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Private Banking

Private Banking is a segment of the Financial Services industry that caters to High Net Worth investors (HNWI). The primary financial planning services provided to this High Net Worth market are Cash Management, Asset Management, Liability Management, Estate Planning and Tax Planning. Some of the more boutique firms have branched out into Concierge Services and Family Legacy Counseling for their clients as well. Typically, private banks have a minimum investable net worth of $1 million or greater that investors must reach in order to become a client. 

This minimum net worth size ensures that Private Banking Clients are larger than the average Retail Client, which allows Private Banking Advisors to personalize their service model and tailor their services toward the needs of the client. The competition for clients has grown over the years, which has caused private banks to increase their service offerings and lower the fees they charge. The increased service and lower fees have decreased the overall margins that can be achieved in the Private Banking segment of the Financial Services Industry.

The China Market

The expansion of China’s economy over the past two decades has started an expansion in the size of the HNWI market in China that is likely to continue, possibly at an increasing rate. According to Capgemini, the number of HNWI in China has increased at an annualized rate of 12% since 2006 and has grown to a total number of just over 525,000 in 2010. These clients held approximately $2.35 trillion in 2009, which means that the average net worth per investor was almost $5 million. This average value is slightly higher than other countries in Asia or even developed countries in North America and Europe. This concentration has been skewed upwards due to the fact that the wealthiest 128 people in China, all billionaires, hold almost $250 billion, or greater than 10% of the total wealth of HNWI. Boston Consulting group believes that wealth in China will grow at an 18% annualized rate over the next 5 years, which will allow the Private Banking Institutions to pursue new business in a growing market, which will decrease overall competition.

Market Participants

Private Bank Participation Methods

Private Banks have entered the China market using three basic strategies. The first strategy is a Joint Stock Bank, where a local bank partners with a foreign bank and they offer services under the joint umbrella. An example of this is the partnership between Agriculture Bank of China and Bank of Montreal. However, this particular example is structured more as a Cooperation Agreement and not necessarily a Joint Operation. The Bank of Montreal will provide cross border services to ABC clients and vice versa. There have been other examples of Joint Stock Banks in the past, but most of the foreign banks have pulled out and discontinued the partnership.

The second strategy is a Foreign Owned Bank, where a foreign bank builds its own branches in the country. The most successful example of a Foreign Owned Bank is HSBC, headquartered in London, which has worked its way to the number one private banking spot in China according to The Financial Times. This strategy is typically viewed as the most advanced and sophisticated type of institution. However, because the Private Banking model in China is so new, the demand for this level of sophistication has not yet reached a large scale level. If a company were to enter the Private Banking market in this manner, it would typically take a minimum of 1 year to receive a Private Banking license and closer to 2 years if you do not have any banking features already established in the country.

The third strategy is as a division of one of the State Owned Banks. The most successful example of this is ICBC Bank, which was awarded the first Private Banking license in 2008 and has been named as the best Private Bank in China according to Euro money. Typically, this model is thought of as being the most reliable and secure, however, the level of sophistication and expertise is below that of the foreign owned banks. This strategy seems to be experiencing the most growth.

How Clients choose a Private Bank

HNWI in China are looking for three primary factors when selecting a Private Bank. The first is expertise, which the advisors in China are currently lacking. The average advisor in China has less than 9 years of experience while the average advisor in the U.S.A. has about 24 years of experience. Since the number of HNWIs utilizing Private Banking Institutions is relatively small and their estate planning needs are not as complex as in other parts of the world, this is not a huge hurdle to overcome. In the current environment, it is important to have some knowledge of tangible assets. As the HNWIs continue to grow in size and sophistication, expertise will be an important differentiator in attracting new business.

The second factor is customer service and relationships. The State Owned Banks have an advantage here because they already have a good bit of the commercial or retail services of the client. The Private Banking services can just be an extension of their existing services. The State Owned Banks know the intricacies of the Chinese culture and how to operate within this culture and they understand what client’s value. In regards to increasing this advantage, they understand hat they must pay for talented representatives, so they should be able to expand their customer service offering by paying up for talent. This will, however, decrease their margins in the future as competition increases.

The third factor is reputation. Foreign owned banks tend to be viewed as more advanced than the state owned banks, but they are also viewed as being less reliable in times of stress. Currently, the market does not have a need for high levels of sophistication, which means that the perception of the foreign owned banks being more advanced does not give them a strategic advantage. However, since most Chinese believe that wealth is abundant in the U.S., it may be a form of enhanced status for a Chinese HNWI to tell your friends that your Private Bank is a U.S. firm.


List of Major Competitors