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Digital First: How European Private Banks Can Rejuvenate


European banks must double down on digital services and apply Code Halo-thinking to raise their competitive standing vis-a-vis U.S. and Asian leaders.

What do “the books” of European banks currently look like? To find out, we recently crunched the numbers from 40 different reports, studies, and references. Here are four things we learned.

  • Still behind. The European private banking industry has yet to recover from the 2008 financial crisis, even as its counterparts in North America and Asia have returned to profitability. Profits in 2013 were roughly 20% less than pre-crisis levels and continue to be affected by lower interest rates and increasing regulatory costs. Revenues per dollar of assets are 18% lower than pre-crisis levels

  • More regulations. The Foreign Account Tax Compliance Act (FATCA) and other global standards taking effect in 2017 end bank secrecy in countries such as Switzerland, Luxembourg and Liechtenstein, removing the competitive advantage these nations once enjoyed to attract offshore wealth. As a result, private banks can no longer charge a premium for their services and can be fined for violating regulation. And the cost of customer management has risen by 20%–30%. Moreover, the banning of retrocession payments and complying with MiFID (Markets in Financial Instruments Directive) has added even more costs for European banks to absorb, cutting into annual profits by as much as 25% across Europe, according to McKinsey

  • Increased competition. Though Europe is battling a prolonged economic crisis and sovereign indebtedness, and is on a slower growth trajectory compared with the U.S. and Asia, its strong wealth fundamentals are prompting many American banks to expand into Europe, posing a significant threat to domestic players. The rise of robo-advisors and SMAC Stack technologies are casting another shadow over European banking industry. Software-driven advisory services such as Vaamo and Nutmeg and other digital services are attracting clients for a fraction of the fees traditionally charged for portfolio management, periodic reviews and innovative investment monitoring.

  • Diminished trust. Another worrying trend is increasing reluctance to do business with big banks. (See our related Perspectives piece.) In a recent study, the majority of 270 UK millionaires said they preferred not to work with large organizations, particularly if it meant dealing with a wide range of people, many of whom they might only speak with once. Following the global economic crisis, customers also demand better performance and more transparency on wealth management fees and investment decisions.

To overcome these challenges, private banks are investing in back-end systems to not only comply with increased regulations, but to improve their customer experience, data analytics, and reporting. They’re achieving this with SMAC Stack technologies. 

For example, digital technologies such as empowering mobile apps and video chat can improve advisor productivity by shortening turnaround times, easing compliance, improving customer service, and reducing costs. 

Four Ways Digital Saves the Bank

Digital natives are increasingly demanding different banking products and services. This group includes digital savvy independents and entrepreneurs who prefer more self-service than their predecessors. They are accustomed to products from Apple, Google, and Amazon, and they expect similar services from other industries, including banking. 

Winning in such conditions requires the following actions, according to our research: 

  • Provide seamless support to a wide range of customers, from older generations to the self-driven, digitally-rich. 

  • Offer customer advice consistently across digital (and analog backup) channels.

  • Support a greater number of customers without a dip in digital service.

Figure 1

Although some European private banks are adding basic online services and mobile apps to carry out simple transactions today, the majority of institutions — Swiss banks in particular — have yet to take serious steps to combat declining profits, lower IT budgets, and the cost of complying with new regulations and increased tax probes.

For banks interested in remaining viable long term, being “digital first” with SMAC Stack, and Internet of Things technologies is the universal answer. Here are four reasons why digital matters:

It improves customer service. 

For an industry driven by high-touch and high-quality service, digital solutions will provide new ways to engage with customers and deliver a highly personalized, seamless, and integrated experience. These technologies can reduce response time, facilitate on-demand service, and provide real-time investment information in a digestible format. 

For instance, Citi Private in View provides customers with all the details of their portfolio and allows them to drill down to better understand portfolio performance, notifications and the latest research. It also offers a single point of contact to interact with bank reps and secure cloud storage for personal and account documents. Similarly, Barclays developed a digital platform to curate customer experiences in travel, arts, and culture. By applying Code HaloTM thinking, (i.e., analyzing what customers choose and how they interact with these information services), the bank can better understand client preferences and associate those needs and desires with relevant offers.

It increases transparency. 

Banks can also offer customer apps that allow them to better understand their portfolios by comparing them with the market, their peers’ portfolios, and portfolios created by other advisors, according to this successful use case. When it comes to better visibility without the need of hiring additional “analysts” or customer support representatives, digital is the best way. 

It enhances advisor productivity. 

Just as it increases customer visibility, digital does the same for financial advisors. For instance, providing advisors with information about a customer’s banking history allows them to offer more tailored recommendations. By analyzing Code Halo data such as profiles and investment choices, private banks can create templates for high-quality advice that can be customized for new clients with similar preferences. Banks can also use social media platforms such as Facebook and LinkedIn to create exclusive groups, enabling them to deliver more meaningful customer engagement and acquisition.

It improves compliance. 

A more strict and continuously evolving global regulatory environment requires banks to be more cautious about cross-border transactions and tax laws to avoid hefty fines and reputational damage to their reputation. Here, too, digital technologies alleviate risk exposure and compliance violations with the help of automated alerts when deviations take place, both internally and on the customer side. 

Five Things Digital Requires

Digitization is not a one-time effort or investment but rather a journey toward creating a better way to interact and transact with clients. Achieving this transformation requires banks to understand and apply Code Halo thinking, revamp their existing IT infrastructure to support new technologies, and improve customer privacy. 

By working with vendors that provide modular and componentized core banking solutions, banks can cost-effectively replace systems based on their business needs and budgetary constraints. Another approach is to use middleware to reduce integration challenges and improve connectivity between core systems and new applications. Credit Suisse is a good example of this, which built a new digital organization in three to six months with the help of partner firms. 

Whatever route you take, research shows that winning “digital first” cultures excel at the following:

  1. Have a strong vision for what the digital organization will look like.
  2. Involve employees and share the vision with them.
  3. Learn from new digital entrants, customer usage habits, and other industries to refine and tailor digital services.
  4. Deploy a chief digital officer to oversee all digital initiatives.
  5. Transform in phases by starting with small, distinct customer experiences (rather than a hodgepodge of tools) before embarking on a full roll-out. 

In our experience, private banks that achieve the above with digital technologies and Code Halo thinking stand to gain significantly. This is especially true in Europe — where customers still value the highly personal touch for complex transactions but want the convenience of digital interactions for routine transactions and reporting. To that end, digital can help private banks create virtual and physical experiences that effectively blend transactional and interactional activities. 

To learn more, read our white paper Digital Transformation in European Private Banking or visit our banking practice

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Digital First: How European Private Banks Can Rejuvenate