customer, how they understand the customer’s needs and are able to provide the right solutions at the right time,” said Diana Cesar, head of retail banking and wealth management, HSBC Hong Kong. “We have made transformational investments in staff training, structured sales process, frontline tools and tailored propositions to engage our customers. The most fundamental change is how we reward our RMs—removing the formulaic link between products sold and RMs’ remuneration. The new incentive plan looks at three key areas: whether RMs conduct the right activities, the outcome in terms of growing customer portfolios, and most importantly, on the control side, whether quality processes have been implemented and the service score they obtain through customer surveys,” Cesar explained. For Choong Wai Hong, group head of HNW and affluent banking, Maybank, with Total Financial Assets (TFA) for the HNW and affluent segments in Malaysia at $40 billion as at end of 2013 (including investments, deposits and lending), three things have to come together. “It is critical to bring together the quality of RMs under an institutionalised relationship and sales process, a balanced compensation and incentive scheme and a robust CRM and analytics system to understand the behaviour/transaction pattern of customers. The way RMs at Maybank are compensated is an important lever in a needs-based performance. They won’t survive very long if they just focus on selling unit trusts without focusing on the other needs. We introduced an annual quality bonus in 2010 which is 20%–25% of total compensation which takes into consideration their relationship with the customer. Unlike other banks which simply withhold a certain percentage of sales towards the end of the year, our 20%–25% is based on annual payout but the KPI in there are more relationship, AuM and service-quality based,” he explained. Building a pool of quality people in the affluent segment is daunting. While industry experience for private bankers in best practice banks is usually 12–15 years, average industry experience in the mass affluent and affluent segment tends to range between two to six years. Positioned below the prestigious private banker, working in the affluent segment is for most only a stepping stone in their career. On average tier-one banks in Singapore and Hong Kong recruit between 100–300 new graduates annually and build them up over a six-week formal training phase, followed by on-the-job training for a couple of months and several post-training seminars to qualify them for investment sales and advisory work. In all, a new graduate spends about six to seven months at best to scale up. Most of them are only able to contribute to the bank’s profitability after their second year. The challenge for banks is how to build them from scratch over a limited time and then make them engage with experienced 30–40 year old young professionals. To hasten the process, some banks have moved away from classroom training to coaching and role play, with coaching continuing for the first year. In some larger banks coaching has been institutionalised and structured to take place on an ongoing basis for RMs. Larger international banks have more resources and use a combination of on-line career management tools and holistic career roadmaps which provide clarity to employees on timelines and performance levels required for progression. They also implemented a career roadmap and mechanism to develop employees from customer service ambassador (tellers) to RM, Branch Manager or RM in Private Bank. Digitisation of wealth management services With RM-to-client ratio around 1:350 on average for the affluent and emerging affluent segments (compared to ratio of around 1:70 on average for private banking), executives admit they can effectively manage only the top 20% of the most profitable and active clients. Thus, simplification of products and processes and the transfer of wealth management services to an integrated digital delivery platform are critical to balance service delivery with cost to serve. Domestic banks have ample of room to expand fee income from wealth management Figure 3. Fee income generation in wealth management 2009/2011/2013 Please click to view enlarged image Banks are optimising their networks and acquisition channels to better capture the emerging and affluent segments in both physical and digital distribution and to strengthen multi-channel capabilities by allowing customers to access wealth management services anytime, anywhere but are often struggling on two fronts. First, how to create the right product and service proposition that attracts affluent customers to digital and offer them real benefits and second, as digital and remote channel customer bases and usage grow, how to acquire new customers with meaningful insights with a bank’s current analytics capabilities While international banks are scaling up their physical private banking infrastructure, domestic banks are building their online capabilities to capture the affluent and emerging affluent market. In Hong Kong, where wealth management centres make up more than 40% of the existing physical network, one bank added eight new dedicated wealth centres to the emerging affluent segment in 2013, with a strong expansion into mainland China to capture cross-border investments. Growth in new-to-bank Greater China customers in the affluent segment is currently in the range of 50%–70% y-o-y for the top performers. The most advanced digital tools in internet and mobile trading offer banks in Hong Kong the ability to provide sophisticated FX mobile rate tracking