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2.4 Speed Matters: Innovation Competence

Along data management, another challenge is presented by generally much-reduced innovation cycles. The growing speed of innovation is in contrast to the more traditional and wait-and-see culture of banking. Banks must examine how they can increase their innovation speed. There are a number of possibilities available, from the implementation of their own spin-offs with a high degree of autonomy to the delegation of development tasks to external suppliers or with innovative partners in a network.

A large number of smaller companies demonstrate innovative ability, thus assailing a classic area of retail banking, traditional payment transactions. Quick and safe electronic and mobile payment methods, combined with eWallets and innovative tools for managing financial means, are changing the function and dominance of cash and credit cards.[1] Naturally one can argue that the margins in classic payment transactions are low, unless the customer is willing to pay for special services. Competitors like PayPal appear to demonstrate that eand m-payment solutions can nevertheless be profitable. The loss of income from payment transactions is not the only risk for banks. Whoever loses payment transactions—and thus also the associated financial management of their customers—will no longer have any access to the growing and competitively decisive volume of data that is available for every customer. The possibilities for dealing with this will be presented in Part III: The path to a customer-centred banking architecture.

2.5 Wrap Up: Game Changers

2.5.1 The Newcomers

This chapter was concerned with understanding how new competitors exploit thought traps in order to develop future-viable business models. The competitors include newcomers with and without banking licenses. What consequences does the market entry of this large number of new competitors have for the established banks?

Newcomers with a Banking License Essentially three types of new provides of bank services in the digital age were identified:

1. Direct banks offer classic bank services without branch operations.

2. Digital universal banks focus on the internet generation by rigorously using new communications channels and platforms.

3. Many internet and telecommunications providers (still) focus on payment transactions, as it allows the generation of “big data”—the perfectly tailored user profile of the customer with regard to financial transactions and consumer behaviour allows an equally well-tailored offer of financial services and solutions. An analogy here would be the predictive product suggestions introduced by Amazon, based on previous user behaviour. This illustrates clearly the potential effect of new technologies on the banking sector. Get ready now, but how?

Classic banks are being threatened by all three groups of competitors: the fact on the one hand is that the established direct banks already demonstrate much higher customer satisfaction. It is likely that the pull effect will lead to the customer basis of the traditional providers being hollowed out, so that the profit margins of the established business models will continue to decrease further.

A future threat, on the other hand, is presented by the options created for customers by the digital universal banks. Some providers—for example Fidor Bank—are already positioning themselves as a platform on which customers can advise themselves and invest directly, due to the rigorous use of modern forms of communication and a partial “withdrawal” from the role of mere platform provider for various financial transactions.

In addition, the “big data” strategies of Google and PayPal pose an extremely large threat, because these providers also hols banking licenses and can create perfectly tailored offers for individual financial needs in the coming years by the rigorous use of customer information and the payment, search and information behaviour of the customer. Banks find that they are confronted with the danger that they are being cut off increasingly from the data basis. To this day not all of the available data appears to be utilised to its full potential. The integration of the different sales channels and the associated information has not yet been fully achieved. It is very likely that a not inconsiderable number of customers would find this offer very attractive. In contrast to newly-founded digital universal banks that still need to build up their customer basis from the beginning, the internet concerns already have an abundance of customer information and a considerable user basis. It is therefore highly probable that they can achieve the necessary number to trigger a “critical mass effect”, thus degrading classic banks to the role of a processor in the background, with no control over the customer interface. However: the reputation of banks, which is based on the factors trust, privacy protection and data security, can be a strong asset. The ability to guarantee data security possibly ensures a comparative competitive advantage and can be a successful business model.

Ø Newcomers Without a Banking License In future consultation situations in which standardised products form the core of the solution, customers can not only advise themselves, but can also complete the transaction online without requiring any advice from the bank. The entire sales process will become possible via the media, without the involvement of a personal advisor. Online forums or private advice from peers can help in the event of problems.

In the case of more complex advisory needs, PFMs will grow in significance in the area of pre-sales. Well-prepared and informed customers have existed for a long time, but this aspect takes on a whole new dimension with PFM, as customers can analyse in precise detail their own financial behaviour. This presents a great challenge to the expertise and the social and methodical competence of the present-day advisor. Personal information and decision-making systems help the customer to gain easily accessible external information that is relevant to their transactions. For the most part the information advantage and the associated power previously held by banks is being eroded. A new trend is to also use the knowledge and assessments of other customers (the wisdom of many) along with information from experts. The accumulation of information in customer groups can lead to joint decisions that are sometimes better than the approaches of individual customers or the bank. Virtual means of exchange do not in themselves pose a direct threat to classic banking services. However, should these parallel currencies ever establish themselves in the long terms as a means of payment, this could represent a new form of competition for banks from companies that manage such currencies. Internet companies in particular appear to be open to the creation of virtual currencies. If 1.1 billion Facebook ( users were to start using their own currency, for example, this would become one of the most important currencies in the world, on an equal footing with the US dollar, Euro and yen.

There are two possible future scenarios as to how the further development pattern of business models in the banking sector might look with regard to competitors without a banking license, who cover only part of the value chain of the established banks.

One hypothesis is that the existing providers will integrate the USPs of those providers without a banking license into their own value chain as soon as a critical mass has been achieved in terms of demands from existing customers. Such a pattern has often been observed in the past. The integration is carried out either by buying up smaller competitors or by copying the relevant technologies.

The alternative hypothesis is that the competitors, who are strong in their niche services, will cause an erosion of the value chains of the banking services and will integrate customers by means of technological possibilities into the partial services of separate providers, in a kind of “plug and play” manner.

It can be seen from the example of consumer loans just how far the fragmentation of the value chain has already progressed and how individual service aspects can be taken on by providers unconnected to the sector. Market analysis can be conducted with the help of comparative portals. Here, the price and often—with the help of communities—also the quality and characteristics of loans offers are displayed. One the purchase decision has been made, an analysis of the financial means can be made using PFM—for example, the number of instalments to be financed for a required consumer loan. Then, via a credit platform, a finance request can be placed online. If the financing has been cleared, the purchased product can be ordered and paid for via the internet. The same is easily conceivable and achievable for the purchase of securities, including the accompanying investment advice, or for the financing of property purchases (Vater et al. 2012, p. 12).

2.5.2 Outlook: Are Game Changers Just a Hype?—Bank Management in the Digital Age

Just a decade ago, some exponents decried the significance of the digital age as pure hype after the bursting of the dotcom bubble (Spiegel 2013). Using the same logic, one could now also express the view that the new competitors are merely a brief occurrence. This assumption must be disproved and—if that succeeds—suitable analytical and design instruments must be developed.

The next chapter, therefore, will show the fundamental forces of change presented by digitalisation with regard to the business models of banks, as well as the instruments of successful bank management.

It will become clear that these developments demand a fundamental change in business models and that the willingness of classic banks to analyse the medium and long-term consequences and to make their business models networkcompatible from the inside will be key to success in the coming years. It will not be possible to defend against future competitors by clinging on to old business models or by imitating the new rivals. Banking in the private sector requires a tailored, customer-centred business model.

  • [1] When surveyed, 35 % of all consumers stated that they would like to use their mobile devices as eWallets (Kearney 2012).
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