The forever banks - how private banks are still unfazed by disruption

Samuel Rueesch

7th May 2024 • 5min read

In the past decade, the banking industry has seen an incredible amount of innovation and disruption. New entrants like Monzo in the UK and Nubank in Latin America are finally taking on the incumbents that, for decades, were impossible to challenge.

With more and more market share lost to these newcomers, incumbent banks are being forced to step up their game and start innovating themselves. We might think that by now, each field of banking is facing the same existential threat of being disrupted by younger, more nimble companies. Yet, one segment of banking seems to be unfazed.

In the world of private banking, the old guard still holds sway without any significant new challengers. But what protects these traditional institutions from change? What makes the world of private banking so intriguingly resistant to innovation?

The origins of private banking

When thinking about private banking, the initial image that often springs to mind is that of a sharply dressed wealth manager situated in a gleaming marble office, enjoying panoramic views of the Jet d'Eau in Geneva—a stereotype not solely perpetuated by Hollywood portrayals like Scorsese's ‘The Wolf of Wall Street’. Yet beyond all the stereotypes, private banking is actually a fascinating part of banking. In fact, it could be argued that private banking at its core is the purest form of banking still in use.

Modern banking traces its roots back to Renaissance Florence and Venice. Families such as the renowned de Medici were involved in managing deposits, loans, and international payments for affluent individuals in the Italian republics and city-states of that time. This practice was later formalised in countries like the UK where goldsmiths transitioned into banking. They issued receipt notes for deposited and borrowed gold, which served as precursors to banknotes and laid the groundwork for the establishment of large private banks. 

Similarly, in Switzerland, the Protestant Reformation led by John Calvin in the 16th century created a secure refuge for European Protestant refugees, who brought with them wealth and financial expertise. This influx of skilled banking professionals contributed to the growth of private banking institutions such as Pictet, Credit Suisse, and UBS.

Even though private banking nowadays presents a much more complicated portfolio of services than back in time, still the most essential service at its core is to safekeep deposits for wealthy individuals. This is exactly the same core service that the de Medici were offering in Florence when they pioneered the start of European modern banking.

It is not a coincidence that UBS’ marketing strategy resembles that of Rolex rather than a high-street bank

The new players in town

New fintech startups are trying to innovate in the private banking space. The accelerator Y-combinator in particular seems to be interested in ventures disrupting the scene, having repeatedly invested in neobanks like Onyx or Letter that want to become a “digital private bank”. 

But not all startups are targeting end clients, most are trying to offer products or services directly to banks, wealth management firms, and their advisors, helping them with back office and making them more efficient. B2B propositions could especially benefit from the current advancement in AI. Lots of ventures are now trying to augment the advisors rather than completely taking them out of the loop.

It’s promising to see so many new entrants trying to challenge the status quo. Only time will tell how successful they become and how larger incumbents deal with this new wave of innovation. What is certain is that building a private banking fintech vastly differs from one tailored to retail clients. It appears to be a far more daunting challenge given the fundamental differences that simply can't be ignored. 

Four things that make private banking unique 

1) Private banking is boring (by design)

Private banks should focus on their core business of keeping deposits safe and providing a small but consistent return to the depositors - and not much else. The moment that they take on riskier activities, there is a risk of losing trust (see Credit Suisse). This also applies to technical innovation where the typical “move fast and break things” mentality won’t fly with a client base that is more concerned about security and generational wealth preservation than about getting the best technological experience.

2) Complex financial lives

Wealthier individuals often have their wealth distributed in multiple investments, banks, and geographies. They might have an art collection in France, two bank accounts in Switzerland, and a couple of real estate investments in the US, so having a clear overview of their total wealth is hard. Yet, often you need to have it to provide a good financial service. This is what a lot of startups are struggling with. Where in retail banking we have mandated open banking laws that help to stitch banking information from different institutions together, open wealth is not there yet. 

3) High fees are part of the experience 

The typical playbook of fintech companies is often to aggressively undercut market fees in order to quickly build up a customer base. Revolut did it by slashing expensive card and withdrawal fees, Wise did it by lowering the fees for international money transfers. However, private banking doesn’t quite work like that. Private banks function as luxury products or services, and, as Thorstein Veblen theorised, demand for luxury products increases as the price increases. This presents challenges for new private banking entrants to innovate around pricing since high prices are typically not a concern but rather an integral part of the service.

4) Private banking has a different user interface

While much of the attention when building new fintech companies goes into improving the digital interfaces, in private banking, you are competing with another type of interface: wealth advisors. A good advisor knows the client, their family, their needs, and if there is a problem or a need for something, the client doesn’t usually use an app, they just call. This basic but very functional way of interacting with banking services makes it very challenging for digitally-native startups to improve the experience by simply developing a better app. If they can’t differentiate themselves on the digital experience, it becomes difficult to innovate on the physical or human one. 

The all-mighty Great Wealth Transfer may be the biggest risk that private banks face.

New demographic, new opportunities

The decades, if not centuries, long head start that legacy banks have had in building up an image of trust and reliability are exceedingly challenging for startups to replicate. However, there is cause for optimism. It may not be a groundbreaking technological innovation like AI that will drive significant change, but rather a simple yet powerful demographic shift.

The all-mighty Great Wealth Transfer may be the biggest risk that private banks face. Trillions of dollars being transferred from their existing clients to the new generation could cause a massive outflow of deposits. It’s already widely reported that inheritors, who might not share the same level of loyalty as their older relatives, are likely to change their financial providers once they inherit. They might switch to institutions that are progressive, more digitally-enabled or are just more aligned with their values. 

Pressured by these new demands, the incumbents simply have to become more innovative. If they don’t, there is a clear risk that new entrants better at addressing the needs of a younger generation will start eating away at their market share.