CHARACTERISTICS AND PERSPECTIVES OF PRIVATE BANKING: OVERVIEW OF THE SERBIAN MARKET

Cilj ovog rada je da prikaže osnovna teorijska objašnjenja fenomena, klijenata i aktuelne svetske prakse privatnog bankarstva. U Srbiji ima malo istraživanja sa ovom tematikom, te ne čudi činjenica da korisnici bankarskih usluga, pa i zaposleni u bankama nisu upoznati ili imaju pogrešnu percepciju o pojmu. U radu su razjašnjene dileme oko termina privatnog bankarstva i srodnih pojmova i dat je prikaz tipičnih klijenata, imajući u vidu geografsku distribuciju. Fokus banaka se sve više pomera ka azijskom tržištu, te u ovom regionu izrasta novi model privatnog bankarstva. Švajcarska je i dalje dominantna, iako su značajne promene u privatnom bankarstvu nastupile nakon liberalizacije tokova kapitala zemalja u razvoju, a nakon toga i kao posledica promene regulative usled globalne ekonomske krize. U Srbiji je privatno bankarstvo i kao pojam i kao delatnost u samom začetku. Klijenti koji zadovoljavaju kriterijume za ulazak u ovaj segment su retkost, dok je finansijsko tržište plitko i nelikvidno sa malo potencijalnih prilika za zaradu.


Introduction
Banking, along with trade, is one of the oldest businesses in the world.During the centuries-long history, banks and banking practice have been modified, adapted to change and competition and new products and distribution channels have been developed as well.In the essence of all these changes was a response to modified business conditions and regulatory framework, fuelled by the desire to increase profitability (Ljumović, Marinkovic, 2013).Although the manufacturing sectors are considered to be most innovative, it would not be a mistake to say that the financial services sector is following closely.Financial institutions develop new products to achieve and increase earnings or to attract a greater number of clients and meet the needs of the existing ones (Ljumović, et al., 2015).Therefore, changes in the economic or financial environment stimulate financial institutions to seek profitable innovations.
Private banking and wealth management are relatively old but they have flourished in the period of financial globalization.Additionally, there are three factors that have accelerated the development of this sector: development of information and telecommunication technologies which has enabled better access to customers and efficient services; erasing boundaries between banks and other financial institutions, because banks started to enter financial markets traditionally reserved for other financial institutions; and the consolidation process which has created mega institutions providing various services.It is believed that the Swiss are the creators of the modern concept of private banking and that they are leaders in this field.However, due to the extremely high profits, the competition follows them closely.A significant number of large banks are already present at this market, because the wealth of individuals is constantly growing and therefore the potential earnings of banks (Molyneux, Omarini, 2005).In the 21 st century, a good private banker is the one providing excellent service or advice to the client or the one who satisfies the financial appetites of his clients.
In Serbia, the concept of private banking has rarely been analyzed and this paper deals with the basic theoretical explanations, clients and the current world practice.Special attention is devoted to the contemporary trends and changes occurring in this area.Having this in mind, this paper has the following structure: after the introduction, the theoretical assumptions in respect of private banking are presented, followed by the discussion related to the terminology dilemmas.The second part gives an overview of a typical private banking client with special emphasis on regional typology.The third part deals with the global trends in private banking.The conclusion gives the prospects of development of these banking services in Serbia taking into account the number of potential clients.

The theory of private banking
Private banking is a special segment of the banking practice engaged in the provision of banking, investment and other services to wealthy, i.e. high-net-worth individuals.Private banking is an exclusive service where bank employees are dedicated to the clients and provide them with services on a personal basis.Clients access their funds quickly and easily through contact with their personal banker, without waiting in lines and without contact with other employees of the bank.Therefore, this service is the opposite of mass-market banking services, based on economy of scale, provided to the population and enterprises.Most authors and practitioners consider that the concept of private banking includes a range of services: classic banking products, such as various types of deposits and loans, asset management in the broadest sense, brokerage services, insurance of persons and property and advisory services (allocation of assets, restructuring of wealth, tax consulting and investments in mutual funds).Unlike conventional banking, private banking is a personalized service carried out in a direct relation between the client and banking officers.
