Private banking profitability at crossroads

_{February 2021}

The number of players in the private banking segment has fallen dramatically over the last ten years due to increased regulatory burdens, technology disruption and FinTech competition as well as challenging market conditions. Private banks need to transform their organizations and operating models to significantly improve cost/income ratio and thus stay competitive.

Examples from other industries show that improving operational efficiency can be achieved in various ways. In 2019, Volkswagen invested EUR 2.6 billion in a Ford group subsidiary aiming at developing self-driving cars. Microsoft created a shared service center in India that today employs more than 10,000 people. Each player has its vision, but the optimization strategies are often the same.

This paper explores five ways for private banks to improve operational efficiency by transforming the organization.

1. Optimizing the legal structure

• Lighten the legal structure: transforming a subsidiary into a branch or changing a banking license for an external asset manager/multi-family office license. It alleviates the operating and regulatory constraints and thus reduces costs.
• Exit a market or a segment: knowing when to stop is critical to improving efficiency.

2. Optimizing the operating model

• Regroup and industrialize functions: also called the “hub & spoke” model, it is based on the mutualization of support functions into centers of expertise. It often requires a critical size to be realistic.
• Outsource to an ITO/BPO provider: when the critical size is not reached, outsourcing is a viable solution and allows smaller players to focus on their differentiating factors.
• Co-construct a platform: like industrialization but with a partner’s support to reach the critical size (banker or IT provider). Under the form of a partnership, the new platform serves its founders and may welcome smaller players as outsourcing clients.

The selection of the appropriate model is not trivial and requires an in-depth analysis considering the following dimensions:

Eventually, the key driver is the strategic ambition combined with the right business model. It should be realistic and achievable. A bank’s organization and underlying operating model must be strategy enablers by being highly flexible and cost-effective.

Do you face a transition in your organization and are curious to find out more private banking profitability? Feel free to download our paper or get in touch and send us a message.