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6.2 The Modern Concept of the Business Models of Banks

In this section, first the pervious findings on the digital age and its effect on the “what” and “how” of business models is substantiated (see Sect. 6.2.1.), before the concrete business model options of the digital age are then presented (see Sect. 6.2.2).

6.2.1 The Success Factors of Digital Business Models Fundamentals

Banks fulfil various intermediating functions (see Sect. 4.5.1) as hierarchical forms of organisation. The costs of fulfilling these functions via the market mechanism have sunk dramatically in the digital age (see Sect. 5.4.3). That means that customers can become informed about all relevant development at any time in any place, real-time and almost free of charge. The previous intermediary functions of banks—such as lot size and deadline transformation (aggregation of the money of different customers via savings accounts and the granting of loans or mortgages to borrowers) or in part also risk transformation[1]—are of very little value to the customer anymore. That is the main reason for the margin-related and industrialisation pressure on banks.

How can banks now adapt their business models to the new situation in the medium and long term? In order to be able to manage this development, the business models must become more efficient—focussing on core competences and task distribution along the value chain will become necessary elements of future-viable business models. For this reason, the positioning in the value chain network and the active management of the customer interface are the key factors of current business models. Analysing the perfectly tailored participation in value chain networks is a central task of management. In a virtual network, companies avail of both their own knowledge and outside knowledge, as well as internal and external resources, in providing their services. In short, virtuality is defined as the competence required in order to participate in company networks (Wu¨ thrich and Philipp 1998, p. 42).

The traditional analytical units of market and company must be expanded to include the new circumstances—the “virtual network structures” and the “redefinition of the customer interface” (see Hamel 2000 and Tapscott et al. 2000 for alternative approaches). Value Contribution (WHAT)

So the previous instruments for strategically analysing the existing success positions of banks must be supplemented by the “value creation network” and “customer interface” aspects. Here the concentration on the bank's own effective core abilities is unavoidable, and the reference to previous services or the passing on of intermediate in-house parts of the service provision to the (end) customer as well as an exact analysis in accordance with the nine factors of the CANVAS model is necessary.

The concept of the three value disciplines by Treacy and Wiersma (1995) gives an orientation for possible value contributions, which arose from studies of the success of large companies. According to the concept, market success is only really

Fig. 6.1 Concept of the three value disciplines based on Treacy and Wiersema (Source Koye 2005a, p. 149 based on Treacy and Wiersema 1995, p. 45 ff.)

possible by focussing on one, or maximum two value disciplines. With customer intimacy, the focus is on the customer interface, while with product or cost leadership it involves concentrating on those parts of the value chain that are not immediately apparent to the customer (Fig. 6.1).

Thus, the following strategies are possible:

• Concentration on cultivating the external customer interfaces

• Positioning at the product level as a product specialist

• Positioning at the processing level as a transactions specialist, and offering this service package as a cost leader to the customer-oriented network partners

A combination of all three areas within a company leads to economic and cultural conflicts. Management is forced into efficiency-reducing compromises. Once, such compromises had to be made because of the high transaction costs of market solutions (see Sect. 4.3). In future, according to this model, no company can afford to be the long-term market leader in all three disciplines. This means that maintaining the previous proprietary models will become gradually more problematic. Increasingly, customers are expecting “best-in-class services” in each area, at cheaper overall conditions. Organisational Form of the Network Cooperation in Providing Bank Services (HOW)

As a consequence, virtual forms of organisation emerge, in which individual partners can work together beyond the company boundaries of network partners.[2] Companies are oriented towards integrating the output of the core competences of other companies into the value chain. The main motivation for the formation of virtual organisations is the concentration on one's own strengths under consideration of cooperation, in order to keep the price/performance configurations attractive. The business processes are designed in such a manner that the individual competences are coordinated to create more value for all network partners. The concentration entails a dependency on external competence providers for those network partners involved (Sieber 1999, p. 245).

As shown in Fig. 6.2, a so-called focal company unit forms the centre of a virtual company, which controls the network and selects the partners. A unified front is presented to the customers, and the value chain is optimised with the use of ITC technology. The prerequisites for the effective realisation of the efficiency gains are a culture of trust and the IT networking of the independently acting partners.