Wealth management is another concept that appears in reference literature.Very often, it is identified with private banking, but it is defined as a long-term service of managing financial assets of individuals with the purpose of increasing their wealth.The clients are also wealthy individuals that are provided with primer, konsultantska kuća Pricewaterhouse izdaje godišnju publikaciju pod nazivom Pregled globalnog privatnog bankarstva i upravljanja bogatstvom (engl.Global Private Banking and Wealth Management Survey), časopis Euromoney rangira institucije koje se bave privatnim bankarstvom i upravljanjem bogatstvom.
Sometimes, private banking and wealth management are identified as the same phenomena.For instance, a consulting firm Pricewaterhouse publishes an annual publication titled The Global Private Banking and Wealth Management Survey, whereas Euromoney magazine ranks institutions that operate in the private banking and wealth management industry.
In certain banking institutions, private banking is being considered as a broader concept than wealth management.For instance, in the Credit-Suisse bank, the world's second biggest private bank in terms of total assets, wealth management is just one of the services offered within the private banking business segment (source: https://www.credit-suisse.com/us/en/careers/experienced-professionals/workingwith-us/business-areas/private-banking.html).In such cases, wealth management is defined as an asset management service aimed at increasing assets.Private banking, in addition to this function, also has all others mentioned above.Numerous authors are using this definition.Private banking is a business of providing banking services, asset management and financial planning services to the influential individuals (Bicker, 1996;Mylonakis, 2009, p. 37).Chorafas also uses this definition but he even includes foreign exchange services and believes that a private banker must meet all investment needs of the client (Chorafas, 2006).According to this definition, which is the most common one, private banking is any service that a client wants; thus, it is banking ultimately focused on the client, with the aim of maintaining and increasing his assets.
Sometimes, private banking is considered as a sub-segment of wealth management.In such cases, private banking is limited to standard banking services (deposits and loans), real estate management, brokerage services, insurance of persons and property and advisory services, while investment and tax advice are implemented through the function of wealth management (Maude, 2006).In this case, private banking is a service which facilitates transactions, while wealth management increases the wealth of individuals.An excellent review of the above-mentioned definitions, allocation and investment strategies of wealth management can be found in Jennings (Jennings et al, 2011).
Essentially, the real difference between private banking and wealth management is related to which institutions can provide certain services.The services referred to in the narrow definition of private banking can be provided only by banks (loan and deposit transactions), while wealth management can be provided by other financial institutions such as various types of mutual funds, but also by banks.
Regardless of how the service is called, private banking or wealth management, the goal is to find a personalized, concrete and effective solution to maintain or increase the wealth of the client, taking into account his risk appetite, investment objectives and time horizon.Having in mind the amount of funds owned by wealthy individuals, the opportunities for asset management are significantly higher, as are yields that clients may expect compared to traditional banking.The price of services (interest) in private banking is lower because the amounts that the clients invest are higher than in traditional services.Fees are negotiable and are generally lower.
Interesantnu evoluciju klijenata i trendova u privatnom bankarstvu prikazao je Maude.Tabela broj 1 prikazuje da su se profili klijenata značajno izmenili.Ovo implicira da su banke prinuđene da menjaju svoje poslovne strategije i In reference literature, the segmentation of private banking clients is related to the amount of wealth and the way of acquiring wealth (old rich vs. new rich) (Mylonakis, 2009, p. 37).Based on the amount of wealth, clients are categorized as wealthy, rich, very rich and ultra-rich.Although not ideal, this segmentation serves as the basis for further categorizations of clients.According to the way of acquisition, clients are divided into those with old and newly acquired wealth.This division is important because the products and services these customers want will differ, as will their attitude towards risk and investment advice.The old wealth is further segmented into active and passive.Active wealth clients want to make their money work for them and are willing to invest in order to increase wealth.Owners of active wealth can give a part of their wealth for philanthropic purposes.On the other hand, passive wealth clients do not want to invest their funds.The segment of new rich is divided into "overnight" and "genuinely" acquired wealth.Overnight wealth is usually acquired as a result of sudden circumstances, such as earnings on the stock exchange, gambling, court settlements or unexpected inheritance.Beaverstock et al. state that there are greater chances that private bankers will offer their services to the "old" customers, relying on reputation and brand.On the other hand, institutions dealing with wealth management offer their professional services to clients who have created wealth themselves and fall into the category of new rich (Beaverstock et al, 2013).
