Innovation in Private Banking and Wealth Management

With this study, Monitor Deloitte emphasises the need for the Private Banking and Wealth Management industry to create a mind shift in how to look at innovation and how to become more innovative.

In particular, the report defines the term “innovation”, describes the industries’ innovation gap and reviews the current business models in the Private Banking and Wealth Management industry.

Wealth managers should become more innovative – and they can: The study showcases possible solutions how innovation can be utilised to transform the Private Banking and Wealth Management business models.

Key findings:

It's about time for innovation in Wealth Management

The profitability of European Wealth Managers has been in constant decline in recent years, with profit margins falling by 40% between 2000 and 2015. During the same period, the market size for Private Banking measured by the bankable assets of European millionaire households has grown by more than 60%. This increasing gap between profitability and market size shows that Wealth Managers are failing more and more to serve clients successfully with their existing business models of an integrated value chain (average industry integration level of above 80%). This suggests that the industry is facing an innovation gap, since industrialisation and M&A – the other two main strategic growth levers – have already been employed for years.

…and the time is about right…

Typically, innovations result from a conscious, purposeful search for innovation opportunities, which are found only in few situations, such as changes in the industry structure, demographics or in the perception of an industry, economic incongruities or the appearance of new knowledge. All these can be found today in the Wealth Management industry. An increasing number of FinTechs active in Wealth Management (+300% in the past three years) is disrupting traditional industry structures; millennials will form 50% of the global workforce by 2020, creating demographic change; and the global regulatory agenda has triggered the reshoring of assets, adversely affecting the prospects for cross-border Wealth Management.

…but ambition is lacking

Innovation ambitions for both Wealth Managers and FinTechs revolve around the existing core Wealth Management business. However, most innovations are a response to existing business challenges, and far fewer exploit opportunities to create value in a new way. Wealth Managers are mainly digitising their traditional business model to reduce their cost base; and FinTechs are either offering digital solutions to support Wealth Managers or are providing digital offerings to compete for digitally-aware private clients. The innovation efforts of Wealth Managers are therefore concerned mainly with industrialisation efforts, and those of FinTechs with disruption: neither are focusing on innovation to embrace a change of the Wealth Management business model.

Enabling innovations that can change the business model…

While eliciting a change of business model typically requires to employ multiple types of innovation with a focus on shifts in the profit model and client engagement, efforts in Wealth Management concentrate mainly on digitising processes and structures in the existing business model. Instead, Wealth Managers could exploit innovation opportunities in a more transformational way by re-designing instead of reorganising their infrastructure (e.g., through Cloud Computing, Open APIs, Orchestrating), deepening their understanding of client needs (e.g., through Social Listening, Instant Client Feedback), identifying new sources of revenue (e.g., supplementary Client Care Services, Digital Security Services) and refreshing their brand (e.g., through Sub-branding, Ingredient Branding).

…requires a shift in the leadership’s mental model…

Innovations come to a halt, or fail, for many different reasons, but most often it is because superficial changes to improve performance are not sufficient to affect a fundamental transformation. Innovation requires change at a deeper level, a change of the leadership’s key beliefs as these typically affect attitudes and culture throughout the organisation. Wealth Management is built around traditional assumptions, behaviours and beliefs about how to create value that drive the strategies leaders deploy and guide their decision-making. These assumptions and key beliefs need to be exposed to the new realities of today’s world and the future, by monitoring trends and their implications, and recognising the urgency and importance of innovation.

…and an effective innovation system

Once the leadership is on board, innovation needs to be formally embedded as a management discipline and the corporate culture needs to be opened up towards divergent thinking. This calls for a systematic change that, based on an analysis of successful leaders in innovation, requires four building blocks to be in place: approach, organisation, resources and competencies, and metrics and incentives. A tailored approach should be built around clear definitions and methodologies for the work to be done in generating innovations, and innovations should be managed as a portfolio. Accordingly, the appropriate talent and capabilities need to be acquired and nurtured. In this context, and as a starting point, Wealth Manager should clarify the role of partnerships.