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6.2.2 Business Models for the Transformation of Banks Fundamentals

Banking business model options can be described in terms of network positioning, key processes and value discipline. The key processes of banking are the advisory function, product development and provision, and basic and implementation transactions. The value disciplines in banking are customer interface management, product leadership and cost leadership in processing. The models are:

• The previous classic models (see Sect. 6.1)

• The product specialist

• The transaction specialist

• The agora Analysis of the Classic Models

The major banks, retail banks and private banking providers have concentrated on all three value disciplines simultaneously. Only the independent asset managers have concentrated solely on managing the customer interface. There were once providers that concentrated only on the product level or transaction level. Frequently they were the internal service providers of certain banking groups—for example Swisscanto in Switzerland as a funds provider for all cantonal banks or, in Germany, various different internal transaction processors for the cooperative banks—these include, for example, Fiducia with its competence in data centre operation or in software development—or savings banks. In addition, there have always been specialist providers of products, such as Fidelity or DWS in the funds area (Fig. 6.4).

Fig. 6.4 Classic business models (Source Own illustration) Current Situation

For the most part, many major, retail and private banks are holding on to previous models. The prevailing attitude is that there is sufficient development due to gradual industrialisation and in some cases the outsourcing of certain areas. Synergies and economies of scale are achieved in transaction processing by means of insourcing. In production, a best-in-class positioning of one's own products is targeted, in order to achieve greater volume with high profitability. The aim is to be positioned as a focal company. Interfaces exist both with customer and with internal network partners (B2C and B2B). The major banks can use the opportunities of mass customisation.

With regard to virtualisation and positioning in emerging networks, in recent years the major banks have driven forward the process of quasi-externalising individual units by means of service-level agreements (SLA). They focus on all three value disciplines and aim to form stable networks and assume the role of the focal company wherever the supplementation of their product or transaction process portfolio appears to make sense. In the course of developments towards open architecture, the banks' own products are made available to other providers. The cooperation corresponds with the form of stable networks.

Retail banks are focussed primarily on the customer interface. Constant monitoring of the value creation processes and the implementation of efficiency potential are crucial for long-term competitive success. Initial approaches to forming value creating networks through cooperation in the areas of transaction processing and product creation can be detected. The retailer is in a difficult position, as it is hard to reach critical mass with many products or in the area of transactions. The process of quasi-externalising individual units by means of service level agreements is underway. The core competences of asset management are not held equally by all providers. The use of technology is employed professionally by all providers, so that the information transfer is also safeguarded. However with regard to the image focus and the implementation of an enhanced customer care and loyalty concept there are clear differences in experience to those providers who concentrate on the customer interface in asset management. Among private banking providers, the option to form value creation networks is exploited more actively than in the models outlined in the previous section. Products and transaction services are bought in from third parties. The primary competence is customer care with individualised service, in combination with the ability to perform complex asset structuring and the selection of the appropriate best-in-class products and service providers. The use of technology and the information transfer are safeguarded in the course of the previous phases of business model change and the core competence of image positioning meets the different customer expectations. With regard to virtualisation and positioning in emerging networks, these providers strive to form stable networks and to assume the role of the focal company in customer interface management. Some selected products with a high degree of value creation will continue to be produced independently as a secondary value discipline, which distinguishes this business model from that of the independent asset manager. In the course of the developments towards open architecture, the in-house products or transaction systems are also made available to other customer interface providers. A quasi-internalisation takes place where the role of the focal unit is assumed by another customer interface provider.

For providers with standardised products, direct banks have presented a strong challenge in the German-speaking region in recent years. They offer the same services as the classic providers—but without a branch network and with roundthe-clock availability. This development is an initial reaction to the digital opportunities, but which distinguishes them from the classic providers only in terms of the feature “channel management”.

Furthermore, there are an increasing number of specialised product providers and transaction specialists who operate independently of bank groups and process the aggregated services of many banks on their own systems, thus allowing economies of scale. In Switzerland the market for process outsourcing is occupied by only a few providers—for example, the Incore Bank, Swisscom IT Services or B-Source. The Zurich Cantonal Bank, for instance, has outsourced its processing to the Incore Bank, an independent, publicly listed transaction bank that in turn evolved from a private banking parent company. Germany has Fiducia and Finanz Informatik, the IT service providers for the Sparkassen.

