Friday, 14 June 2024

What we learnt from Swiss private bankers

5 min read

By Foo Boon Ping

The Swiss banking sector is characterised by its stability. But presently, innovation is needed to enable institutions to deal with the changing regulatory landscape

  • Swiss private banking gain strength when the rest of financial world is in crisis and in need
  • Swiss banking’s need for innovation could satisfy evolving necessities of private wealth customers
  • Existing business models and products will disappear at some point, thus, investing in research and innovation to develop new businesses and products is essential

The traditional trusted advisor model of Swiss private banking is being disrupted by new regulatory measures aimed at eliminating the role of Swiss private banks as possible vehicles for tax evasion. This has precipitated a net outflow of investor funds, increased costs of compliance and exacerbated competition, which in turn have put significant pressure on margins and profitability leading to massive consolidation of the industry and the demise of many of the smaller partnership based private banker institutions which traditionally provided independent and objective investment advice.

To survive, these institutions are exploring mergers and acquisitions and transforming business operating model as either a trusted advisor, product specialist, transaction champion or managed solution provider. While the larger institutions such as UBS, Credit Suisse, Julius Baer, etc, are adopting the American universal banking model, providing a more holistic range of commercial, investment banking and asset management products and services.

Strengths of the Swiss private banks

A reputation built on trust and stability – “When the world is in crisis, Swiss private banking benefits,” opined Robert Straw, director of education – Swiss Finance Institute. Swiss private banking draws strength when the rest of financial world is in crisis and in need. Most of the world trust Swiss private banks’ advisory capability on complex family and cross-border wealth management issues as well as diverse and alternative asset classes built on a lega cylasting over 200 years.

Private banks in the country also have executional and transactional capability that is claimed to be unmatched by institutions domiciled in other jurisdictions, added Straw.

Switzerland’s reputation as the world’s most innovative nation

Switzerland invests close to 3.4% of its GDP in research and development (R&D). It spends $22.58 billion (CHF22 billion) on R&D. The private sector accounts for most of the funding and execution of this work (86% and 71% respectively). The Swiss Commission for Technology and Innovation (CTI) supports applied R&D projects, in 2016, provided subsidies of $189.5 million (CHF184.6 million) to fund 539 projects.

The need for innovation and regulation in Swiss banking

In Switzerland, the need now for innovation is to help institutions deal with the new regulatory landscape and transform how they operate. Swiss banking’s need for innovation could satisfy evolving needs of privatewealth customers through contract-based advice; new asset classes – potentially through cryptocurrencies; service delivery, perhaps through robo-advisors; goal-based investing; the rise of passive products; leverage environmental constraints (which include economy, regulation and competition); and by exploit of technological advantages, such as digital transformation.

With regards to industry collaboration and partnership with regulatory technologies (regtechs), changes already implemented or coming up will lead to more concentration on the market. The obligation to implement different legislation and regulation increases the complexity of the task, but might also offer a potential for synergies. The new anti-money laundering, Automatic Exchange of Information (AEOI) and Markets in Financial Instruments DirectiveII (MiFID II) framework within financial institutions have to be highly industrialised in order to be compliant and cost-efficient at the same time.

Proven business models are disappearing

Institutions such as Swisscom and Roche recognise that existing business models and products do not last forever and will disappear at some point. That is why they are constantly investing in research and innovation to develop new businesses and products – to discover new “stars”.

Seventy percent of Swisscom current revenue result from products that did not exist ten years ago. Similarly, for Roche, the period that it enjoys exclusive patents to new products typically lasts ten years, before margin son these are eroded as exclusivity expires.

Some institutions are also now beginning to explore blockchain and cryptocurrencies. “Blockchain or distributed ledger technology, that underpins cryptocurrencies, enables asset transactions,” said Oliver Bussmann, president of CryptoValley Association. Blockchain could dramatically reshape products and processes across all industries. The first blockchain movers are focusing on selective and existing cases into production with the highest benefit impact. Crypto Valley is developing one of the world’s leading blockchain and cryptographic technology ecosystems.

“Regulated financial service providers need a cryptocurrency and digital assets platform in the future,” stated Peter Hofmann, an associate at Swisscom AG. Growing demand for crypto-based smart-contract enabled digital asset platform for matching and settlement, especially due to increasing complex regulatory compliance requirements.

Swisscom is developing a digital asset platform offering for regulated financial service providers delivered in a platform as a service (PaaS) model. "Most robo-advisors today offer solution to a limited number of passive exchange traded funds that are re-balanced automatically on a periodic basis. They have not achieved the level of sophistication to deal with more active management strategies or complex, alternative products or assets that may be less liquid, hence not able to meet the more sophisticated needs of privatewealth clients,” Patrick Oberhaensli, CEO and founder of EVOLIDS FINANCE LLC, noted.

New generation artificial intelligence-enabled customer relationship management platforms can help automate processes and operation to significantly increase productivity and efficiency of private wealth relationship managers. One example is InvestGlass’ Integrated Wealth Advisor Platform, which is designed to support wealth advisors’ daily activities, as a white-labelled, client and prospect management platform for bankers, wealth managers and advisors meant to foster more efficient prospecting and onboarding of new clients, as well as the management relationships with existing clients.

Another example is the UBS Wealth InnovationLab, established by Swiss bank UBS in 2014, to identify and to test future products and services and to act as a centre of research and development to develop and incubate new concepts that have the potential to improve client services and generate added value into testable prototypes within a sandbox environment. These strategic insights and radical approaches allow UBS Wealth Management to create new business channels and engage more effectively with current andnew clients as well as to map the future of wealth management.

For UBS, innovation and digitalisation are key strategic priorities and they are investing heavily into those areas, including driving the development and integration of new technologies into their existing business model and investing in market research to understand what tomorrow’s clients will expect. To support these efforts, UBS is adopting the so called “permission-to-fail culture”, opening to innovation and experimentation without immediate pressure of ROI. Its WM Innovation Map focuses on four key pillars of New Advice, New Trust, New Choices and New Wealth. Its mission is to develop in-house entrepreneurs  or “intrapreneurs”, building innovations from within and among its employees, examples of which include internally driven and developed initiatives like UBS Smart Wealth, Ask UBS and UBS Optimus Foundation Virtual Reality.

Download the post event report of the Switzerland Wealth Innovation Tour 2017

Keywords: SWIT 2018, AEOI, MiFID II, AML, Private Banking, Transaction Banking
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