Who's the Next Skype of Private Banking?

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by: Alexander Osterwalder

I'm a little bit obsessed with the question of who could become the next Skype of private banking since I started doing research in this area. I'm wondering if the private banking and wealth management sector could be just as vulnerable to disruption as any other "ordinary" industry (e.g. Skype in the Telecom market, EasyJet in air transport, …).

As a reminder a short quote summarising the concept of disruptive innovations which was introduced by Harvard Professor Clayton Christensen:

A “Disruptive Innovation” is a successfully exploited product, service or business model that significantly transforms the demands and needs of a mainstream market and disrupts its former key players.

There are some arguments speaking in favor of a possible disruption of private banking and wealth management incumbents, such as UBS, Credit Suisse, Pictet, HSBC and there are arguments speaking against it. Two reasons why disruption could happen:

  1. The sector is very lucrative with high margins and growth rates – this naturally attracts potential insurgents. I remember Niklas Zennström from Skype telling me in an interview: "We deliberately chose to disrupt the Telecom sector with our technology because it looked very attractive".
  2. The big actors in this sector admit competition, but they don't seem overly concerned by it. Why should they? Their returns are still stellar and the market is growing. However, this has led to a certain sluggishness that makes them vulnerable to potential insurgents coming from outside of their radar screen.

Two arguments speaking against a potential disruption:

  1. Brand names reflecting stability and security are still of enormous importance in private banking and wealth management. This constitutes an important barrier to entry for new and upcoming actors (more in some regions like Europe than in others like Asia).
  2. Over time switching costs increase in this sector. Once a private banking relationship has been established for over 2 years the probability of a client defecting decreases substantially. This can be explained by the personal relationships and the knowledge in terms of wealth management that a bank builds over time for each of their clients.

Obviously, we can't know how private banking and wealth management will look tomorrow, since we don't know the future. However, we can launch a search for potential insurgents or at least promising new players. To search, find and analyze these potential insurgents we can start by asking ourselves a number of questions based on the characteristics of disruptive innovations and study if they could apply to private banking:

  • Disruptive innovators begin their success by meeting the unfulfilled needs of an emerging or niche market.
    Private Banking: What are the unfulfilled needs and niche markets?
  • Disruptive innovations are characterized by innovative performance attributes that are not initially appreciated by mainstream markets, though they are highly rated by niche market customers (e.g. Skype). Mainstream market customers as well as competitors value different performance attribute sets and therefore view the innovation as substandard.
    Private Banking: Which innovations (products & services, business models, technology, processes) are perceived as substandard?
  • Niche market adoption of disruptive innovations enable investment in the product, service or business model to increase its performance. They can then create or enter new niche markets and expand customer numbers.
    Private Banking: Which disruptive innovations have already conquered a niche market and are expanding customer numbers?
  • As awareness of the product, service or business model increases, they change the mainstream market's perception of what it values.
    Private Banking: Is any disruptive innovation already changing the incumbents' market?

In conclusion, even if private banking and wealth management proves resistant to disruption each player has to ask himself how the playing field might look tomorrow. In that light questioning the state of private banking and wealth management is definetly not a waste of energy…

Original Post: http://business-model-design.blogspot.com/2006/12/whos-next-skype-of-private-banking.html