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4.5.2 Commercial Business Management Areas of Banks

The specific business fields of banks can be categorised as follows (Bernet 2003, p. 29):

• Retail banking: retail and private banking as investment advice, depending on the amount of assets

• Asset management: the management of significant sums of assets belonging to private or institutional customers in different asset categories

• Financing business: financing private or corporate customers by means of mortgages or loans, sometimes also called commercial banking

• Investment banking: support for companies in raising capital and IPOs, and the trading of securities on financial markets with large sums

4.5.3 The Concept of Financial Services

Services are generally independent, marketable and immaterial benefits that are made available by a provider (Bruhn and Meffert 1995, p. 27, other definition approaches Hotz-Hart et al. 2001; Bu¨schgen 1994; Su¨chting 1991; Corsten 1990). In contrast to real goods, services cannot be stored. They become obsolete if they are not used within the time period in which they are available. The result of a service process, on the other hand, can be storable.

Thus, an asset manager can give advice only during office hours, otherwise it is forfeited. However the financial products purchased on his or her recommendation can be stored in a depot for an unlimited period (Bruhn and Meffert 1995; Bu¨schgen 1991; Corsten 1990). Financial services are marketable, intangible benefits that are easy and quick to imitate. Their development time is relatively brief, and they can be “protected legally against imitation only in exceptional cases” (Ba¨chtold 2003, p. 24). They do not emerge per se, but rather are linked directly to the need for a certain good, and are therefore a means to an end. For instance, loan financing becomes necessary upon the realisation of the desire for property (Bu¨ schgen 1998, p. 19).

The lack of shelf life that is mentioned in terms of services in general also applies to financial services. The capacities required vary considerably over time. While certain cycles can be observed, customer demand often cannot be planned. Reacting flexibly to the demand for financial services can present a problem to providers: shortfalls can lead to the loss of potential customers to the competition, while overcapacity can cause an increase in fixed costs. Therefore, overcoming the restricted storage and transport capability is a key objective of the financial service provider (Kotler and Bliemel 1992, p. 667).

The distinction between standardisable and non-standardisable financial services is important to the extent that they determine the scope of consulting requirements. Standardised financial products—such as payment transactions—can be marketed relatively easily as a mass product with a high degree of homogeneity. Retail banking services, on the other hand, are very heterogeneous—due to the customers' intensive need for advice and integration—and could barely be standardised prior to the digital age. Here, not only the needs of customers determine the results of the process, but also the experience and education of the advisor (Zollner 1995, p. 38). The complexity and degree of abstraction of consultation-intensive financial services entail a significant amount of explanation. Because of its immateriality, it is difficult for customers to make a quality assessment of a service prior to its purchase. These factors make financial services trust-based goods or “credence qualities” (Platzek 1996, p. 10).[1]

Due to the large share of consultation and the great significance of the trust component, human capital—i.e., the competence of the advisor—plays a key role (Bu¨schgen 1994, p. 19). From banks' own perspective, and based on these characteristics, the strategies of financial service providers are focussing increasingly on developing a positive image and a good relationship of trust between customers and institutions (Kotler and Bliemel 1992, p. 664), as customers usually do not—or did not—have the same degree of knowledge as their advisor.

Theoretically, information-based services have an unlimited life span, as the information is not used up by consumption. The time value of the information, on the other hand, is indeed limited. A rapid loss in value often occurs as soon as the novelty of the information creates the added value. Share prices, for example, can become immediately valuable due to fast communication. Over time, however, additional information, such as the overall market development, becomes more important. Conclusion: the value depends first on the speed, and later on the comprehensiveness of the information (Whinston et al. 1997).

Information items are intangible in nature, so that there are hardly any storage problems, and the physical storage site is technologically insignificant as long as access is secured. The items can be used by a number of people simultaneously. There is no competition in terms of direct use (Cohen et al. 2000).[2] Different consumers can derive a different benefit at different times from the same information. The possibility to exclude third parties from using the ideas contained in the information is limited. A monopoly position can be maintained through patent and copyright protection, but only for a certain time period. The ability to separate the idea from the protected information item[3] means that information can be replicated at low cost (Arrow 1962).

Prior to the beginning of the digital age, the cost of switching between information-based products was high due to the amount of learning and familiarisation that was involved. These days, systems are user-friendly, and at the same time quality can be better assessed by reading the opinions of other users online. The new media have expanded people's horizon of activity, enabling social and economic contacts with ever fewer limitations to time or space. This should be considered when designing a service.

Despite their growing knowledge and the easier availability of information, customers are still attracted to relationships of trust, even in the digital age. Purchase decisions are made under greater ex-ante uncertainty than is the case with physical products. Following purchase, customers cannot judge conclusively whether the expected added value has actually occurred. Yet the ex-ante price depends on the ex-post benefit, which can lead to a potential conflict between buyers and sellers (Arrow 1962). If the provider cannot send a sufficient signal in the form of reputation or reports by other customers, the customer will perceive the risk as being high.[4]

The cost of the initial production of immaterial goods is high, while the costs of reproduction are low (Arrow 1962). There are almost no production-related limitations to what can be offered, as information can be reproduced at will (Shapiro and Varian 1999). This determines a corresponding pricing and the aspiration for a critical mass of turnover.

  • [1] In addition to these there are “search qualities”, which can be assessed analytically prior to the conclusion of a transaction, and “experience qualities”, which can be assessed after the conclusion of a transaction (Bruhn 1997; Bruhn and Meffert 1995).
  • [2] Thus many users can read the online version of a daily newspaper at the same time. The freedom of financial products from competition is limited, however. The danger of insider trading and the delayed forwarding of information are just two examples of possible conflicts of interest when it comes to financial products.
  • [3] Internet Explorer by Microsoft, for example, is a protected object, but a browser in general is not, which is why there are a number of products that are based on the same idea.
  • [4] See Nelson (1970) on trust-based goods. From this perspective, the importance of brand management for asset managers is understandable.
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