services, integrated investment platform linked to deposit accounts, easy online and investment account opening. In entry segments of wealth management, technology plays a key role in delivering superior value and transactional convenience to investors and banks are building the capability for straight-through processing (STP). This includes linking the investment services account to the savings or current account and hence all debits and credits pertaining to the investment would flow directly from and into the account. Banks are also working on STP for electronic documents, cheques and digital capabilities to undertake all subscriptions, redemptions, switches and setting up processes online. To woo customers, banks have launched upgrades to their wealth management online platform to provide a one-stop online fund trading platform, often with lower minimum subscription amounts and fee charges, priority service lanes at branches, dedicated toll-free phone banking, special financial privileges in payments and other lifestyle privileges. Some have gone further and reward affluent clients for their total banking relationship and improving real time online communication with a click to call or online chat option. Some banks have even gone as far as to offer electronic lockers conceived to be a virtual online locker analogous to physical lockers. They can be used to store electronically scanned copies of physical documents such as legal agreements, policy documents, degree certificates and bank statements in different formats like pdf and jpg and serve as a backup and retrieval tool. The trend is clearly set towards more powerful, interactive and personalised services such as personalised web pages and Widgets (for real time information on FX rates, net asset value, investment news) in order to improve the user experience, digital revenue generation and customer loyalty. We observed that winners in this field focus on a few key action points to realise wealth management sales and service in the digital space, such as: a) Creating a superior website response time and loading speed, for example with internal monitoring systems which, when triggered by abnormal readings, will lead to immediate corrective action by a round-the-clock technical team. b) Implementing a simple registration process for trading/investment accounts. c) Addressing customer break points, for example STP for business accounts and credit card applications, turning off paper statements for credit cards, full STP for conditional credit card and home loan approval, a three-click process for new product applications which pre-populates customer information, etc. Leading banks are looking at 100% STP process with e-signatures and electronic document uploads. d) Improving customer communication, for example via a consolidated landing page to all banking relationships, access to help lines or the introduction of a client inbox, which allows customers to sort bank messages by category and choose which messages they would like to receive via email and implementation of account alerts, including via SMS. Leading multinational banks allow customers to view their accounts and transact under a single sign-in to manage transactional and investment portfolios. e) Providing sophisticated but easy-to-use financial planning tools. f) Creating an integrated payment portal. g) Improving mobile security, for example, a secure sockets layer and extending validation SSL certificates working in conjunction with anti-phishing and malware protection on browsers and a “Transaction Signing” token that enhances online security by effectively counteracting “man-in-the middle” attacks, etc. h) Linking online banking with analytics capabilities and CRM platform to achieve contextual marketing. Domestic banks are professionalising their segmentation models with enhanced specialist teams, advisory capabilities and improved service levels Figure 4. Wealth advisory framework Please click to view enlarged image Moving towards a trusted advisory model Banks have succeeded in slowing down attrition by improving the quality and frequency of their client communication. Yet, the differentiating factors need to go beyond a brand engagement, scheduled contact making and the promise of needs-based, quality-driven services. Wealth management providers need to hone their skills as consultative advisors who are not just trying to sell a product but are actively watching over client assets and making service contacts according to the client’s expressed needs. In the broadest sense, banks have a moral and fiduciary obligation because they are responsible for the quality of their clients’ lives. And this is where banks often fall short despite their segmentation strategies becoming more professional. Banks today go way beyond simply noting AuM and basic demographics, but it requires years of RM training and experience to develop the capability to understand a client’s current and future investment objectives, diagnose extended family issues and know the preferred mode of communication and desired level of interaction, leaving aside determining behavioural characteristics and external interests. Capturing, analysing and acting on those insights are key to ensuring a consultative, collaborative and sustainable relationship, regardless of the wealth of the client. Categories: Retail Banking, Wealth Managementretail,Wealth Management, Retail Banking,Wealth Management, Keywords:AUM, Analytics Platform, Straight Through Processing, CRM AUM, Analytics Platform, Straight Through Processing, CRM
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