Certain authors segment private banking clients based on the source of wealth to those who gained money from family sources (inherited wealth), from business, politics or crime (Smith, Walter, 2003).It is logical that banks are targeting only the first three groups, while they avoid the last two.Serving clients whose wealth is of dubious origin (political or criminal) is not recommended, because the bank could damage its reputation and thereby lose a significant number of existing and potential customers.
Individual banks have their own subsegmentations of clients.For example, clients can be categorized based on family background, work experience, gender, age, lifestyle, etc.An important categorization of clients is related to risk appetite.This is significant for banks, in terms of services they potentially offer.Usually, rich entrepreneurs have bigger risk appetites, while the inheritors prefer safety and exhibit an aversion to risk.
An interesting segmentation of private banking clients was conducted as a part of the study conducted by Hamilton and sponsored by Reuters.He identified four types of private banking clients: Delegators, Selectors, Participators and Ultra High Net Worth (UHNW).Delegators want private bankers to manage their assets and have a low tolerance to risk.They require reliability, professionalism and discipline from private bankers.Participators perceive investing as a hobby and together with their banker they manage their portfolio to maximize profits.They seek innovation, attention and time, as well as financial expertise.Selectors are financially sophisticated clients that choose where and in what to invest.They need innovation, high standards of service delivery, perfect performance and long-term investments.Ultra High Net Worth clients are those worth more than $50 million and they seek the highest standards, because their behavior and investment choices can identify with professional investors.They needed professionalism, ability to manage complex transactions, links with other investors and accuracy in the execution of services (Hamilton, 2003).
Private banking clients change along with the environment and international factors.In particular, starting from the last decade of the twentieth century, the liberalization of capital flows in developing countries and transition economies brought a new segment of clients.They are businesspeople, extremely rich.Prior to the liberalization, they did not have direct access to services of private banking.Consequently, the number of private banking clients has increased significantly and so is the number of countries with large number of wealthy individuals.This applies in particular to the clients from Asian and Latin American countries and the countries of the so-called post-socialist block.
Number of wealthy individuals and their wealth increased significantly in the period after 2000.However, the global economic crisis in 2008 was the reason for a significant decrease of wealth (according to certain estimates, the decline was by about 14%, with only the Asian region recording a growth in the range of 0 to 1%), yet even with the crisis in mind, the estimates are that the global wealth has more than doubled in the period after 2000.Noteworthy is the fact that the Asian region, first of all China and India, contributed the most to this rapid expansion.The area of private banking is extremely dynamic, and the analysis of the past six years leads to the conclusion that the largest number of wealthy individuals is located in North America, but that the biggest increase in the number of wealthy individuals is in Asia and the Pacific (in the period 2013-2014, the Asia and the Pacific recorded a growth by 8.5% and in North America by 8.3%).The analysis should also include fact about the growing population, the highest growth being recorded in the Asian-Pacific region.The Middle East also has a dynamic growth, which amounted to 7.7% in the period 2013-2014.The growth on the European continent is somewhat slower than expected and in the period 2013-2014 it was 4%.It is believed that the biggest reasons for this are the tension around Ukraine and the crisis in the Eurozone.The number of wealthy individuals has only been reduced in Latin America (down by 2.1% in 2013-2014).These movements are displayed in Chart 1. Posmatrajući distribuciju bogatstva po regionima (grafikon broj 2), najveća količina bogatstva koncentrisana je u Severnoj Americi, gde je i broj bogatih pojedinaca najveći.Odmah nakon Severne Amerike nalazi se azijskopacifički region, koji imaj najveći rast u periodu 2013-2014 od 11,4% i ozbiljno ugrožava primat Severne Amerike.Evropa je treća po distribuciji bogatstva, a sledi je Latinska Amerika.Osim smanjenja broja bogatih pojedinaca i ukupno bogatstvo se smanjilo u Latinskoj Americi za 0,5% u 2014.u odnosu na 2013.godinu.Grafikon 2 -Distribucija bogatstva po regionima Looking at the distribution of wealth across regions (Chart 2), the greatest amount of wealth is concentrated in North America, there being the largest number of wealthy individuals.The North American region is followed by the Asian-Pacific region, which has the highest growth in the period 2013-2014 of 11.4% and seriously threatens the primacy of North America.Europe is the third according to distribution of wealth, followed by Latin America.In addition to the reduced number of wealthy individuals, the overall wealth decreased in Latin America by 0.5% in 2014 compared to 2013.
