- Private banking is the financial management services by banks to people who have a high net worth or high levels of income.
- It involves banking, investment tax services, and other financial services on a more personal basis than in retail or the usual banking offered to the public
- High net-worth individuals (HNWIs) possess more wealth than the average person, which lets them access a large variety of banking and other financial services
Private banking is a more personal or personalized banking and financial services offered by banks to financially wealthy people. Most banks that offer private banking only accept clients with at least $500,000 in investable assets. However, some banks may take clients with over $50,000 worth of investable assets to access some of their personalized services.
Such high levels of wealth or income allow these individuals to participate in alternative investments or assets that are not conventional like cash, stocks, and bonds. These include private equity, hedge funds, managed futures, real estate, commodities, and derivative contracts.
Since it attends to individuals with a high level of assets or incomes than an average person, private banking clients receive highly personalized services. They are assigned with their account or relationship manager to tailor a customized approach according to their preference.
Banks provide the clients tailored proprietary solutions which are kept confidential to prevent competitors from selling similar products. Likewise, HNWIs are attracted in private due to its culture of privacy since they can conceal their personal information that may be an advantage to their rivals. Sometimes, HNWIs are subject to lawsuits, which involves their investment, that’s why having their information private gives them a sense of security.
Discount in services
In addition, banks may give discounted services to HNWIs as a reward for the large volumes of business they bring to their bank. In other words, they receive discounted services due to their substantial assets that is beneficial to the bank. Services such as estate management, corporate checking, and tax preparation are available at a lower cost than the usual retail bank cost. For example, clients involved in import and export business may receive an attractive discounted or reduced foreign exchange rate.
Challenges facing Private Banking
Private banking division faces various challenges due to the Great Financial Crisis of 2008, such as the regulatory restrictions.
The financial crisis of 2008 led to the collapse of major financial institutions, which led the private banks to deal with a restrictive regulatory environment. Governments moved in to enact strict regulations that resulted in a higher level of transparency and accountability. These regulations have made the licensing of private banking professionals more stringent. In some countries, like Switzerland for example, banks were banned from storing assets as means of tax avoidance, since some HNWIs save their holdings as a way of hiding their wealth from government authorities.