Private banking market: can neobanks crack it?

Is the private banking and wealth management market up for disruption? When the fintech industry first emerged, startups attacked the low-hanging fruits with business and retail payments: the Stripe, GoCardless, etc. These companies are now huge behemoths because this particular fintech segment has quite matured. Fintechs then went after the retail customers, and a bit later the small & medium enterprises (SMEs), with neobank propositions and lending products. Your Monzo, Starling, Funding Circle, and others. What’s next? From a customer cohorts standpoint, trying to secure the large corporate banking relationships, which is tough and complex. Or the high-end of retail customers: the high net-worth (HNW). The tiny percentage of people at the top of the pyramid that have a lot of money. But can neobanks crack the private banking market?

Who are the private banking customers?

It is not only the Queen of England as a starter. Even though she would qualify as HNW, even an ultra-high net-worth (UHNW). We actually do not know, the Queen is not required to provide the state of her private finance, but you can guess it. It is widely known that the Royal family banks with Coutts, a private bank owned by the NatWest Group. The private banking customer cohort is actually a bit broader than that. Not so broad though. If you look at the UK as an example, there are an estimated 700,000 HNW according to KPMG. And within that, there is a smaller subset of UHNW of about 8,500 people. You could say that the private banking market as a whole is a bit bigger. That’s because some banks like HSBC have significantly lowered the entry requirements.

There is quite a difference between Coutts, where you need at least £1m of investable assets or earn £500k per year, and HSBC where with £50k to invest or an income of £100k per year you would qualify for their Premier account.

Private banking has thus been slightly democratised over the years. With certain banks you are able to access the services if you are in the top 10% earners as opposed to the top 10% richer by assets. There is quite a difference between the two: the concentration in the latter is much bigger than in the former. There are more chances that you end up a top earner than at the top of the asset holders. One of the greatest illusion of capitalism, that you can make it to the top. But that’s a story for another day…

Who is trying to enter the market?

This is a juicy segment of banking. High available income and assets mean ability to invest, which ultimately means income potential for banks. Customers in this segment want you to look after them, act as a trusted advisor to manage their money and grow their wealth. It also means that customers are less likely to mind paying fees for account maintenance and other things like a relationship manager. Something that it is harder to charge retail customers for. Unless you start by offering your services for free and somehow you convince people that they now have to pay à la Monzo and Starling.

A few of the neobanks have launched what they call “premium services” but these are not really comparable to what private banking clients are looking for. Maybe if you are in these “semi-private” segments like HSBC Premier. But if you are the Queen of England banking with Coutts, you’re surely not going to let it go to get a Revolut Metal. Some neobanks are still trying to go after private banking clients. In the UK, Monument, who wants to launch soon, is targeting customers with a net worth between £250k and £5m. Somewhere between the private banking service of a high-street bank and a pure-play private bank. Similar with Alpian, a digital private bank in Switzerland.

On the other end, robo-advisors are not disrupting this part of the investment management industry. Wealth management is a bit different. It’s a turnkey solution if you wish. Clients in wealth management are looking for a different kind of service and are willing to pay more fees for it. However, the upper class that has a bit of money and do not qualify for pure-play wealth management is likely to be interested in digital investment management firms like Nutmeg for example.

Do they stand a chance?

High fees, service levels probably not adequate… But who you bank with matter for those segments. Neobanks tend to focus on two things: superior digital experience and cheaper services. Which is quite a problem for a cohort of customers that do not care as much about that. Firstly because they are looking for someone to manage their finances. Secondly because they are not price-sensitive. The sweet spot is probably the in-betweens: people that do not qualify (yet) for the “real” private banking proposition but would like a bit more than your normal banking. The customers that feel that big banks’ private propositions are underwhelming.

Newcomers might also want to think that they will attract the next generation of rich people. Still according to KPMG, over $200bn of wealth will be transferred by HNW over the next 10 years. So maybe you are trying to secure these customers, the young and affluent that will care a bit more about the digital experience because they are digital natives. Even so, still a tough one to crack.

Again, the ones that stand more to lose are the large high-street banks. The pure-play private banks that offer bespoke services to the very rich are unlikely to be disrupted. Very hard to displace these kinds of businesses. But you can definitely disrupt the private banking segment of a big bank. All-in-all, this will accentuate the trend of a fragmentation of the financial services industry. Where specialised players hold on to their customer segments and the universal banks are likely to vanish in the wind.