Digitalisation continues to have a significant impact on the business and operating models of financial institutions worldwide. A recent joint study¹ by KPMG Luxembourg and the Private Banking Group Luxembourg examines the extent of this impact on private banks in Luxembourg on strategy, organisation and culture, customer experience and distribution and sales. The findings across these areas reveal some interesting insights and similarities with the evolving offshore wealth management landscape in Hong Kong.

We continue to observe that the degree of digital strategy implementation among private banks in Hong Kong varies significantly. In our view, only a few private banks have genuinely identified, analysed, selected and implemented fintech solutions, with most applications still in the proof of concept stage or around specific add-on use cases – such as portfolio reporting – instead of integrated front-to-back digital capabilities. Our observations in Hong Kong are aligned with the Luxembourg Private Banking report, which shares similar findings.

In addition, digital transformation remains high on the agenda for financial institutions globally, and therefore the digital strategy of the organisation is often set at group level. Since many private banking entities in jurisdictions like Hong Kong and Luxembourg are subsidiaries, their digital strategy is often defined elsewhere. The challenge of having a centralised digital strategy is that it might not cater to regional client expectations and local regulatory requirements. We expect this to continue to be an important issue that the Hong Kong operations of global private banks will need to address in the next few years. 

Most of the surveyed banks in the Luxembourg Private Banking report do not foresee a major challenge with regards to digital acceptance among their relationship managers (RMs). On the contrary, digital is largely seen as an enabler rather than a restraint or threat, with private banks viewing digital transformation as an opportunity to increase their attractiveness as an employer. This is in line with the findings from the recent joint KPMG China and Private Wealth Management Association report² (HKPWM Report) on Hong Kong’s private wealth management industry, which state that technology will lead to a fundamental shift in the role and skills of RMs. A number of the private wealth management senior executives surveyed for the HKPWM Report expect technology to enable RMs to spend at least three-quarters of their time servicing clients in five years’ time. We predict that enabling RMs to spend less time on administrative work and more time facing clients will enhance their understanding of client needs, improve service delivery and make the RM role more attractive and more effective. Indeed, the ability to attract, retain and incentivise talent will be increasingly crucial for wealth managers to stay ahead of their peers in an increasingly competitive market.

In Luxembourg, most surveyed private banks believe that wealth management will remain a “people business”, with the digital component serving as an enabler to serve clients better rather than something that will completely displace the RM workforce. Similarly, in Hong Kong, wealth management clients are increasingly demanding digital experiences, but still expect personal face-to-face interactions with their advisors. This is emphasised in KPMG China’s recent Customer Experience Excellence Survey^,3 which finds that customers, particularly in Hong Kong, still value human interaction. For traditional wealth managers, a key area of focus will be to deliver a consistent and seamless experience across physical and online channels.

Client onboarding and client data management are the primary digital priorities for private banks in Luxembourg. However, these banks are also aware that the full digitalisation of the onboarding process may not be possible in the foreseeable future due to more stringent KYC and suitability requirements, as well as the complex nature of the products and services offered compared to in retail banking. In Hong Kong, onboarding is continuously cited as one of the biggest obstacles to a smooth and seamless client experience. With an average onboarding time of 40 days in Hong Kong, KYC, AML and suitability rank highest on the resource and budget spend agenda, according to the HKPWM Report. The issue however is not one of process or data but in corroborating clients’ source of wealth.  That said, aiding the onboarding process by deploying mobile and workflow tools to enable RMs to perform all related administrative tasks during remotely held client meetings will help.

Another area of focus is around client communication channels. In Luxembourg, 65 percent of the surveyed banks say that their clients expect mobile app communication with their RM. This creates a considerable conflict between customer experience expectations and compliance requirements, and many banks are still considering the best way to address this issue. This is also the case in Hong Kong, where customers have similar communication channel requirements – such as via WeChat for Chinese clients. Private banks in the region continue to work on solutions to enable the compliant use of mobile communication apps, particularly by addressing message archiving and the use of voice and video call features.

Luxembourg private banks are currently making limited use of technology in their distribution and sales strategy. This is largely due to existing legacy systems and the lack of Application Programming Interface (API) connectivity, hindering a fully-fledged integration of front-end client applications into the bank’s IT backbone. In addition, cybersecurity concerns around remotely accessible private banking applications represent an additional barrier.

This issue has been recognised by the Hong Kong Monetary Authority, which launched an Open API Framework for the banking sector in July 2018. This framework allows (but does not require, unlike the European PSD 2 Directive, which focuses on payments) banks to open their internal system infrastructure to third party service providers (TSPs) for direct data exchange. This is a fundamental requirement of TSPs to deliver complementing services – such as product or account information, and transactions – without friction. The aim of this framework will not only enhance the banking client experience while adhering to international standards of security, but it will also encourage closer cooperation between banks and technology companies.

In addition, client data is not being sufficiently leveraged to obtain enhanced customer insights. Less than 15 percent of the surveyed Luxembourg private banks are leveraging any form of data analytics or artificial intelligence, and about half of them are performing basic data mining through manual queries and analysis. The HKPWM Report confirms this as well for Hong Kong, with big data analytics of customer preferences and cross-selling opportunities ranking particularly low in terms of current availability.

Technology used in the front office tends to focus on basic digital functionalities for portfolio reporting and consultation. Less than half of the surveyed Luxembourg private banks offer dynamic (generated on demand) investment reporting tools, despite perceiving these as high value added services for clients. Transaction capabilities top the list of digital themes, with nearly two-thirds of respondents offering or planning to offer securities execution functionality. The picture differs with regards to B2C robo-advisors – for example, automated portfolio management and rebalancing according to a client’s risk profile without the intervention of a human portfolio manager or RM. Only 15 percent of the surveyed private banks would consider such an option, and here only to automate the servicing of the lower private banking client segments. The biggest potential for robo-advisory in both Luxembourg and Hong Kong is mostly seen for internal purposes, for example to support the investment manager and RM.

Current trends in Hong Kong’s wealth management industry paint a similar picture. Non-dynamic portfolio reporting tools as well as access to research currently top the list of digital client capability readiness. However, there is an expectation that technologies will be launched or implemented within the next two years that enable more sophisticated products to be traded online, as well as tools that help RMs to perform their roles more efficiently and effectively. This resonates particularly with the next generation of clients. Fifty-eight percent of private banks surveyed in Hong Kong disagree that current industry practices in wealth management are well-suited to the next generation of clients, citing the top three next-gen requirements from their wealth managers as “holistic digital multichannel delivery”, “self-service platforms” and “access to global research and products”.

In summary, the digitalisation of financial services is only going to increase. Against the backdrop of an increasingly competitive wealth management landscape in the region, it is our view that the financial institutions that can effectively leverage technology to drive operational efficiency and enhance client experiences will secure a major advantage.

Read the full Luxembourg Private Banking Report here.

Read the full Hong Kong Private Wealth Management Report here.