Jul. 09, 2012
The following is a guest article by Linda Doesburg and Boudewijn Chalmers, managing and senior consultants, respectively, of Capgemini Consulting. The article addresses the need for private banks to focus more on their clients and in order to achieve this, develop a better customer segmentation.
Private banks are doing good business in a growth market with a positive market outlook. Returns on investments (RoI) are positive and assets under management (AuM) are increasing automatically. In addition, clients are generally satisfied because they see a positive return on their invested capital.
In a less positive market environment such as we are experiencing now however, private banks are faced with the other reality, especially in cases where supervisory demands or restrictions are imposed on the income portfolio. By this we are referring to the ongoing debate on the abolition of the kick-back-fee (commissions). For private banks, in addition to a sustainable earning model and optimizing yields, it is important to determine an efficient cost structure. As well as this, it remains important to focus more on client’s needs and the realization of client’s goals. The time is right to act on topics such as 'customer focus' and 'optimizing the profitability of private banks' and integrate these in practice.
Proposition and the correct segmentation go hand in hand
For a good business model, it is necessary to achieve optimal yields and determine an efficient cost structure. At the relationship level, this means that banks want to relate the revenue per client to the costs that their operation entails. Because of current market conditions and the high expectations of clients, private banks are forced to take an in-depth look at their operating model. The following model (figure 1) provides insight into the various components that private banks can use for the provision of customer service.
Figure 1: segmentation model
This model provides insight into the components that are important in defining an optimal control model, and that differ from the traditional private banking operation model we are familiar with from recent years. In the traditional model, which is widely used in practice, banks are primarily looking at the wealth a client brings, known as asset under management (AuM). This model has a clear focus on the banks interest, less focus on the client’s interest, and a clear difference exists amongst the several private banks in the industry: variations between € 80.000 or a minimum of € 1,000,000 or € 5,000,000.
We believe that wealth is just one of the multi parameters that should be used by a bank to categorize the client. In practice, private banks add a single variable, such as degree of complexity or profession. To come up with an optimal segmentation, private banks need to take more variables into account. In practice, this principle has rarely (or never) been applied.
Figure 1 contains four major components: customer type, product offerings, service concepts and channels. These taken as a whole, lead to the optimal services of the client portfolio.
Client type
There are several variables which determine client type. Important variables include the customer's needs, the origin of the present wealth, age, geography and risk appetite. Based on these variables the entire portfolio should be categorised by client type.
Product portfolio
From the various categories now defined, we should determine which products best fit these categories. It is useful to know that there are different variants of the products, each with different conditions and different price tags.
Service concepts
For service concepts, similarly to products, there are options such as variations in conditions and price tags. Service concepts are complementary services where additional fees may be requested. A small survey among HNWI in The Netherlands has shown that clients are willing to pay for these additional services.
By service concepts you could think of financial planning, estate planning or 'family workshops’ in which the younger generation will be prepared for the forthcoming wealth they will receive. For both the product portfolios and service concepts there are new variations on the market; consider the modularity in offered products, but also packages tailored to the specific target group.
An example is the provision of advice composed of several modules. For each target group, modules could be selected/defined which are offered as part of the overall advice. This would achieve a more simple and less expensive advice which can be tailored to fit every target group and meet every client need.
Channels
A very important step in optimising the operating model is choosing the right channels by which to manage/deliver products and services to the client. By doing this, companies are matching client needs with in the way clients would like to be serviced. By selecting which of the different channels should be used, a Private Bank could make a more effective trade-off regarding which HNWI clients will be serviced via an expensive private banker, and which group of the clients is serviced via the Internet and other digital channels - without reducing client satisfaction. As part of the customer journey an HNWI-client needs to receive the same experience via all different channels.
The starting point of this approach is that by adjusting the service concept, the client’s need could become the lead factor, and the private bank has the ability to optimize the earnings model of the private bank. By focusing on the right segmentation (which client type) and offering the right products and service concepts through the right channels, different price tags could be used which could positively impact the earning. It is an important principle that advisors (private bankers) spend time with clients based on the level of attention required by the client, and not by simply adhering to the target minimum number of visits per client. By adding more variables to the segmentation model, customers can be served in their preferred manner. The customer and his needs will become the driver. In short, the correct segment leads to a better control of contacts, both for the customer and the bank.
An end to the traditional method of customer segmentation
Because the approach of this model starts with the segmentation of the client portfolio, and we cannot discuss the whole model in this publication, we will specifically address the segmentation
Being wealthy does not automatically mean setting high standards and having high expectations. These requirements and expectations differ by individual. Therefore it is important to know and understand the client’s needs. As indicated, we believe that five variables need to be added to the segmentation of the client portfolio. This means that banks also look at client needs, the origin of the assets, age, geography and risk appetite of client.
HNWI (client) needs
In determining client needs, thinking from the client perspective is a precondition. A client may be an investment professional who is looking for a sparring partner and in need of more intensive contact; this sets high expectations for his advisor. Conversely, a client may expect comfort and simplicity, may completely trust his private banker and may take little or no initiative to keep in contact. Both types of relationships should be serviced differently in the onboarding, advice and execution. You should consider of the use of other channels, frequency of contact and the supply of more or less complex products.
Geography
The geography of a client’s wealth is a particular component indicating a type of complexity. The geography can be seen as an indicator of the type of relationship.
Risk appetite
The risk appetite of a client specifies the target return the client expects, and the risk is that he is willing to take. In addition, it indicates the investment horizon and objectives of his wealth.
Age
Age is also an important indicator to determine the type of client. It may be clear that a client that retired 10 years ago has different goals and needs to a young HNWI who is just at the beginning of his career. A specific topic to consider here is the application of technology. More and more we will see that the younger generation wants to use modern technological tools.
Origin of wealth
Whether a client generated his wealth personally by means of his own business, has inherited their wealth, or has won a lottery, it all says something about the attitude of the client regarding his assets. An important variable to determine the type of customer is the origin of the assets.
Through this detailed segmentation it may be possible to define categories of relationships that have similar expectations and needs. For the bank, this means a more standardised approach for each service group of clients, where the client receives customized services and experience.
Good relationship, good for private banks
An optimal segmentation approach not only contributes to happy relationships, but is also of great importance for the private bank. A more detailed segmentation approach will make the private banks more able to effectively deal with the capital-intensive time of private bankers, while the client experiences services which are better adapted to their specific needs and objectives. There are currently too few players in the market that have found the optimal combination of product / service concepts and channels for the different client types. If an optimal mix is found, this will have positive impact on earnings.
This approach requires a transformation with respect to the current methodology; but this will soon start to contribute to tangible benefits for the customer, and also for the private bank.
Private bankers should therefore certainly take more care to provide the personal touch in banking. The choices made are then based on the concept of a personal and relation based vision. This is in the best interest of the client and the bank.
Linda Doesburg is Managing Consultant at Capgemini Consulting and is part of the expert team Private Banking and Wealth Management in The Netherlands.
She gained her experience in the private banking sector as private banker at Van Lanschot Bankiers for 6 years. (A leading private bank in the Benelux).
Linda holds a Bachelors degree in real estate.
Boudewijn Chalmers Hoynck van Papendrecht is Senior Consultant Capgemini Consulting for 4 years and is leading Capgemini’s Center of Excellence for Wealth Management, a global network of wealth management specialists within the Capgemini Group. Boudewijn holds a Masters degree in Business Adminstration at the Nyenrode Business University.
Capgemini Consulting is a worldwide consulting firm. Capgemini publishes the World Wealth Report every year, this year in cooperation with RBC Wealth Management.