Tabela broj 2 prikazuje 10 najvećih privatnih banaka u svetu prema rangiranju časopisa Euromoney.Švajcarska u prvih 10 ima 3 najveće banke, računajući prvu i drugu po redu.Tradicionalno veliki i bitni centri privatnog bankarstva su SAD i Ujedinjeno Kraljevstvo.Izuzetno aktivne zemlje u oblasti are specialized private banks.They can be organized in many ways, as small and mediumsized banks engaged in certain activities in the segment of traditional banking, as private banking firms, family private banks, independent banking affiliates of large banking groups, and as a special group called Swiss private banks.In the US, as a counterpart to the classic private banks there are the so-called trust banks.They have spread their core activity, custody operations, into the business advisory services, asset management and other services in the areas of private banking.Competitors to private banks are also investment banks.They can provide a wide range of services based on economy of scope and on the existing customers' base.Consulting firms are active in the private banking segment providing services to clients seeking independent advisory.In the era of technological innovation a very popular subgroup are online consulting companies providing high-quality services in the short term.A specific subgroup developed in the United States is family offices that offer personalized services to one or more families.Certain private banks increasingly appreciate this concept and create special family offices within the bank itself.Hedge funds, venture and private equity funds, mutual funds, insurance companies, law firms and others also operate in the private banking market.
Depending on the type and structure of the financial markets, regulatory and institutional players, there are two models of private banking: North American and European (Maude 2006).North American model, which is based on universal banking, is better in the provision of investment services in relation to the traditional banking systems.On the other hand, in the European model of private banking, which is bank-based, universal and private banks offer a wide range of services and products.The new model of private banking occurs due to the rapid growth of wealthy individuals in the Asian region.Hong Kong and Singapore, as the largest local private banking centers, established their own model.Unlike the North American and European model, where banking secrecy is of great importance for the client, in Asia it has no special significance because people are traditionally proud of their wealth and they openly brag about it.Single families own most corporations, so Asian private banks have the need for the formation of family offices within the bank.The majority of wealthy individuals in Asia emerged after the World War II, so the wealth is still in the hands of the first or second generation.Asian clients generally seek advisory services to expand business, find new markets and appoint competent directors or successors.Classic investment services are not in focus.Asian clients are very interested in the purchase of real estates around the world, especially in the large centers such as Singapore, Hong Kong, Paris, New York, Frankfurt, and similar (Palm, 2015).In order to catch up with the European or North American model, it is essential that the management of the Asian banks understands the specifics of the region that could allow them to service a growing number of wealthy individuals.It is necessary to adopt a strategy focusing on a specific market segment, since the Asian market is extremely fragmented (Ang, 2010).It is also necessary to create or "import experts".The most prominent advantage of private banking in Switzerland is human resources, which is actually the biggest drawback for Asian private banks (Palm, 2015).
