How Private banking and wealth management can adapt their marketing to the new generation of customers.

Background Information

Private banking has traditionally been characterised by its exclusive and personalised services, catering primarily to high-net-worth individuals (HNWIs) with a suite of financial offerings such as investment management, tax planning, estate planning, and exclusive lending options. The core objective has always been to provide tailored financial solutions to address the complex needs of wealthy clients and assist them in growing and preserving their wealth [1].

In recent years, however, the landscape of private banking has been undergoing significant transformation due to evolving technology, shifting regulatory environments, and changing client demographics. One of the most notable changes is driven by the expectations and preferences of the new generation of clients. While the financial aspirations of the new generation might not differ substantially from their predecessors, the form and tools they prefer are markedly different. For example, nearly 80% of millennials express a preference for managing their assets using digital tools, a stark contrast to the approximately one-third of baby boomers who share this inclination [2].

The shift towards digitalisation is further highlighted by the emergence of digital payments as a core service within primary financial relationships (PFRs). Neobanks, in particular, have leveraged their strong digital payment offerings to gain a competitive edge, especially in markets where digital payments are prevalent. For instance, in Mainland China, a significant majority of consumers (92%) use digital payments, demonstrating the diminishing centrality of traditional deposit accounts in such regions [4].

Moreover, private banking is on the cusp of one of the most significant disruptions, driven not by external crises but by The Great Wealth Transfer. Experts predict that by the end of 2045, approximately $84 trillion in wealth will be transferred from one generation to the next, marking a pivotal shift that will necessitate innovative approaches to wealth management [3].

In light of these transformative trends, private banks and wealth management firms are increasingly focusing on integrating advanced technologies like AI and data analytics to offer personalised wealth management services, thereby meeting the evolving expectations of the next generation of clients [3].

Role of AI and Machine Learning in Personalised Banking Experiences

AI in Personalised Banking Experiences

Artificial intelligence (AI) has become a pivotal tool in transforming personalised banking experiences for the new generation of customers. By leveraging AI, banks can analyze vast amounts of customer data to provide highly tailored and customised services, which leads to enhanced customer engagement and satisfaction [5], [7].

The journey of AI in banking started in the 1980s with simple rule-based systems and has since evolved into sophisticated applications such as fraud detection, customer service automation, and personalised banking services [10].

AI's role in personalised banking is particularly evident in mobile banking, where it allows for the analysis of customer data to predict trends and offer personalised recommendations [7].

This capability helps banks to meet the evolving needs and market trends of their customers, ensuring they stay competitive in the industry [6].

For instance, conversational AI and generative AI are being utilised to create interactive and individualised customer experiences [6].

Moreover, the significance of AI in crafting tailored banking experiences extends beyond developed markets. In emerging markets, AI-mediated services need to be strategically implemented, considering the challenges related to infrastructure and the necessity for human intervention [8].

Despite these challenges, the potential for AI to enhance personalisation in banking remains substantial.

The impact of AI on personalisation is not limited to traditional banking channels. The advent of digital banking and open banking has further amplified the importance of delivering individualised experiences [9].

Traditional methods of personalisation, which relied on broad customer segmentation, have been surpassed by AI's ability to offer highly individualised services based on detailed customer insights [9].

Machine Learning Applications in Wealth Management

Machine learning (ML) has emerged as a critical technology in the wealth management sector, despite the slow pace of its adoption compared to its popularity [11].

Wealth management firms are increasingly pressured by competition, customer demands for digital experiences, and the need to reduce fees [11].

Additionally, the shift to digital operations, accelerated by the pandemic, has pushed many firms to seek innovative solutions for client engagement and retention [11].

One prominent application of ML in wealth management is in creating personalised banking experiences for clients. By analysing vast amounts of data, ML algorithms can provide tailored financial advice, predict market trends, and optimise investment strategies to meet individual client needs. This personalisation helps firms generate leads, enhance client relationships, and stand out in a crowded market [11].

Moreover, ML tools can automate and optimise various operational tasks, from risk assessment to fraud detection, enabling wealth management firms to operate more efficiently. The adoption of these technologies not only enhances service delivery but also supports firms in maintaining compliance with regulatory requirements, ultimately leading to improved client trust and satisfaction [11].

Communicating ESG Investment Benefits and Impact

To attract and retain younger clients who prioritise sustainability, private banks must effectively communicate the benefits and impact of their ESG (Environmental, Social, and Governance) investment options. ESG represents a set of standards that measure a company's impact on the environment and society, as well as the quality of its governance [14].

ESG reporting involves disclosing environmental, social, and corporate governance data, which allows businesses to benchmark and track their progress in these areas [14].

This transparency satisfies the information requirements of key stakeholders, including younger investors who place a high value on sustainability [14].

Private banks need to highlight the long-term value and transformative impact of their ESG strategies. EY, for instance, offers long-term value teams that help shape strategies, drive transformation, and measure progress in providing sustainable value using the WEF-IBC’s common metrics [13].

