Private banking is a novel method of finance that provides customized banking and financial services offered by commercial banks to wealthy individuals Note1 (Omarini 2017.). Despite the COVID-19 virus, the amount of wealth and the number of high-net-worth people increased by a staggering 9% across the globe in 2019. Further, the proportion of ultra-high-net-worth individuals increased by 2.4 percent in 2020.Footnote4 This huge wealth offers great opportunities for private banking. In China, private banking industry assets under management (AUM) increased by 22.11%, and the number of ultra-high-net-wealth individuals grew by 21.55% annually from 2019 to 2021. Footnote 5.

The development of a new organizational structure is one of the key aspects of the development of private banking within China (Chen 2013, 2013). Private banks in China are associated with large commercial banks and act like an internal bank department (Wang Guo, 2022) and Guo 2022). The association with commercial banks emphasizes the importance of organizational structures that affect the allocation of resources within companies. Commercial bank managers have to balance the distribution of resources among different divisions (including retail and private banks) by establishing suitable structures that will improve organization performance (Ellman and Pezanis-Christou, 2010). On the other hand the other nations have the majority of private banks are independent registered and are primarily assets management institutions with the main goal of increasing the private banking business profit margins, so the allocation of resources between divisions isn’t an issue but less attention has been given to the structure of the organization (Chen 2013, 2013). The organizational structures of China’s private sector banking differ greatly from the structures in other countries, making them the most innovative feature as per the Oslo Manual (OECD and Eurostat 2018). In this context, China’s private sector banking is not receiving guidance from other countries and academics on the use of organizational innovation to better allocate resources. In light of the rapid growth of the private sector within China and the crucial importance of the organizational structure in distributing the resources in private banks, this study examines the best ways to go about the development of private banks in China in the context of innovation in the organization.

Private bank banking within China is operated under two major types of organization structures: the large retail mode (BRM) and the independent development mode (IDM). Under the BRM, the branch for retail banks is responsible for establishing both private and retail banking. The two divisions are a cooperative relationship in which retail banking transfers high-net-worth customers to share profits in private banks. The revenue-sharing ratio (Liu and co. 2018) affects Private banking’s effort in serving customers transferred to it. If the retail banking division is able to take an excessively large percentage of total revenue, the private banking division would earn very little income and make efforts to service the customers who have been transferred. This could cause customer churn and impact the retail banking division’s profit. This study therefore investigates two important questions to be asked during the initial phases of the private banking industry within BRM: BRM: (1) What is the best ratio of revenue sharing between the two divisions? (2) Based on the ratio of revenue sharing that is set in the division of retail banking, how does the private banking division manage efforts to retain loyal customers of the transferred division and gain new customers?

Under the IDM, the private and retail banking divisions are developed independently, and both divisions create a competitive partnership in which they compete to acquire high-net-worth individuals. In contrast to the BRM, the high-net-worth individuals in the banking department of the retail sector are transferred over to the private banking division of the IDM. This requires this division to improve its operational and marketing capabilities to compete with high-net-worth customers in a fiercely competitive market. In this paper, we describe each division’s activities as attempts to attract customers. We study the most effective strategies of both divisions as well as the effect on loyal customers to the banking retail department on competition for customers both divisions.

We first formulate the Stackelberg game (von Stackelberg 1934) to establish the relationship between the private and retail banking divisions. We also study their revenue sharing mechanisms in the BRM. The game is played by the first bank’s retail division acts as the Stackelberg leader, while it is private bankers who are an Stackelberg follower. The Stackelberg game lets us examine the best decisions that can be made in the relationship between these two branches which includes the revenue-sharing ratio, as well as Private banking’s effort in serving the customers transferred. We demonstrate that the growth stage of the private bank division is a key factor in these decision-making processes, with a better advanced private banking division decreasing the ratio of revenue-sharing for that division’s retail bank as well as efforts of the division of private banking to assist the customers who have been transferred. The more the private bank division expands and grows, its dependence to the division of retail banking as well as the customers transferred becomes smaller and this decreases its motivation to serve the customers who have been transferred and also retailers’ bargaining ability when deciding on the ratio of revenue-sharing.

We then design a static game using all details to study the best actions of both divisions within the IDM. We conclude that the the best customer acquisition strategies of each division increases the potential customers’ assets as well as returns. This means that the strength of competition in the market increases as customers are richer and both divisions provide more lucrative returns. Regarding customer loyalty, more loyal customers in the banking retail segment lead to less optimal efforts for both divisions. This can reduce competition intensity, lessen the negative effects of competition, and lead to greater profits across both divisions.

This study adds value on the subject in various ways. First, it complements studies of innovations in banking literature by studying the role of innovation in private banks’ organizations. The second aspect is that this study enhances the literature on banking by offering an economic study of the private-sector banking industry. Thirdly, an organizational approach is utilized to examine the decisions made under two private banking structure in China and to optimize the most important choices that determine the profitability of each bank division in cooperation with BRM in addition to the rival relationship under IDM. We present the organizational structure and show its crucial importance in the study of the business of private banking. Fourth, under the BRM, we introduce a revenue-sharing mechanism into the cooperative relationshipFootnote6 and design the optimal revenue-sharing ratio between the two banking divisions in private banking studies. Additionally, the analysis of different organizational structures also offers guidelines for those who make sensible decision-making.

The rest of the paper is in the following way. ” Literature review” section offers an overview of the literature. ” Big retail mode” section suggests the Stackelberg model to study the most efficient revenue-sharing ratio as well as the best way to serve transferred customers in order to sustain customer loyalty within the BRM. ” Independent development mode” section provides an analysis of the optimal effort and the effects on the competition for loyalty of customers for the banking retail division within the IDM. ” Survey-based empirical analysis” section provides an empirical analysis based on survey data as well as ” Conclusions and policy implications” section concludes the research and suggests some possible directions for the future.