The Table 2 shows the 10 largest private banks in the world according to the ranking of Euromoney magazine.Switzerland has three banks in the top 10, including the first and the second one.Traditionally large and important centers of private banking are the US and the United Kingdom.Extremely active countries in the area of private banking are Luxembourg and Austria in Europe and Hong Kong and Singapore in Asia.Unfortunately, their banks are not in the top 10.According to research by KPMG and the Institute of Management, University of St. Gallen, Switzerland as the largest private banking center is oriented towards the European, North American clients and clients from the growing markets (Asia).Luxembourg is focused on customers from Western Europe, while private banks in Austria attract clients from Eastern Europe and countries within the former Soviet Union.Private banks in Hong Kong and Singapore render services to clients from the Asian countries (KPMG, nd).privatnog bankarstva, čijih banaka u ovom rangiranju nema su Luksemburg i Austrija sa evropskog područja i Hong Kong i Singapur iz Azije.Prema istraživanju konsultantske kuće KPMG i Instituta za menadžment Univerziteta Sent Galen, Švajcarska kao najveći centar privatnog bankarstva je orijentisana ka evropskim, severno-američkim klijentima i klijentima sa rastućih tržišta (pre svega se misli na Aziju).Luksemburg je orijentisan na klijente sa područja zapadne Evrope, dok su privatne banke u Austriji koncentrisane na klijente istočne Evrope i zemalja u sastavu bivšeg SSSR-a.Privatne banke iz Hong Konga i Singapura imaju klijente iz azijskih zemalja (KPMG, n.d.).

Private Banking in Serbia
Pioneers of private banking in Serbia were Unicredit Bank and Hypo Alpe Adria Bank.VIP banking services, which are viewed as a precursor to the creation of private banking, are provided by Raiffeisen Bank, Commercial Bank and Eurobank.UniCredit Bank opened its first private banking branch in early 2008.The thresholds for entering the category of private banking clients are €200,000 of deposit (this limit is much higher in the developed countries) and monthly income of over 5,000 euros.As part of this exclusive service, the client will receive counseling in asset management, investment banking and brokerage services, maintenance and increase in property and consultancy in the field of real estate.Potential clients in the Serbian market are successful managers, athletes, media personalities, former shareholders or persons who cannot commit to managing personal funds.They need private bankers to do that for them.Private bankers should draw their attention to the important events in the financial market and together with them consider the underlying risks.It is desirable for private bankers to be investment advisors.
A specific offer of private banking services on the local market includes contracting higher interest rates on deposits, lower commissions for transaction costs, favorable interest rates on loans, advisory services related to investments in the domestic and global financial markets, lower transaction costs related to securities trading, creating pension plans, management and maintenance of all client accounts, etc.
The private banker is always available to the client.If a branch is not working, the contact is established by a mobile phone.The private banker is also required to visit clients, as well as to control all transactions that client performs through payment cards.
The market for private banking in Serbia is extremely small; we can even say that it is rare to find a client that meets the criteria for entering this segment.Due to this fact, a few banks, actually only two, decided to develop this type of service.Given that the data on the number of Serbian citizens who have income above 5,000 euros per month are not available, an estimate of the potential market of private banking is compiled based on the number of citizens who are required to pay annual income taxes.According to the unofficial data, in 2013, 17,972 citizens were obliged to pay this tax (source: http://mondo.rs/a696361/Info/Ekonomija/Dohodak-za-porez-u-Srbijiprijavilo-17.972-gradjana.html), which accounts for less than 1% of all taxpayers.However, most of these taxpayers earn up to 2,000 per month and do not qualify for private banking services.This tax is paid on income three times higher than the average annual salary per employee in the year for which the tax is assessed according to the data of the relevant statistics authority (Law on Personal Income Tax Law, Article 87, Paragraph 1).Specifically, in 2013, all citizens who have earned a total income of more than 2,185,488 dinars in the current year (182,124 Serbian dinars per month is slightly higher than 1,500 euros per month) were obligated to pay this tax.It is clear that this amount does not qualify them for the service of private bankers, but these data show that the number of wealthy individuals who have stable and high earnings in Serbia is