Why digital private banking is the future of finance

Brian Barnes
Brian Barnes August 4, 2022
Wealthy man at a restaurant using digital bank on smartphone

If an AI tool spent ten seconds analyzing how you spend money, it would probably know more about you than a financial advisor would after an hour-long conversation.  

This comparison may seem obvious given the power of digital innovation. But is it obvious enough to reconsider your relationship with financial institutions? It should be. The cost difference alone reveals why digital private banking will soon replace exclusive private banks. 

Of course, there’s a benefit to a team of dedicated financial professionals. But digitizing banking can significantly bring down the cost, open access to traditionally exclusive resources, and help you make personalized financial decisions. 

For this to happen, you need to think about your finances in the same way an ultra-wealthy person thinks about theirs. Instead of paying hefty sums to people in suits, imagine a cost-effective digital private bank in your pocket. 

The current private banking experience is inaccessible.

Most people get standard products from their banks – checking, borrowing, investing, and so on. If you’re a high net-worth individual, you likely work with a secret part of the bank that’s off limits to everyone else. Most financial institutions have their exclusive offering they only reserve for their best customers – their private bank. This gives you access to better products and services in two ways: 

  1. White glove service. Rather than visiting a teller, private bank clients work with a team of experts. They’re always in the background optimizing your wealth. It’s your own financial concierge, at your service. 
  1. Access to exclusive resources. Private banks give you resources that are inaccessible to everyone else. They give you access to different investments, let you borrow at cheaper rates, help you plan for retirement and your kid’s education, advise on charitable giving, and more. 

Adding “private” in front of “bank” simply creates an air of exclusivity that attracts the ultra-wealthy. You have a team on retainer. You have access to resources and rates others don’t. You can expect prompt answers at any time of day. Of course, that experience can cost 1-2% of your net worth every year whether or not you use it.  

An educated, well-paid person whose job is to optimize your account may be better than a digital offering, but that person is significantly more expensive. That’s out of reach for people whose net worth is hundreds of thousands, rather than hundreds of millions.  

A digital private banking experience can benefit more people.

Digital private banking will share the perks of private banks with more and more people, which comes with several benefits. 

1. Access to resources reserved for the affluent. 

High net worth people put their assets to work to reach their financial goals. They use private banks to access lower borrow rates, preferential pricing, and alternative investments. This might include lower rates on lines of credit, favorable foreign exchange rates, and opportunities to invest in exclusive funds. 

A digital private bank can offer many of the same products and services, without exorbitant fees. Think about how online brokerages have made trading more accessible by offering fractional shares and letting clients borrow against their investments at low rates. You can also see how blockchain’s digital ledger technology is revolutionizing the payments industry and increasing access to digital assets.  

A need for improved financial resources is driving innovation in the industry. Every day, exclusive private banking resources become accessible to more people. 

2. Control of your money, for a fraction of the cost. 

If you called up any private bank with $1 million to manage, they’d likely suggest investing in one of their total market funds. These come with high management fees, but you can invest in similar funds at a fraction of the cost. 

Most private banks have a threshold for personalized services because they have teams of trained, well-paid employees who can only manage a handful of accounts. For example, you need a certain amount of money to get a separately managed account (SMA). This lets you hand-select your investments alongside an advisor. If you don’t meet the threshold, your money is put into a one-size-fits-all investment pool. 

There are plenty of options for people with $100 or $10 million. Software-driven financial tools are inexpensive because once the software is built, it costs much less to maintain than an office full of financial advisors. On top of that, your portfolio can be exactly what you want it to be. At M1, for example, managing your portfolio is commission-free, and you can choose from hundreds of assets.  

When products and services are 1s and 0s in a database, companies can do a lot more for more people. Not paying 1-2% in management fees is equivalent to earning an extra 1-2%. Sure, having a personal librarian hand-select your books is better than searching on Google. But Google is a great replacement for 99.9% of the time you need a new read. 

Digital private banking products and services will help strip out excess profit and fees.  

3. Tools that get better with time. 

In private banking, you can say, “I want to achieve these high-level goals” and a team makes it happen. They download all your transaction files, run analysis, move money, and wait for markets to settle. 

The same thing can happen with automation. You can create complicated rules, like smart transfers and auto-invest, without making every money move yourself. Automation tools use high-level instructions to put your rules into effect, and you don’t have to worry about the exact details or steps. 

It’s different than the human touch, of course. You can have a personal shopper pick up the latest iPhone, or you can ask Alexa to buy it for you. At the end of the day, both show up at your house. One is crazy expensive, and one is cost-effective. Most people pick the option that saves money and time—and gets them the new phone. 

The best thing about automation is that it only gets better with time. Software is quick to innovate, and institutions are slow. Artificial intelligence is already transforming the banking industry through fraud detection, virtual chatbots, and personalized recommendations. At M1, we see progress anytime we make an improvement to our platform, because it immediately goes out to hundreds of thousands of clients. When it gets better, it gets better for everyone.  

The digital private banking experience will only improve. 

There’s nothing that precludes digital private banking from becoming an accessible experience for anyone to enjoy. The only way this is cost-effective is by providing a similar experience, not an identical one, to more people. While it won’t be white glove, it will help you make the right financial decisions for your personal needs and goals.   

Digital private banking is designed to manage money like a wealthy person, except you won’t need millions to get control over your portfolio or access to cost-effective tools. All you’ll need is a smartphone.