Digitalization: Opportunities and challenges for wealth management

Digitalization creates economic growth

The financial industry has been undergoing a digital transformation for some time. The push for digitalization gained additional momentum due to the pandemic. Increased client expectations, innovative technologies, and new players present banks with significant challenges. In order to remain competitive, they must fundamentally question their traditional business models. What are the consequences of the disruption for the existing financial ecosystem?

According to Prof. Dr. Tobias Straumann, digitalization primarily brings opportunities. "If we look back on the last 150 years of Swiss economic history, we can see that new technologies usually bring more benefits than disadvantages," says the economic historian from the University of Zurich. Furthermore, fears of mass unemployment have turned out to be mostly exaggerated. "New technologies have never completely replaced existing ones, but rather enabled other business models and fields of application, as well as stimulated the economy." An impressive example of this, according to Tobias Straumann, is the construction of the railway in the 19th century. Instead of replacing the stagecoach, the increased transport of goods via the railway also led to significantly higher demand for postal transport.

Digital assets are just getting started

Distributed ledger technology (DLT) perfectly illustrates how digitalization creates additional fields of application for the capital market. Blockchain technology, which became famous through cryptocurrencies (payment tokens), is now considered to be a forward-looking solution for the digitalization of assets. Using a digital securitization process known as tokenization, assets can be virtually broken up and divided into asset tokens. In addition to securities, tangible goods such as art, valuable cars, real estate, and industrial facilities can also be tokenized. This enables companies to easily make their assets tradable, which fundamentally simplifies capital raising in particular. It also gives investors access to, for instance, exclusive asset classes, for which their capital was previously insufficient.

As part of a proof-of-concept, Credit Suisse has taken first steps regarding the custody and trading of tokenized assets and has tokenized shares of a private equity investment product. "We want to use this case to learn how we can also use distributed ledger technology for traditional banking transactions," explains Dr. Daniel Hunziker, Head of Institutional Clients at Credit Suisse.

Decrease in cash fuels demand for digital currency

The Swiss National Bank (SNB) is also reviewing DLT with regard to the development of tokenized assets. In a feasibility study (Project Helvetia), two questions were examined: to what extent can a distributed ledger be combined with the existing payment system (SIC) and/or what advantages or disadvantages would the introduction of a central bank digital currency (CBDC) have for financial intermediaries?

While a wholesale CBDC is being considered as a possible option for trade between the central bank and retail banks, the SNB sees no need for a digital currency (retail CBDC) for the general public. "Thanks to a politically independent and stability-oriented monetary policy, the Swiss franc is highly trusted worldwide," says Dr. Andréa Maechler, Member of the Governing Board of the SNB. Furthermore, the two-tier financial system with central bank money and bank money in Switzerland is deemed to work very well, and there is already a broad offering of digital payment solutions. "Why replace something that works well?" asks the SNB Board member. Far more important than a digital currency is a simple, immediate payment system that works in real time between the central bank, the retail bank, and the end client.

Many central banks worldwide – including the European Central Bank (ECB) – are examining the launch of a digital currency. This is in response to the decreasing use of cash and the increasing risk due to the circulation of digital currency from private companies, such as Diem from Facebook.

Banking infrastructure is becoming permeable

Advancing digitalization increases the pressure on companies to adjust their processes to the new client needs. "Our clients increasingly use digital channels in their everyday life and want simple and efficient solutions from their bank as well," says Daniel Hunziker, Head of Institutional Clients at Credit Suisse. For this reason, Credit Suisse continuously invests in infrastructure expansion and is pushing ahead with new technologies. For instance, with the development of digital onboarding processes in wealth management in order to simplify the processes. In the medium term, it should be possible to carry out all steps digitally, from client and KYC (know your client) information through to account opening.

Furthermore, Credit Suisse also advocates for an open banking infrastructure.
As an active member of the "Open Wealth" initiative, it is working with other banks, software providers, and additional service providers toward the goal of operationalizing the Open API standard in the field of wealth management. The aim of this is to define standards that enable a simple data flow along the entire value chain. "Everyone benefits from client information and client documents having to be entered only once in the value chain," stresses Daniel Hunziker.

Cybercrime requires investments in IT security

The growing use of digital channels increases the risk of cybercrime. "Swiss companies are also at risk of an attack from cybercriminal organizations," says Dr. Florian J. Egloff, Senior Researcher in cybersecurity at the Center for Security Studies (CSS) of the Swiss Federal Institute of Technology Zurich. The biggest threats include malware (especially ransomware), phishing, and payment fraud.

"A cyberattack can drive a company to bankruptcy," says Florian J. Egloff. For this reason, it is important to build up the cyber-resilience of your own company, in addition to prevention. This is how to protect yourself as best as possible and react correctly in case of an incident. In particular, this requires investing in your own IT security. "Depending on the company, a solid 20% of the IT budget can be invested in security measures." Furthermore, this requires clear processes with regard to data and data security as well as ongoing training for employees. Regarding the management of a potential attack, a clear crisis communication and business continuity strategy is also needed.

Competitive situation creates differentiation

Digitalization has made lasting changes to the competitive situation on the financial markets. New players, such as neobanks, create an increasing differentiation of the financial offering through digital financial products and services. Daniel Hunziker, however, doesn't see this as a disadvantage. "Credit Suisse supports competition and seeks to collaborate with new providers."

While fintechs launch innovative products, Credit Suisse's strengths are investment advisory services at a very high level and close client relationships. Dr. Daniel Hunziker is convinced that clients and partners alike would benefit from this interaction in the field of wealth management.