extremely small.Banks operating in Serbia very ambitiously launched the private banking activities in 2006, and one of them even established a separate branch that dealt only with private banking services.Other banks decided to provide private banking services in certain branches, as one of many services offered.In order to be able to perform private banking, a number of staff was trained and specialized in this segment.The arguments for the decision to establish private banking were fast economic growth Na žalost, poslednjih godina usluga privatnog bankarstva gubi na značaju u Srbiji.Banke ne vide ovu aktivnost kao rentabilnu, jer visoke troškove ne može da nadoknadi usluga pružena malom broju klijenta.Dosadašnja iskustva bankara pokazuju da trenutno nije pravo vreme za ulaganje dodatnih sredstva u promociju i širenje ove usluge.Takođe, ostale banke koje trenutno posluju na finansijskom tržištu ne pokazuju zainteresovanost za ovaj segment.Neatraktivnost tržišta ogleda se u činjenici da nijedna međunarodna privatna banka nije ustanovila bilo kakav organizacioni oblik u Srbiji, što nije bila retkost za zemlje u širem okruženju, koje su ostvarivale ubrzani ekonomski napredak i sve veći broj bogatih pojedinaca nakon liberalizacije tržišta.Nije za očekivati bilo kakav dinamičan razvoj ovih usluga u Srbiji u bliskoj budućnosti.
Unfortunately, in recent years private banking services have been losing importance in Serbia.Banks do not see this activity as profitable because a small number of services provided to the clients cannot compensate high costs.Experience shows that it is not the right time to invest additional resources in the promotion and expansion of these services.In addition, other banks that currently operate in the financial markets do not show interest in this segment.The unattractiveness of the market is reflected in the fact that no international private bank has established any form of private banking organization in Serbia, which was not uncommon for the countries in the wider surroundings that had rapid economic growth and rising number of wealthy individuals after the market liberalization.We do not expect any dynamic development of these services in Serbia in the foreseeable future.

Conclusion
Private banking is a service for wealthy individuals who have specific and sophisticated requirements in relation to their assets and lifestyle.Although it is a relatively old service, it has experienced renaissance in the period of financial globalization and transition when the structure of the clients changed, along with their resources and services they require.Additional pressure on the area of private banking has been imposed by new regulations created as a result of the global economic crisis.Private banking is an attractive business for many banks and the global trend is the growth in the number of financial centers that specialize in this service.This form of banking continues to be most developed in Switzerland, but new centers such as Hong Kong and Shanghai are threatening to take their primacy.In the neighboring countries, private banking is most developed in Turkey, Croatia and Bulgaria.
In Serbia, private banking as a concept and as an industry is in the embryonic phase.Few clients qualify for these services and it is not surprising that users of banking services identify private banking with the related terms, or concepts associated with the name.Private banking is mixed with traditional banking services provided by privately owned banks.Also, private banking services are mixed with VIP banking that is only one feature of private banking.Often bank employees have no knowledge of private banking and cannot define it.An additional problem that banks face in providing private banking services is related to the investment segment.Banks do not have a problem with traditional services such as deposit and credit transactions, but the problem emerges in the field of investment activities.Financial market is shallow, underdeveloped and illiquid, leaving banks with little opportunity for investments.On the other hand, clients who qualify for private banking services incline towards private banks in Switzerland, Luxembourg and Austria (even, though rarely New York).

Tabela 1 -
Evolucija trendova i klijenata u privatnom bankarstvu Kvadrati u drugom redu predstavljaju veličinu tržišta i odnos zarađenog (crnom bojom) i nasleđenog (bez boje) bogatstva.Izvor:Maude, 2006, p. 50   clients have significantly altered.This implies that banks have been forced to change their business strategies and business models, particularly in the field of value proposition.Although private banking services are primarily provided to the clients who are second or third generation and fall into the category of the old rich, the liberalization of capital flows in developing countries has been changing the scene.Liberalization of the Asian and Latin American markets has brought new customers.

Table 2 .
-Top 10 private banks in the world