Value propositions in the world of finance
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A financial value proposition depends on the type of customer in each operator, and on the approach to their customers that each operator has defined. There are essentially three value propositions in the world of finance: for retail clients, for investment banking and corporate banking clients and for private banking clients
For retail customers, operators are strengthening digital channels to reduce costs, and are boosting services such as remote advisory. On the product side, they have strengthened their offering with both short- and long-term mutual funds and pension plans. For this purpose, they promote remote advisory under Mifid II guidelines by means of different model portfolios according to asset allocation. And on the credit side, they use both specialized advisors and digital tools to drive the business.
The biggest changes in the value proposition are in corporate and investment banking clients. This is because bank disintermediation brought about by regulatory changes has generated a boom of new regulated operators, such as firms, hedge funds, and others, which are not obliged to submit to capital requirements to lend money.
This hurts banks, which need to consume more capital to lend to companies that do not have a credit rating, or smaller companies, such as SMEs. Thus, many companies can finance themselves at a lower cost, and in less time. And transactions are simplified: for example, for syndicated loans, the agent no longer has to be a bank: it can be a large consultancy firm, which can even take charge of structuring M&A, debt or loans. This is what happened with the purchase of Inversis by Andbank.
And in the value proposition for private banking clients, the strong growth of the sector, due both to a larger population with high levels of wealth and to the growing number of competitors, has strengthened the offering of products and segmentation. The need for advisory increases, and private banking services are universalized to clients with lower net worth; this is the case of personal banking, and sometimes with retail banking, as long as the advice is automated.
The offering of sophisticated products for private banking clients has broadened to other segments. This is the case of international funds, with which universal banks have gone from being “single-product” to “multi-product” in order to build customer loyalty vis-à-vis competitors. An open architecture that has boosted cost efficiency and, with it, the automation of investment processes.
For the higher net worth client segments in private banking, providers have broadened their value proposition by “democratizing” family office services, once specific to high net worth individuals and family groups, which are now provided to lower net worth individuals. And along these lines, many non-bank entities have focused their value proposition on service, leaving the product and custody part to the entities in which the client has deposited his assets.
How do we convey and deliver this value proposition to our customers as a financial services company?
The value proposition is the most important part of a financial provider’s business model. This is because it is essential to their customer relationship model, and a provider defines it according to the resources and growth strategy they have implemented.
Since the arrival of Mifid II, many financial institutions have offered different value propositions to their clients depending on the chosen format: banks, broker-dealers and securities firms, EAFs, asset managers, asset managers, intermediaries, robo-advisors, market places and so on. Financial services companies therefore have a wide range of options in approaching clients.
What is really important is to know how to design a relationship model that can adapt to the your clients, fully satisfies their financial needs and achieves full and lasting trust over time. Such models range from an exclusive relationship through digital channels, to personalized advice from expert relationship managers. The customer experience that each entity develops is the result of how each financial company wants to approach its customers in order to build customer loyalty with a different and quality value proposition.
How does the current regulatory change influence this value proposition?
Since the 2008 financial crisis, financial regulation has been tightened considerably in order to prevent crises such as the subprime crisis. Central bank interventions have injected abundant liquidity into the system, to the point that interest rates for public debt have been in negative territory for quite some time.
These liquidity injections have driven the search for alternative investments outside traditional markets in pursuit of higher returns, such as real estate, venture capital, renewable energies, infrastructure, hedge funds, and others.
Regulatory change has therefore been decisive. Basel III, for example, which regulates the consumption of capital for loans, has been key to the current process of bank disintermediation. The elimination of banking secrecy has forced investors who want to buy securities in other countries like the US to register. And Mifid II, which seeks to provide greater investor protection, has led to a complete categorization of investor and product types.
Does market uncertainty mean that we need to pay more attention to a more differentiated value proposition?
No doubt about it. Greater banking segmentation is also a response to market uncertainty. This is because it is based on promoting different service models that adapt to the needs of a given type of customer. Accordingly, segments that are more sensitive to the effects of uncertain market environments on their assets, such as private banking, receive a differential and tailored value proposition due to segmentation.
Why is brand positioning important for financial institutions?
Changes in business models driven by regulation, abundant liquidity, more intense competition and the continuous increase in the population that is eligible to receive advisory and management services from financial companies make it increasingly necessary to achieve a brand positioning that reflects the differential and successful value proposition that each financial institution aims to implement as a lever in its growth strategy.