1. What is private banking?
Private banking can be defined as banking, investment and other financial services provided by banks to high-net-worth individuals. These high-net-worth individuals enjoy high levels of income and/or invest sizeable assets. Why is it called private banking than? Because the term “private” refers to customers service rendered on a much more personal basis while in the retail banking customer service is rendered on a mass-market level.
Private banking is a subset of wealth management. Usually, it consists of largely of banking services which include deposit taking and payments, discretionary asset management, brokerage, some concierge-type services, etc. Most high-net-worth individuals trust their bank managers.
While individuals may be able to conduct some basic private banking with only $50,000 or less in investable assets, some exclusive, closed private banks only accept clients with at least $500,000 worth in investable assets.
2. History of private banking
Actually, private banking is the way the banks first started their work. In past time, most people were poor or did not have any investable assets, therefore, the first banks in Venice were focused on managing personal finance for wealthy families. There are two types of banks; private and retail banks. Private banks added the term “private” to stand out from retail banking and savings banks aimed at the new middle class.
The term “private” also refers to bank secrecy and minimizing taxes through careful allocation of assets or by hiding assets from tax authorities like IRS. Some private banks in Switzerland and some other offshore locations were criticized for such cooperation with certain individuals and unethical behavior. The trick is that tax fraud is a criminal offense in Switzerland, tax evasion is only a civil offense and therefore not required that banks notify any authorities.
In Switzerland, there are many banks that are providing private banking services. In it interesting that during World War II, many wealthy people, including some Jewish families and other institutions moved their assets into private banks in Switzerland to protect them from Nazi Germany. Moreover, this huge transfer of wealth had certain controversies. It was very hard to retrieve the assets after the war. Furthermore, when World War II ended, assets were moved again into Switzerland in fear of confiscation by the communistic government. Thanks to that, Switzerland remains the largest offshore center with about 27 percent of global offshore wealth according to Boston Consulting Group.
On the other hand, first private banks were established in England during the 17th century, in parallel with the development of agriculture, managing the assets of the royal family and other notable, wealthy families.
Because of the globalization and internalization of the economy, technological development such as the internet and mobile phones have ensured that banks are always with us as we can access our bank accounts at almost any time. For example, because of the technological boom during the 2000s, the number of Asian millionaires has grown to 3.6 million. On the other hand, because of the regulation and the regaining of confidence after the financial meltdown, private banks as well as retail banks require a new layer of transparency and different methods of charging for services.
3. Valuing proposition private banks
One can value the proposition of private banks in a variety of ways. There is parent brand, one-bank approach and unbiased, strong advice. Let’s start with the parent brand.
Many large banks leverage the “parent brand” to gain a client’s trust and confidence. For example, most individuals would put some of their assets into big, branded banks such as JPMorgan, Credit Suisse, etc. These banks have a strong presence across the globe and they usually present private banking as a part of a special, discreet service.
The “one bank approach” is where private banks offer all inclusive, integrated service to clients to meet their personal as well as business needs. Private banking companies have to understand client’s needs and risks appetite and tailor them accordingly.
Some banks even claim to have “strong advisory team” that reflects in the products they offer to the client.
4. Private banking and product platform
There are two different product platforms private banks can choose, open and closed architecture.
Open architecture is a product platform where private banks distributes all the third party products and might even sell some of their proprietary products.
Closed architecture is a product platform where the banks only sell its proprietary products and does not endorse any third party product.
Because of the globalization it is very hard, if not impossible to satisfy the needs of the client. Most clients demand only the best and that is why most private banks have an open architecture where they distribute the products of other banks for a certain percentage of commission. Some of these products are equities, fixed-income securities, foreign exchange (FOREX), commodities, deposits and real-estate investments.
5. Private banking fees
Every bank have its own policy when charging a client. There are some banks that follow the transactional model where the client is not charged any advisory fee what so ever. Some banks thrive on the commissions they get by distributing third party products. On the other hand, some private banks follow a hybrid model where the bank charges a fixed fee for certain products and advisory fee for the rest. Some banks are only advisory driven and they charge the clients a certain percentage of AUM, usually that is around 0.75% of entire AUM. A few banks offer both transactional and advisory model. That is the beauty of private banking because the client can choose what suits them.
6. Making new customers
New customer or popularly referred to as lead generation is a vital part in the private banking business. Banks have their own ways of obtaining new customers. While some banks rely heavily on their wholesale banking referrals there are some banks that have strong ups with their Retail and Corporate banking divisions. Most banks do not have a revenue sharing model between their respective divisions. They are either one time charged to the division or they are based on an annuity that the division gets for a client referral. However, most banks believe the primary and most valuable source of leads must be client referrals. A client would refer his or her business partner, friend, etc. when he or she is satisfied with the bank’s service. If the bank is generating a solid number of leads through client referrals, that shows the good health of the private bank.