I find that when I mention the “c” word in private banking circles I often get strained reactions. It is touch and go which way the audience...

I find that when I mention the “c” word in private banking circles I often get strained reactions. It is touch and go which way the audience responds. Indeed, in some places, if I mention the word customer I am shunned. The notion is that the private banking sector does not service customers, it serves clients. Customers are retail, clients are not. Customers get packages, clients get parcels. Customers are mass group, clients are individuals. And so on… It’s a mindset that is difficult to unseat. Perhaps one might think I am making a point out of nothing. I disagree. There are some important distinctions in my view about the customer-led model versus the client-led model and these are worth considering for private banking. In brief I will raise some of these points below and I am happy to debate these in more detail with anyone. This is not a closed book and I encourage the industry practitioners to consider closely the differences between the concept of the customer and the client for it is at the root of their whole business. Once the bankers calm down, stop thinking I am a concept junky and just playing with words, then the debate on the customer-client issue becomes interesting. It has ramifications on the future approaches to the market. Essentially, the two questions that must be answered definitively in this business (and in any commercial enterprise) are: Who, exactly, do you sell to and what, exactly, are they buying? Our view on this debate is relatively simple. Commercially, having customers is better than having clients. Yes, customers are a retail concept on one level although retail is a very subjective concept in money-terms. Nevertheless, there are more of them (the customers) and they have more commonly identifiable needs. And, they can be sold to more often. Crucially, they do typically accept packaged products and this will mean, at scale, the supplier can earn a more predictable revenue line and often with a better margin than customised solutions. In this context, in private banking, it is notable that it is significantly more profitable for banks that are active in the $500,000-$5 million mark. Often by a factor of 50 basis points or more. Recent annual work we undertook on assessing the business performance of the global private banks underscored this (The Scorpio Partnership Benchmark 2006). This is backed up data made public by UBS on the revenue streams of their different wealth segments. Indeed, more global banks are effectively lowering, not raising, their minimum investment levels to attract more clients in to private banking. At first glance this would seem wrong, but when the numbers are analysed, it is clear what is happening. The banks recognise that there is a very large base of individuals worldwide in the above asset band who are prepared to buy in to some form of “premium financial service” and if it is called private banking, they will even accept a higher payment – for the time being. And this is the crucial point. These individuals are buying into an aspiration product, perhaps even a luxury item in their mind. In return, they are receiving a packaged solution virtually every time. They do not get, nor do they often expect, a consistently personalised service. Indeed, if they do get this, they see it as a bonus and they may even pay more for it. This is particularly so in the domain of financial planning advice. Critically, these individuals are customers. Banks that are winning in this important area of private banking recognise that a customer has a voice and by responding to this voice, they actually increase their revenues not decrease them. Moreover, by making the customer experience even more consistent (and even intellectually productive) then they get more business as a consequence. The actual products being sold have not changed dramatically, the difference is in the approach, delivery and fulfilment. Stepping outside private banking, one only has to look at Starbucks to illustrate the point. If Starbucks just focused on the coffee when they were planning to launch the business, no one would really have backed them for saying clients would pay $3 for something they could get for $1 anywhere. However, by focusing on the customer experience, the customer environment and the customer outcomes they have not only introduced a new norm in coffee consumption they have dramatically increased coffee drinking expenditure, even to the extent that some people seem to drink nothing else. So what? Customer or client – it is the same thing. I don’t agree. The client-focused businesses around the world that we have looked at tend not to be scaleable. Client-led businesses concentrate on particular crafts, they demand personal contact, they typically generate less total revenue although it may appear at face value they are per capita or per unit more expensive in certain industries. They have a value in society, certainly, but from a full scale business perspective, they are less valuable. The reason for this is that they are simply not able to give enough people enough client service all of the time. Crucially, the client and the customer do have one thing in common – they are both sentient adults and, confusingly, they are able to have the two characteristics at the same time. And this is the final point of this article. If you approach a business as a client, you expect the client-type services outlined above. Indeed, that is what you are buying. If these are not delivered consistently and to your expectations, you are dissatisfied. Typically, you become really dissatisfied if you sign up as a client, but you receive a customer service of the type I outlined earlier – ie packaged solutions and low touch. Your view will be that if that is what you wanted you would go elsewhere to get it and, what you assume will be, for a cheaper price. Therefore, my suggestion is that private banks that continue with the client mind set but in reality offer customer solutions will consistently end up with dissatisfied individuals. Moreover, if these banks accepted that they are in a customer business and paid greater attention to the factors that drive successful consumer businesses they would do much better. Making the customer king does actually benefit the bottom line. But sticking to the client approach is constraining over the long term. Yes I accept this is on many levels a point of theory but it has practical consequences, particularly for mass market private banking which I would argue goes all the way up to accounts with $30 million. Take Starbucks again – the actual commodity (beans and water) on sale has never really changed, but the experience has. Private banking should take note, or else it runs the risk of being an equivalent to a General Motors where it ignored the customer-requirements en masse and finds out too late that it is in has been overtaken by faster models that people actually want to be seen in. Indeed, it is not really a question of who drives faster, it is a question of how comfortable the ride was. Shifting the orientation of the private banking business will come from working out whether, therefore, they serve customers or clients. Bring on the debate…