How Asia-Pacific‘s private banks are embracing online trading

Over the last 18 months, the Wealth Management market in APAC has seen a surge in self-directed trading via online brokerage platforms, as the pandemic disrupted the normal social interactions upon which relationship managers traditionally rely. An e-trading platform is now seen by many as a critical channel for private banking in the Asia-Pacific region.

Some banks have yet to develop or launch their own e-trading apps. However, those who have adapted quickly are now likely to seize the opportunity to build market share and make across-the-board improvements to their operating model, while creating a new channel that helps to maximize convenience for customers.

E-trading has boomed during the pandemic in Asia

E-trading apps have attracted a new breed of investors across the Asia-Pacific region¹: They are young, cash-rich, with time on their hands². Using apps to buy into ETFs is proving popular among the Millennial generation (aged 25-39), and in Australia, young women in particular, are becoming increasingly engaged in e-trading³. Some existing apps also provide information about environmental, social and governance factors, which are seen as a priority for many investors today.

In theory, e-trading platforms only accept unsolicited, self-directed trades. In practice, many platforms provide contextual insights to users and might even have a social media-like community functionality, as well as a “gamified” style and features intended to make investing more fun, as implemented most famously by the US-based Robinhood.com. Such features have attracted the scrutiny of regulators, given the controversy over whether gamification is appropriate in an investment context.⁴

More importantly, those apps make trading easy. Therefore, a clean interface is crucial to the success of such platforms. I believe, if it takes more than 30 seconds to show a screen, the user is likely to quit.

How banks can avoid being left behind

All this poses a challenge for traditional banking relationships. In the high-net-worth segment, lockdowns have prevented private bankers from meeting clients in person. Clients using online brokerage apps are increasingly confident in their own investment abilities and are questioning the need to pay brokers’ commissions when e-trading platforms are often commission-free.

The heavy burden of regulation is also a potential barrier for banks considering an e-trading platform, particularly in more sophisticated markets such as Singapore and Hong Kong. Banks need to consider how to implement cross-border guidelines on their e-trading platforms in a way that complies with local or regional banking regulations.

More generally, the development of e-trading platforms offers private banks a new customer acquisition and “stickiness” strategy that could potentially help grow customers from being retail investors to affluent and private banking clients. E-trading apps can incorporate thresholds to check eligibility or to verify that a portfolio is well-diversified against risk, as well as keeping users well-informed regarding compliance considerations, barriers and scams. As a customer relationship grows, an e-trading app could also deliver further enhanced features and options.

Given the opportunities presented by e-trading, banks that fail to invest in such platforms could be at a competitive disadvantage in the future.

Which model works best?

In order to benefit from the e-trading revolution, banks might consider working with external partners to implement their e-trading solution. There are three main approaches to consider:

• White labelling. Fully outsource the platform to a third party, who can manage the entire trade lifecycle from client order-taking to trade execution.
• Front-end only. The bank retains control over the digital front end (and the customer experience), with the back-end execution implemented by a third-party provider.
• Hybrid model. Similar to the option above, but uses the bank’s existing infrastructure for traditional trading, so it can integrate the online and offline journey.

Understanding which approach might be best for each bank requires an appraisal of every stage of the trading lifecycle, from order entry to validation to settlement. It also requires an appreciation of which of the bank’s existing assets, if any, can be leveraged, or whether it’s best to buy a platform “off the shelf”.

An “off the shelf” approach comes with its own challenges. Aside from differentiation, which becomes harder if multiple institutions are using an identical platform, regulations could prevent banks from outsourcing certain activities to a third party – whether this is the handling of confidential client information or protecting users from investment scams (to which users of e-trading platforms can be vulnerable.⁵)

Overall, for banks, these digital platforms could act as an enabler for consolidated reporting, seamless integration across the business, and ultimately, a single customer view, replacing what for many institutions is a fragmented manual system that creates multiple pain-points for both staff and clients. Building a seamless e-trading platform could therefore offer banks the chance to enhance their overall operating model, to something leaner, more efficient and ultimately more competitive.