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European banks – and German banks in particular – are currently experiencing an unprecedented upheaval. A combination of multiple trends is driving this radical transformation of the banking sector. The technologization of our society, the marginalisation of traditional sources of income, and the growing presence of online giants with quarterly profits sufficient – should they wish – to buy a major German bank, are just a few examples of these trends. As a result of all this turbulence, the senior managers of today’s financial institutions are confronting a number of strategic challenges:
In the long term, a substantial proportion of banks’ historic maturity-based revenues will disappear. Furthermore, despite years of effort, banks have been unable to increase their share of commission income. This is why banks must develop new services as a matter of high priority. But this requires a well-developed culture of innovation. One of the key components of such a culture is customer-centricity, meaning the integration of business processes into customers’ own processes (apoBank is an excellent example of this approach). Turning banks into centres of trust, or creating banking services that are also sustainable financial products, could be other key components. One thing is certain: Future banking services will go far beyond the services traditionally offered by financial institutions. This will require cross-company approaches that involve rethinking services as part of the Internet of Things (IoT) or as platform-based business models.
If a business does not succeed in increasing revenues, it must resort to the traditional alternative, cost-cutting – and must do so at an early stage. To remain competitive, process management tools must be applied as systematically as possible, simplifying processes, standardising products (unless the focus is on differentiation), and of course automating wherever possible and wherever it makes sense to do so. This requires strict end-to-end design, as well as close collaboration between IT and business departments (Commerzbank’s digital campus being an excellent example). Outsourcing non-critical activities to partners is just as much a part of this as using industrial production management processes (robotics, simulations, process laboratories and so on). In the future, banks will run on mixed business models; they will be half distributor (for anything not already handled by Amazon et al.), half IT company (as operators of banking services). Progressive institutions like BBVA and online banks (fintechs) are already doing these things.
Many banks will find it difficult to devise new business models that include sufficient sources of income. There is a limit to which you can streamline efficiency. These institutions only have one option – to consolidate (again, as early as possible!), i.e. give up their independence. This process has already been happening across both major banking associations; the remaining institutions are growing ever larger and must now evolve into “high-performance organisations” in their respective markets. Regional joint ventures between savings banks, cooperative banks and private banks should also be an option. Developing a clear, viable business model (here, ING Bank is a good example) is one of the top priorities for senior managers. Furthermore, larger institutions (at the very least) must now think far beyond German borders. The harmonisation of the EU marketplace requires suitable banking structures – and as yet, they do not exist.
Nearly all European banks have a lot of catching-up to do when it comes to using new but widely available technologies. Banks are data-processing companies – although many bank employees and managers have yet to grasp this fact. Artificial intelligence, robotic process automation, blockchain technology, cloud computing, data analytics, involvement in social networks (not just for advertising, but offering real-world services) all add up to a wide variety of new opportunities. Nor should these things be left to the “IT department” – they relate directly to the business of banking. Beyond that, it is time to transform banks into platform organisations, otherwise they run the imminent risk of no longer being compatible with newly emerging ecosystems that extend far beyond traditional banking IT. Connectivity – especially to the IoT (as exemplified by connected car payments, cf. Tesla) – is vitally important. But trialling new technologies while simultaneously continuing to spend time and money on the maintenance and upkeep of existing applications (partially as a result of constantly changing regulatory requirements) represents a major challenge for banks.
Banks are metamorphosing into technology companies. Consequently, skills are needed at all levels that are not, unfortunately, part of the traditional banker’s skillset. This entails (painful) workforce restructurings, which have already started in some institutions. The “academisation” of head offices will increase (this applies to all banking groups) due to the ongoing proliferation of methodological and technological requirements such as data analytics in marketing, process and technology expertise in organisation management, and actuarial-statistical expertise in, for example, controlling and auditing. Banks will also need to know more about other industries as their work with clients becomes increasingly integrated with their clients’ processes. Inevitably, this means that in corporate banking in particular, banks will need to know more about customer needs than ever before (one example is export trade finance, as banks become integrated into blockchain-based supply chains). In contrast to previous eras, however, it will become increasingly difficult for banks to recruit suitable employees, because so many other sectors (including consulting firms, Internet companies, startups, not to mention automakers and automotive suppliers) are viewed as offering more attractive employment conditions.
The upheaval currently sweeping through the banking world is all-embracing, calling into question the traditional and habitual patterns of thought and behaviour that have hitherto typified bankers. But it is also creating opportunities. To take full advantage of the latter, banks must continually evaluate new possibilities and systematically exploit those identified as most relevant. While banking has become extraordinarily challenging, now is precisely the right time for bankers who have the courage to change to build the exciting, customer-centric, technology-based banks of the future.
An earlier version of this post appeared on January 17, 2020, on Bank-Blog: Moormann, J., Banken 2020 – zerrissen zwischen Tradition und Hightech. Das klassische Modell des „Kreditinstituts“ ist nicht mehr zukunftsfähig, in: Leichsenring, H. (ed.), Ausblick 2020 – Themen, Trends, Chancen und Gefahren für Banken, Sparkassen und andere Finanzunternehmen im neuen Jahr, e-Book, 2020, pp. 36-37
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