The current crisis presents an opportunity for Swiss players to increase global market share and profitability.
This will be driven by three main client demands over the next decade:
- Wealth preservation
Swiss private banks are uniquely placed to respond to these client demands.
The last decade wasn’t that great for Swiss private banks. Despite exits and mergers, costs remain high, driven partly by ever-increasing regulatory costs, and new business growth was challenging. This left the profitability of many private banks too tied to equity market performance, something they cannot control. You can see this by using mid-cap player Julius Baer and regressing its performance against the European market.
In 2019, KPMG wrote:
Many management teams seem to be hoping for better times rather than focusing on performance improvement.
… the key ratios for the industry have worsened or remained unchanged for 10 years or more as banks have failed to take advantage of the good times to improve.
Philipp Rickert, a co-author of their report, concluded that “Switzerland doesn’t need more than 20 private banks”. The other co-author, Christian Hintermann, said “I don’t know how many people would cry if they disappeared [i.e. 80% of the private banks].”
Well, I’ll tell you who might cry: people around the world who want to protect their wealth and make their money work harder for them. A significant number will turn for help to Switzerland and its private banks, who have lived through crises from religious persecution to the Napoleonic wars, from the Spanish flu to stagflation.
The Coronavirus impact
The future with Coronavirus is uncertain. The policy response has been a dramatic increase in money printing and purchases of low-quality debt. Two results of this action are quite likely: asset prices will rise and yields will remain low.
Two charts tell us our past and future:
Take away: The purchasing power of the US dollar, like all currencies, has declined over the past 100 years, and will continue to decline over the next decade. Don’t live in the US? Well, the dollar makes up 88% of global trade so you are exposed to dollar risk via consumption and your home currency is probably worse than the dollar.
The opportunity drivers play to Swiss private banks’ strengths
This new era presents the opportunity to be a golden age of Swiss private banking, based on safety, openness and helping clients make their money work harder for them.
Concerns about local currency and financial system weakness will be many people’s number one concern over the next decade. Switzerland, as a country, has been the global standard for centuries as the place to keep your money safe. Private banks need to make this their number one sales pitch.
Banking, like all good human relationships, is based on trust. Clients will increasingly demand transparency, so they can be reassured about their wealth. Swiss private banks should radically adopt openness towards clients, not just for moral reasons, but because it will be good for business. You do more business with people the more you trust them.
Here, again, Swiss private banks have an advantage: Switzerland has embraced blockchain technology more than any other country. Blockchain architecture will allow private banks to prove to their clients where their funds are at all times. Clients can retain title, meaning they remain segregated from bank assets in the event of bankruptcy. Blockchain allows Swiss private banks to operate globally, from Switzerland, rather than only where they have offices. It opens the world to the advantages of banking in Switzerland.
The past decade has seen a war on savers. It will get much worse in the years to come. The clients who come to Swiss private banks for safety will turn to them for help in making their money work harder for them. The answer cannot be to push them into riskier or illiquid assets to get yield. Clients instinctively know that commercial banks earn a good rate of interest on lending and pass little of them on to depositors, regardless of how wealthy you are.
Swiss private banks need to have an answer for savers. The answer surely involves technology and global trade. A disproportionate amount of global trade passes through Switzerland: 35% of all oil trading, 50% of coffee and sugar, and 60% of grains and metals go through the country. Private banks need to exploit this Swiss advantage. This is going to be one of the biggest problems to solve for clients for the foreseeable future.
As savers ourselves, fed up with low rates in the bank, we decided to create a financial technology company based in the safety and security of Switzerland. The result is FluidFi SA, a regulated firm that combines decentralization + blockchain technology + insurance. We’ve tested it with our own money. It is designed to be everything that the traditional financial system is not: transparent, honest and low risk. It is our effort to help other savers make their own money work harder for them.
 Source: Bank for International Settlements, Triennial Survey of turnover in OTC FX markets, 2019.