Some providers combine the product and processing competence—for example Hypotheken Management GmbH in Germany or Hypotheken Servicing Schweiz, who both allow banks to outsource the production and processing of their mortgage offer either in whole or in part—in the sense of overcapacity management.

Furthermore, some providers have built up strong positions in other value disciplines, alongside their primary value disciplines. UBS was able to take this approach with many banks with their “Bank for Banks”—Migros Bank, for example, processes its stock market transactions via the UBS systems, notably at much better conditions. In addition, both Migros Bank and PostFinance procure their mortgages as “white-label” products from UBS. In Switzerland the first reference example was the cooperation between the Linth and Wegelin banks, in which Linth remained the independent interface to the customer, while the asset management systems were managed completely by Wegelin: margin sharing among equals, with each using their own competences (Koye 2005b). Other examples include the cooperation of the VALIANT Group with the Geneva-based private bank LODH (Lombard Odier Darier Hentsch) in the area of product offerings and the equity stake-supported cooperation between the Vontobel banks and the Raiffeisen (Schweiz) Group in the area of product sales (Auge-Dickhut and Koye 2012).

Purely sales banks also emerge in this phase as a result—such as the aforementioned Linth bank[1]. The only value discipline is the customer interface. Neither the bank's own products nor its own processing capacities are developed. In the medium term, this model will be able to offer a more competitive pricing in the segment of affluent clients and for standard services than full providers. Economies of scale and scope can be achieved with the rigorous outsourcing of non-focus value disciplines. Customers often have a number of bank relationships and expect optimum coordination. In this role, product procurement and transaction processing can be distributed among many providers and conditions can be optimised. The added value towards the customer lies on the one hand in the efficient execution of this coordination and negotiating function, and on the other hand in the selection of best-in-class producers. With regard to virtualisation, the role of the focal company in a stable network is aspired to in order to control the customer interface. The internalisation or quasi-internalisation of other partners is conceivable, as long as a stable network can occur. Due to the technological developments of the information age, the product and transaction specialist are also a specialisation option. Neither of these two type will position themselves as a focal company.

What they all have in common is that the interface with the customer continues to be occupied or cultivated by one provider. Furthermore, the digital age already allows the customer today to identify the best offers on comparison portals, and also to contact the providers directly via these portals. Portals are usually located upstream of previous customer interfaces, even though the direct contact does then usually take place between the customer and the original provider.

In the past, customers were less willing or able to switch providers due to technological, time-related and other hindrances. If we look at the insurance industry we can see that customers with good negotiating positions/risks know their negotiating power and therefore in some case switch providers annually and accept only short-term contracts. Should these developments intensify in the banking sector, we can assume that customers in future will switch providers much faster, and the price/performance ratio will be more closely questioned and also sanctioned (Fig. 6.5).

The product specialist focuses on product development and production and distinguishes himself through his independence and by striving for a best-in-class positioning for his product. Sales to end customers are outsourced to network partners with a customer interface. Contact with network partners is made primarily over modern communications and processing channels. This business model works

Fig. 6.5 Business models today (Source Own illustration)

with hardly any physical asset values, but has a lot of know-how and a brand name. By switching off all non-core activities, micro-industries are developed that are based on specialised knowledge as a core competence. This specialisation allows the rapid and profound further development of the knowledge basis, which secures expertise and reputation. The networking capability of the products is a necessary prerequisite for this strategy. The product specialist participates in internal, stable or dynamic networks. Depending on the positioning at the start of the digital age, quasior real externalisation, or quasior real internalisation takes place.

The transaction specialist concentrates on cost leadership in the processing of transactions. This business model achieves economies of scale and scope by taking on and executing the relevant process component from asset managers who are oriented towards the customer interface, and these effects can be passed onto the customer in terms of pricing. The use of technology and image maintenance towards network partners are the core competences that are need in the valuecreating networks. Using modern technology facilitates membership in networks and a good image attracts many partners, thus leading to economies of scale and scope. This type is aimed at internal, stable or also dynamic network partnerships with providers of customer interfaces and/or product specialists.

Fig. 6.6 Digital intermediaries (Source Own illustration) The Future

Various different future scenarios are conceivable, for which the approaches are already visible in principle, due to digital realities (Fig. 6.6).