Banks can adopt similar approaches to showcase their commitment to sustainability and the potential long-term benefits for their clients.

Traditional private banks and wealth managers often struggle to appeal to younger generations, risking the loss of these clients to competitors with more compelling proposals focused on social responsibility and client centricity [15].

As Generation Z and similar cohorts are set to inherit significant wealth, estimated between $15 trillion to $68 trillion, engaging them with ESG-focused investment options becomes even more crucial [15].

With growing concerns about climate change, many financial institutions are committing to ESG and net-zero goals. However, setting targets is not enough; banks must actively engage their customers in their ESG strategies, encouraging them to make sustainable lifestyle choices and personalised sustainability efforts [16].

This active engagement can help banks differentiate themselves in a competitive market and build lasting relationships with younger clients who prioritise environmental and social impact.

Digital Tools and Platforms Preferred by Millennials and Gen Z

Private banking and wealth management services need to adapt to the preferences of Millennials and Gen Z by leveraging specific digital tools and platforms. These younger generations, especially Gen Z, are deeply integrated into the digital world, utilising a wide array of devices such as phones, tablets, watches, computers, and TVs simultaneously, making them the first digital-first generation [18].

Gen Z, born between 1997 and 2012, has grown up amidst significant technological advancements and economic crises, which have shaped their financial habits and preferences [22].

They frequently use peer-to-peer (P2P) payment apps like Venmo for their convenience and social media features, which allow them to see and comment on friends' transactions [20].

This preference for seamless and interactive digital tools is crucial for financial institutions to understand.

AI-powered financial apps are increasingly popular among Gen Z, who are known for their tech-savviness [19].

These apps enhance customer service, optimise costs, and offer valuable new products. AI technologies, including chatbots, fraud detection systems, and task automation, have become integral in how Gen Z interacts with financial institutions. As Dennis Gada from Infosys mentions, for Gen Z, "banking or financial services is an extension of their lifestyle," with a higher level of trust associated with more digital banks [19].

Moreover, social media platforms like TikTok, Instagram, and Twitter play a significant role in how Gen Z seeks and consumes financial information [21].

These platforms provide financial insights and advice, influencing their banking habits. Financial institutions need to recognize the importance of social media in their marketing strategies to effectively engage this generation.

To successfully capture the attention and loyalty of Gen Z, financial institutions must offer digital tools and services tailored to their interests and habits. Integrating seamless technology, creating engaging audio/visual content, and hosting events geared towards their preferences can help build lasting relationships with this tech-savvy and financially sophisticated demographic [17].

Ensuring Data Privacy and Security

Ensuring Data Privacy in Private Banking Using AI

In an era where Artificial Intelligence (AI) reshapes financial services, dramatically improving operations and revolutionising customer experiences, the imperative of data privacy and security has emerged as a number one priority for business leaders [23].

The integration of AI in private banking introduces numerous benefits, such as personalised customer service and enhanced operational efficiency, yet it also poses significant challenges regarding data privacy and compliance [24].

AI technologies enable banks to implement advanced data protection strategies that are both proactive and reactive. These strategies include AI-driven data protection mechanisms which enhance the security measures to safeguard sensitive customer information [25].

Furthermore, AI privacy enhancement technologies play a crucial role in maintaining customer trust in financial services by ensuring that data privacy is not compromised [25].

As banks and financial services firms increasingly adopt generative AI, they are discovering its potential to revolutionise various facets of their businesses, from customer service to document processing and external marketing. However, while the potential of generative AI in improving customer experience and generating significant financial value is substantial, ensuring robust data privacy and security remains paramount [26].

Banks must be meticulous in evaluating the platforms they use for integrating AI to mitigate privacy risks [26].

Moreover, as AI systems rely heavily on vast amounts of data to function and make decisions, the importance of data privacy in these systems cannot be overstated. The digital age has heightened public awareness of data privacy issues, prompting calls for stricter regulations and ethical considerations in AI technologies [27].

Consequently, financial institutions must prioritise data privacy and security to maintain regulatory compliance and protect customer data while leveraging AI to enhance their services.

Security Measures for Big Data in Wealth Management

As custodians of large amounts of money and data on high net-worth individuals, wealth management firms can make appealing targets for threat actors. In fact, twenty percent of cyberattacks reported to the UK’s Financial Conduct Authority (FCA) in 2018 were targeted at the wholesale and investment management sector [28].

Despite this, the sector has only recently been making large-scale efforts to improve its cybersecurity measures.

Cybersecurity in wealth management refers to all the practices put in place to protect clients' sensitive information, their portfolios, and internal company data in the digital realm. It is crucial for both organisational security and client trust. Cybersecurity in this context involves several key areas, including network security, application security, information security (in compliance with laws such as GDPR), operational security, disaster recovery, and end-user education [29].