Depending on the speed of change within the network and the complexity of the knowledge and information demands, one speaks of an internal, stable or dynamic network (Keller 2000, p. 36 f.):

• Internal networks are formed by decentralised units within a company. The provision of services is coordinated internally, as it concerns the management of complex knowledge and information demands.

• In stable networks, external partners are involved. Here the service provision is guided by a focal company that covers most of the key value creation itself. The knowledge and information demands of the components outsourced to partners are not as complex as those in internal networks.

The focal company at the customer interface completes the value chain by procuring some elements and products externally. Network partners who were once competitors before the information age can now be both competitors and partners. The focal partner usually also has the contact with the customer.

Fig. 6.2 Features of network-oriented/virtual organisations (Source Koye 2005a, p. 185)

• Dynamic networks are situation-dependent and composed of different partners, with the aim of using current market opportunities. Both partners are leaders in their own areas in parts of the key value creation.

These three network positioning options are open to all banks. If a major bank decides to organise individual divisions as independent units, a quasiexternalisation or externalisation of individual units is possible. In the case of quasi-externalisation, these remain connected with each other in an internal network (on the basis of service level agreements). The involvement of smaller providers, where at the same time major banks take on the role of the focal unit,

Fig. 6.3 Overview of the network organisation options (Source Koye 2005a, p. 187, based on Sieber 1999, p. 247)

leads to a stable network with the procurements of external products. For the smaller providers, participation in a stable network—while maintaining independence—or in an internal network—with a surrender of independence—leads to an internalisation, as their own decision-making competence is surrendered to a large degree to the focal company. Participation in a dynamic network is a quasiinternalisation—while maintaining independence—because it is integrated into the legally independent network (Fig. 6.3). Importance of the Customer Interface

The customer interface has always been important, but now, in the digital age, it has a disruptive role. Previously, customers maintained one, or at most a few relationships with banks, who provided their services in an aggregated manner. Today, thanks to the technological possibilities, customers are able to use a number of service providers in parallel, and even to coordinate them to an ever greater extent as focal partners.

The layout of the customer interface by the banks can be described with four elements: the information status of the customer, the relationship dynamic between customers and providers, the type of product delivery including support, and the fees structure.

The greater the customers' level of information about the possibilities of procuring information and their willingness to use it actively, the more likely it is that they themselves will act as focal network partners. Depending on their needs and preferences they can compile individual components of the value chain—for example the independent selection of optimal investment solutions in the form of securities; the purchase of securities from a provider, and the management of the securities in a deposit bank. Potentially, they use three partners: the advisory platform, the provider of the securities, and the deposit bank.

The fees structures are transparent to a different degree, depending on the network form. Margins decline depending on the network structure and the degree to which the customer is informed and active. With internal networks, the fees remain completely within the bank, as it provides the whole value creation. In the case of stable networks, the focal network partner can claim the largest share of the fees. In dynamic networks, the fees must be shared with at least one partner equally, who has also contributed a key value creation. The fees structure is most transparent when the customer himself is the focal network partner. He knows the contributions of all involved parts and can choose in each case the “best-in-class source”.

  • [1] A smaller denomination of investments might be possible via the market, thus reducing the risks. However, these are then borne by the market participants.
  • [2] A virtual organisation (VO) is a form of organisation in which legally independent companies and/or individuals join together virtually into a business partnership (usually via the internet) for a certain period of time. The virtual company presents itself to third parties or clients as a unified company. A distinction can be made between intra-organisational and inter-organisational forms of virtual organisation. While in the first case, the virtualisation occurs within a single legally independent company, the (often time-limited and project-related) inter-organisational form for virtual organisation is composed of a number of legally independent companies (Gabler Wirtschaftslexikon 2013). The concept of the virtual company has not been defined uniformly. The main discussion points are: the duration of the connection, the extent of the contractual regulation, and the safeguarding of key functions solely based on information and communication equipment. See Keller (2000), Sieber (1999), Mertens and Faisst (1995) and Wu¨thrich and Philipp (1998).
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