Customers can procure the financial services they require via a digital intermediary. This can take different forms:

• Digital universal banks

• Financial platforms

• Internet concerns

Digital universal banks usually cover the same standard service portfolios as direct banks. In addition, they act as platforms for the direct interaction between customers. For example, the FIDOR Bank acts as an intermediary for peer-to-peer loans.

Financial platforms can compile all the necessary information, products and possible transaction processing. Customers can choose their individual service portfolio, almost as if from a menu. They are not in contact with the service providers behind the products. This can be done explicitly—as suggested by the name “platform”—or implicitly– like the bank Simple, which is effectively no longer a bank, but instead offers an app interface in order to offer mobile banking and to ease the aggregation of different providers.

The internet concerns have understood the digital conception from the very outset and are in the process of analysing the user behaviour of all users via Big Data, in order to then combine perfectly tailored offers. A distinction should be

Fig. 6.7 Self-consultation by customers (Source Own illustration)

made here between internet payment systems like PayPal and conventional internet concerns such as Google and Yahoo. The former can analyse the payment flows of customers and derive perfectly tailored offers from this analysis, while the latter can take the interest structures of user behaviour and search requests as a basis for designing offers, without any knowledge of the financial flows. They can use this information themselves or sell it on to financial concerns. Google has already acquired a banking license in Europe and is working vehemently on the development of a new core competence: perfectly tailored advice for customers via an online platform. What payment transaction providers and internet concerns have in common is that they can probably act quite quickly as a form of financial intermediary, which—in contrast to digital universal banks and financial platforms—can generate perfectly tailored offers with risk-adequate pricing, by utilising their existing data pool (Fig. 6.7).

The customer advises himself using the available online and offline channels, selects what he believes are the best product and service providers, and allows everything to be processed by the best transaction processor. In this model, the customer takes “architectural responsibility” for his personal model with regard to customer/advice interface, production and processing.

The concept of forming a network platform integrates products and providers— and thus gradually invalidates the previous logic of the business models of banks. It represents a dynamic network without a focal company. The customer himself becomes his own “independent asset manager”, he chooses the providers of the individual elements of the value chain himself using an electronic platform that allows the integration of the data of different network partners. The agora represents the realisation of a dynamic network that is compiled by the customer.

For the respective partner this means an externalisation or a quasi-internalisation, depending on their original positioning, and a completely new distribution of value creation.

The possible use options of the agora include the selection, aggregation and structuring of the overall offer of all market participants. In-house products, in the sense of a combination of other external products, are also conceivable. The benefit for the customer lies in the possibility to procure the required parts of the value chain, choosing freely among the specialist best-in-class providers for each element (Cocca et al. 2001). If such a portal manages to gain the trust of a critical number of customers, it will threaten the position of established providers as a focal company, and thus their control of the customer interface.

Dynamic networks are a consequence of this. They are formed, situation-dependent, from a number of different partners, in order to utilise current market opportunities, and they are characterised by great speed of change and complex knowledge and information requirements. The individual parts of the value chain are put together modularly as required—and the alliances with the best form of service design prevail. What is decisive about these dynamic networks is that the customer actively selects the individual service packages. Approaches can already be seen today, where payment transactions are processed on the internet by the provider PayPal, mobile payment transactions will be conducted in future via the respective telecommunications provider, and securities will be purchased from a different provider than the one who holds them in safekeeping. This trend of buying partial services separately will intensify, and will only be moderated when financial service providers come up with convincing overall concepts. Intelligent complete solutions, like those offered by the automobile industry for new-car purchases (mobility guarantee, leasing rates and insurance from one source), could be a model for similar offers in the financial services sector, starting from the personal financial management system, for example (Auge-Dickhut and Koye 2012).

The banking landscape will have changed radically with progressing digitalisation. One possible scenario: the large customer pressure on margins will lead to the formation of advisory banks and product or transaction providers. The advisory banks, in competence centres with specialists, offer qualified advice for a fee to customer groups that are not yet fully self-guided. For the provider banks (who, after all, produce the bank products) infrastructure-sharing is necessary because of the large investments. But the advisory banks are also feeling the burden of high rents in good locations, and are therefore developing a smartphone-oriented branch structure policy (Ernst & Young and University of St. Gallen 2012).

