According to a study carried out by EY, “Digital Disruption and the Game-Changing Role of Technology in Global Wealth Management, 2015”, Luxembourg private banks have been cautious in their IT investments, wary of the digital revolution ahead.

The study sheds light on the costs, priorities and IT applications through an international comparison, which includes Luxembourg. It was originally undertaken only in Switzerland, but given the prominence of wealth management activities in the Grand-Duchy, the study was extended to include Luxembourg and Singapore also. 

EY’s advisory team interviewed almost thirty representatives of private banks in the three centres, including both local and global players in the industry. This offered a suitable basis for surveying relevant IT benchmarks in terms of costs, services and the development of information technology, with a special focus on the impact of digital on wealth management.

After years of stability, in the wake of the financial crisis, the wealth management industry is now undergoing fundamental changes. Increase in regulation costs, regulatory constraints on revenues like inducements, tax transparency, customer’s evolving demands, wealth creation shifting to Asia-Pacific, pressures from non-traditional players or disruption of the traditional value proposition by the digital evolution, are many of the challenges faced by the industry. In this context, the importance of information technology has risen sharply, as a means of countering cost pressure on the one hand and facilitating new business opportunities on the other hand.

How is IT in wealth management responding to these challenges?

Digital technologies are rapidly converging in the wealth management industry

Denis Costermans, Directeur Associé, Advisory specialised in Private Banking, said: “This year’s study has put an emphasis on a particular context affecting the industry and the way IT is expected to evolve: digital in wealth management. Luxembourg private banks are cautious in their IT investments at the dawn of the digital revolution, according to EY’s study analytics and cloud computing are increasingly relevant for the industry. Digital is one of the drivers for change in Private Banking and most wealthy individuals are strong adopters of digital approaches”.

Digital technologies are fundamentally transforming how the client is served and how operations are conducted. This transformation is well underway. When investing, many banks however focus their digital investments on customer-facing solutions, while ignoring that they can extract so much value from digital, if not more, from front to back office process improvements. The survey shows that digital is actually about the conversion of the entire value chain, including front-office productivity and operational excellence.

Costermans commented: “The survey clearly illustrates the true benefits of going digital, from a revenue and cost perspective. However we also see that the wealth management industry is only slowly entering the digital age, creating a gap between customer expectations and banks’ proposals. Non-traditional players are entering the markets, which may force traditional players to speed up investments”.

Compliance requirements and optimisation questions still dominate IT

Compliance with regulatory requirements and information security are top priorities for CIOs (respectively 92% and 72%). Automation of customer processes and further cost or operational optimisation are also considered as top priorities. Only 48% of respondents viewed the use of mobile devices and apps as important relationship management factors, while social media and cloud computing fail to make an impact at all (4% and 0%).

Olivier Maréchal, Partner and Head of Financial Services Advisory at EY Luxembourg, explained: “Those results show that IT is clearly a key enabler to respond to strategic and operational questions related to compliance or operational efficiency. We also observe that CIOs have their own agendas to contribute to optimise the overall costs. We can however deplore that many traditional private banks shy away from using IT for essential innovation in the customer interface. The Asian market plays a pioneering role in this area – for example Singapore where a tech-savvy attitude appears to prevail, with one in three respondents attaching great importance to social media. Somehow we will also have to face this challenge, because of the pressures from clients, from new digital entrants and from the new generation”.

International IT cost comparison

IT costs in comparison to overall costs in private banking for the Luxembourg financial service providers amounted to 15.8% on average, showing a slow but constant increase from year to year, from 15,5% in 2009 to 16,2% in 2013. The situation is the same when expressed as IT cost per employee, from $35,000 in 2009 to $43,000 in 2013. The cost of IT in the total operating expenses is lower in Luxembourg than in Switzerland (16,4% on average). Singapore, compared to the two other regions, appears to be underspending on IT, with an IT cost ratio of 12.8%.

In addition to the total IT costs, personnel costs were also considered in the EY analysis. In Luxembourg, based on our sample, an internal IT employee in private banking costs $136,000 (including all non-wage labour costs). This figure has increased by 6% since 2009 ($128,000), whereas the personnel costs for general bank employees has increased by almost 12% over the same period (2009: $136,000, 2013: $152,000). The situation is different in Switzerland where there is a 36% higher cost per IT employee ($185,000), more or less constant since 2009, with the personnel costs for general bank employees falling by almost 10% over the period (2009: $252,000, 2013: $230,000). In Singapore the costs per IT employee in 2013 amounted to $129,000 (general staff: $189,000) versus $127,000 (general staff: $195,000) in 2009.

Olivier Maréchal commented: “When we further look at how budgets are split between “run the bank” and ‘change the bank’, the figures in Luxembourg remain stable over years at around 40% for the ‘change’ part, which is not an evidence of a growing investment in innovation. Singapore on the contrary is proving very innovation-friendly, with fast growing figures. As a result of growing digitalisation of the value chain in private banking, new fields of application are set to emerge for IT, like the integration of mobile, social media and big data. These digital technologies open up a multitude of opportunities and IT will have to take on a driving role in the integration of such tools if banks are to fully exploit the opportunities these technologies offer”.

IT standard platforms as the most common choice

The study also investigates which architecture model of the core banking platform entails the highest and lowest costs across the three countries. Here, the distinction was made between three groups of private banks: those that mainly use a “standard IT platform”, those that rely on a “self-developed platform” and a third category using a broad mix or a “best-of-breed platform”. Standard platforms and self-developed platforms are almost equally expensive on average, at about 15% of the overall costs of a private bank. Best-of-breed approaches made of several banking packages often further customised are significantly more expensive, amounting to 21%.

Pascal Vaucouleur, Directeur Associé leading IT Advisory at EY Luxembourg said: “The standard platform, based on an integrated package, clearly holds a predominant place in the Luxembourg wealth management industry. This approach is efficient to transfer development costs to the software provider and to enable increased automation of business processes. We observe that a wave of core banking transformation hits the industry, and not only in Luxembourg, with two strategies: strategic investments in platform migration and tactical investments in IT architecture simplification, all combined with operating model redesign and a strong involvement of users”.

Towards a profound change in the IT operating models

Several developments have forced IT to evolve: digitisation of wealth management, business becoming tech-savvy, increasing IT outsourcing opportunities, time-to-market becoming more critical, need for close relationships with business, to name but a few.

Based on the interviews conducted with executives, the study observed that IT is still reactive today and the capacity to support the digital agenda can be challenged. It will require top quality technology talents and superior organisational agility to adapt rapidly and in a cost effective manner.

The survey concluded on the opportunity for two IT models to coexist in companies: a traditional model at optimised speed and a second “high speed” model to support digital development. The “high speed” operating model is challenging: it must support the business in generating benefits quickly by building modular components that can be quickly combined in solution architectures.