The Future of Banking in Germany – Who Will Survive the Death of Banks?
In June 2007, the first shock waves hit the German banking industry: speculative transactions in the subprime market, the US mortgage loan market for borrowers with low credit ratings, led to the biggest global economic crisis of the post-war period. Since then, the German banking system has been trying to get back on its feet. But the rapid pace of digitalization is leading to increasing international competition in the domestic market and the pressure to invest in current IT infrastructures is growing. It seems that the really hard times are just beginning.
The "Bankenreport 2030", published in February 2018 by management consultants Oliver Wyman, predicts that the number of banks in Germany will fall from 1,600 to just 150 to 300 within the next 10-15 years. Can German banks even arm themselves against the demise of banks and their competitors, including foreign banks, FinTechs, market infrastructure providers and global technology companies? And if so, what measures can be taken?
At first glance, the situation does not seem all that dramatic: according to Oliver Wyman's Bankenreport 2030, banks in Germany currently have a large customer base of private and business customers, draw on a stable earnings pool of around 115 billion euros and have low risk costs. But profitability has been reduced by a third in the last ten years and banks are operating in a fundamentally different market environment. The existing 'three-pillar structure' of private commercial banks, state-owned providers and cooperative banks will be streamlined by bank consolidation and increasingly centralized structures and supplemented by a fourth pillar at the same time. This pillar consists of foreign banks, market infrastructure providers, international technology companies and FinTechs and directly competes with German banks. Such a change would lead to sustainable transformations in the entire industry.
Against the background of new competitors and additional drivers of change such as technology and innovation, changing customer expectations and strict regulations, two possible future scenarios can be expected, according to Oliver Wyman. On the one hand, a calculable, incremental evolution scenario that supplements existing structures with cooperations, expanded business models and digitization initiatives; on the other hand, a much faster, radical disruption scenario that requires speed and digital technologies and makes current structures obsolete due to the adaptation of new systems and processes.
The increasing modularisation of supply and demand plays a decisive role in both scenarios. This means that products and services no longer necessarily come from one provider, but are also offered as a conglomerate of different financial service providers. According to Oliver Wyman, successful banks will no longer map the entire value chain in the financial sector with their services, but will follow the trend of value creation networks. Thus, a sustainable corporate positioning of the banks either as suppliers by concentrating the product range or as 'orchestrators' with a regional focus and contact to the customer is decisive for their survival in the market.
To be prepared for both scenarios, banks should on the one hand train their intercultural competence and on the other hand improve their ability and willingness to innovate. As a result, a far-reaching change in corporate culture is required, which is why the strength profile of managers and their ability to enable changes in the company are seen as an important competitive differentiating factor.
Why are FinTechs putting so much pressure on German banks?
A major driver of changes in the financial sector are the so-called FinTechs. These companies are rapidly changing the banking market with specialized financial solutions that are adapted to current technology and market conditions and are driving the disruption scenario. The number of FinTech companies in Germany is growing steadily. According to the study 'Germany FinTech Landscape' by the auditing and consulting agency Ernst&Young, there were already 310 companies in 2017, with an upward trend. It is to be expected that the upcoming Brexit will have a positive influence on Germany's attractiveness as a location and that there will be a move – especially from FinTechs located in London. It can be assumed that the rapidly increasing number of FinTech's will put additional pressure on German banks.
It is a fact that different digital financial service providers already cover a large part of the product range of large banks. Whether in the areas of payment and payment transactions, in the financing and lending process or in the property and insurance industry (PropTech and InsureTech). FinTechs often redefine banking and address the weaknesses of banks. In the age of digitalization, FinTechs have already exploited the potential that some banks have not yet recognized or implemented. Online banking or customer advice via video chat are no longer enough. With their innovative banking processes and customer-journey analyses, FinTechs are much more agile and customer-oriented: Cloud technologies and mobile service offerings enable customers who do not have direct access to a bank's branch network, for example, to configure their credit via app. Algorithms automatically determine their creditworthiness and determine the repayment rates.
That is why it is now more important than ever for banks to develop a clear digitalization strategy. Only by cross-platform and cross-departmental linking of data can customers' current expectations of service and speed be fulfilled, as they are already accustomed to from FinTechs.
In addition to the need for extensive process innovations, the Bankenreport 2030 emphasises the relevance of a sustainable business model based on a clear strategic positioning of German banks for the evolutionary as well as the disruption scenario. In both scenarios, far-reaching changes through digital technologies are expected, also for the employees of financial institutions. In case of a disruption, a drastic reduction in staff numbers is to be expected, which will have major consequences for the employment and IT architecture of the banks.
According to estimates by the analysis service provider Barkow Consulting, on which the Handelsblatt has already reported, the bank branch network has halved from 66,000 banks in 1996 to around 30,000 in 2017. The IT architecture of German banks also needs to be fundamentally renewed and adapted. Here the FinTechs are ahead of the banks and benefit from process automation and omnichannel offerings by using current IT and cloud systems. Most legacy systems of German banks are outdated. Historical programming languages, functional gaps, isolated IT solutions and redundancies in the IT landscape result in high support costs and excessive IT costs. Modern, modular banking platforms are much more flexible and form the backbone of a state-of-the-art IT infrastructure.
Using open interfaces, existing systems can be integrated, and front and back office applications can be linked in a useful way. Frameworks and templates enable banks to generate efficient, fully or partially automated solutions more quickly and to focus much more strongly on their actual business model. The technological flexibility is described by Oliver Wyman as one of the most important key elements in the banks' struggle for survival.
The structural change in the German banking system is already in full swing: drastic changes due to disruptive technologies and increasing competition from foreign banks, infrastructure providers, international technology companies and FinTechs are forcing banks to act quickly. Due to their range of innovative financial services and new product variations in the financial services industry, FinTechs are increasingly becoming stronger in the battle for the relationship to customers and are acting as a accelerator for the decline of banks in Germany.
To survive, traditional banks must have a clear strategic position and benefit from the advantages of digitalization and modularization to develop viable business models. The implementation of digital banking platforms is an important step in bringing the IT architecture into line with the new market speed by using lean and flexible processes.
The digital transformation must be practiced within the entire company and anchored in the corporate culture. Only in this way will the irreversible change in the banking sector become an opportunity and not an obstacle for German financial institutions.