Given the evolving landscape of AI and big data, private banking and wealth management firms must ensure robust data privacy and security measures to tailor services for the new generation of customers. By implementing comprehensive cybersecurity strategies, firms can safeguard their operations and maintain the trust essential for client relationships in this digital age.

‍

Sustainable Investment Strategies

Sustainable Investment Strategies for Private Banks

Private banks can leverage a range of sustainable investment strategies to ensure their offerings are both competitive and genuinely impactful, thereby building trust with younger clients who are increasingly skeptical of greenwashing. These strategies include the identification of sustainable investment approaches that align with clients' personal values and the use of a comprehensive sustainable investing framework [30].

One effective strategy is integrating Environmental, Social, and Governance (ESG) ratings into investment decisions. ESG ratings are a numerical measure of a company's performance on various ESG topics, with lower ESG-risk ratings indicating better management of these risks [30].

This approach involves screening equities and bonds with an ESG Select screen to exclude companies flagged for high ESG risks [30].

The concept of sustainability in investment has deep roots, tracing back to the 1987 UN report "Our Common Future," which emphasised the need for significant changes in international economic relations to meet the needs of the present without compromising future generations [31].

This has evolved into a mainstream investment theme, particularly with the establishment of the UN's 17 Sustainable Development Goals, which address energy consumption, social justice, biodiversity, and economic growth [31].

Private banks are encouraged to blend sustainable investment criteria with traditional financial analysis to uncover new opportunities, better evaluate and manage risks, and align investments with clients' values while seeking competitive returns [32].

This can be particularly effective in an era of rapid technological innovation, where companies leading in innovation are well-positioned for growth [32].

Additionally, the landscape of sustainable investing has significantly evolved, with increased mainstream acceptance and regulatory frameworks like the EU taxonomy and SFDR shaping the industry [33].

Studies, such as the fourth edition of the "Sustainable Investing Capabilities of Private Banks" report, highlight that private banks must focus on sustainability strategy and governance, sustainability risk, the range and depth of sustainable investing products, and client interactions and reporting to remain competitive [33].

By adopting these strategies, private banks can effectively cater to the new generation of clients who prioritise sustainability, thereby fostering trust and long-term relationships.

Avoiding Greenwashing in Sustainable Investments

The number of sustainable investment options is rising dramatically, yet sustainable claims are currently no more than assertions [34].

To build trust with younger clients who are increasingly skeptical of greenwashing, private banks need to implement specific strategies to ensure their sustainable investment options are both competitive and genuinely impactful.

One effective approach is for private banks to conduct thorough due diligence and continually monitor the sustainability claims of the investments they offer. This ensures that the marketed green credentials are not merely superficial [34].

Additionally, they should leverage recent regulatory labelling interventions, which aid in decision-making by providing clearer guidelines on what constitutes a genuinely sustainable investment [34].

Another crucial step is transparency. Private banks must provide clear, detailed information on how their sustainable investment products achieve their goals, backed by verifiable data. This transparency allows investors to challenge assertions and align their investments with their sustainability objectives more effectively [34].

The recent USD19 million fine paid by Deutsche Bank’s subsidiary, DWS, in September 2023 for greenwashing underscores the significant risks associated with making misleading sustainability claims and highlights the importance of accountability in ESG investments [35].

By adopting these strategies, private banks can build stronger trust with the new generation of clients, ensuring that their sustainable investment options are both impactful and reliable.

Financial Management Behaviours of Millennials vs Gen Z

Millennials and Gen Z, the largest generational demographics in the U.S., are reshaping consumer behaviour and the financial landscape [39].

Born between 1981 and 1996, Millennials, and Gen Z, born from 1997 onwards, have unique financial management behaviours shaped by their digital upbringing [37].

Millennials are currently the largest driver of net new loan demand and will continue to be significant in the lending market for the next several years [39].

This generation generally exhibits cautious optimism about their personal finances despite ongoing financial insecurity [36] .

They are more likely to have experienced financial instability firsthand, which influences their financial decisions.

On the other hand, Gen Z faces substantial anxiety regarding job security and long-term financial stability. The economic volatility and job market uncertainty, exacerbated by events such as the massive layoffs seen in 2022 and 2023, have heightened their distrust towards employers and increased their job-related stress [38].

Despite this, Gen Z is quickly adapting to financial technologies, with up to 80% of smartphone-carrying members already utilising mobile banking [39] .

This early adoption of digital financial tools is a key characteristic that differentiates Gen Z from Millennials, who have generally transitioned more gradually to digital banking solutions.

Both generations show a cautious optimism about economic improvement, yet they continue to grapple with financial insecurities and stress, albeit in different contexts and magnitudes [36], [38].

Financial institutions must recognise these nuanced behaviours and preferences to tailor their services effectively to these digitally savvy and economically cautious generations.

‍

Want to explore more about how to meaningfully communicate with your audience? 

Book your first discovery moment here

‍