Ø Outlook Structural gains in efficiency through industrialisation might improve the price/performance configuration in the existing paradigm, and thus extend the established success position even further. Nevertheless, awareness is growing that another challenge is appearing on the horizon in the medium term, which is already beginning to display itself clearly in the behaviour of Generation

Fig. 6.8 Industrialisation and digitalisation (Source Own illustration)

Y. Business models like Google have shown how digitalisation is eroding existing success positions. Upon reaching a critical mass of users, Google has now also begun to be a significant, and by now the central player in online marketing. AdWord optimisation is familiar to every marketing professional today, earning millions in turnover for Google in an anonymised market. And this logic can also be expected in the banking sector. The mere industrialisation of a bank's own business model is therefore only the admission ticket for the actually decisive competition in the next 5 years—the true digitalisation of business models at all levels of the business model (Fig. 6.8).

The challenge is to tackle the creeping-radical change in business models— strategically, structurally and culturally. Compared to other industries that have had to face radical phases of change the challenge is a double one, as the erosion process is slow but steady. The existing models should be maintained for a certain period, yet the mistakes made by many successful companies and banks in failing to address the new success potential and performance configurations due to a lack of innovative strength, must be avoided. As the Google model shows, the time will come when both curves will meet—and then the market will be too full for the new and indeed no longer very innovative business models. Therefore it is necessary for banks to firmly address the innovation and redesign of their business models now, and to live in both worlds in parallel—only those who manage this will still have a success position or simply a right to exist in 10 years' time.

As could be demonstrated in Chaps. 4 and 5, the competitors from the digital world are already very active. PayPal might already have a banking license, but at present it is earning a turnover of “only” double-digit billions in payment transactions, and it is not seen as a large competitor—but as soon as customers grow accustomed to this functionality and develop trust, the necessary critical mass will be reached and it will be possible to extend the activities in the agora age to include other functionalities of financial intermediation. These long-term revolutionary change processes form the framework for the mediumand short-term developments that should not be ignored in the industrialisation of business models. Purely structural industrialisation will not take account of the actual chances and dangers of ongoing digitalisation—buzzwords Web 2.0 and Web 3.0—as a relevant design parameter: a deadly mistake that can soon have very negative consequences. The “digital natives” are already up to 35 years old—in future they will continue to “soak up” the technological possibilities that are still in their infancy at present, and will only pay for the services they need.

That is the real challenge for the banks of today. In the next 5 years the perfect balance must be achieved between the industrialisation of present-day business models—to catch breath—and at the same time the strategic, structural and cultural digitalisation—whereby, incidentally, nobody knows how the end stages of the former business models will look. Precisely here is the challenge: in a meeting between CEO, CIO and IT consultants, all three parties will look at each other and expect from the other that he knows exactly how to shape the future. Gradual effective digitalisation and co-creation mean more than just slimmer processes, incremental process improvement and industrialised services at low margins.

The only way to maintain existing business models and at the same time to meet the prerequisites required to face creeping, yet exponentially increasing change, is an effective customer focussing. Banks must succeed in orienting themselves constantly towards the customer needs of the individual customer groups, thus strategically, structurally and culturally safeguarding the balance between preservation and renewal. Just as Samsung—in contrast to Nokia or Blackberry—managed to keep up with the iPhone, many different providers (e.g., Fidor Bank, Bank Simple) have managed to take the step into the world of the digital natives. Existing providers will manage this only if they can square the circle while at the same time implementing radical renewal and evolutionary continuation in their business models.

When individual specialised providers become a serious threat to traditional banks, the banks can then buy up their technologies. The same also applies to the direct banks, which are either developed from within or acquired in addition. In contrast, it is not yet clear which role digital intermediaries will have in the future, and how customers will handle the option of self-consultation. Among the internet concerns the options of imitation or acquisition will no longer work—and this is the real threat to today's banks, well beyond the necessity for industrialisation. A forward-looking, networked internal culture of change is required in the banks, which not only reviews the status quo from time to time, but which constantly develops its business models further from the inside in a permanent prototype mode. “Run” and “change” melt into “evolve”. This has strategic, structural and cultural consequences, which will be explained in the following sections, and it will also be decisive—alongside the behaviour of the internet concerns—in the sense of “to be or not to be” in the coming decade.

  • [1] This has now been integrated into the LLB corporate group.
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