Digitization and banking: Reaping gain from digitization of the economy
German banks are currently operating under difficult market conditions. But there are options and approaches available to them for lowering costs and tapping into new sources of revenue. We present three.
Banks are under enormous pressure these days – from several sides at once. On the one hand, there is great pressure on profit margins. The European Central Bank is holding interest rates at historically low levels, and money is also still cheap to borrow in the United States, Japan, Great Britain and Russia. This is having a big impact on German banks, especially, because in the past about three quarters of their income has come from interest margins. Swiss banks, by comparison, earn less than half of their income that way. German banks are responding by closing branches. Recently, they have also begun charging fees for services that used to be offered for free. Costs have nevertheless remained high while incomes have shrunk.
And on the other hand, there is growing competition from new challengers. Fin-tech startups and large technology companies are taking over simple processes like money transfers or loan brokerage, and they are winning over customers by being fast and user-friendly. Keep in mind, though, that the conventional processes and cash flows are still taking place in the background – services like PayPal, Apple Pay or paydirekt don’t work without a checking account or credit card. Finally, the increasing level of regulation is not only creating new requirements that must be met but also making it more difficult for banks to develop unique products they can use to stand out from the competition.
Strategies for the Future
How can banks position themselves for the future amidst these pressures? Three possible ways are becoming apparent, and these approaches can definitely be combined with one another.
1. Digitization and expansion of self-service banking
Digital services that can be accessed through various channels are an appropriate way to lower administrative expenses in the branch offices and streamline processes. Chatbots based on artificial intelligence will soon be able to answer even fairly complex customer queries on their own. Video telephony makes personal consultations independent of time and place. And many processes, such as switching accounts, can be automated.
On the one hand, this improves the cost situation at banks. It also creates room to expand personal, face-to-face services in areas where customers still want them – as in the case of complex financial products that require extensive explanation or advice, or for products tailored precisely to the needs and preferences of customers. After all, simply consigning customers to an anonymous self-service environment would not be a sustainable, long-term solution.
2. Evolution of the branches
Many banks are already changing the structure of their branch offices. Assuming that not all banks want to become online banks without any branch offices at all, two developments are conceivable for small bank branches in particular. First, there is the digitized branch. Here, customers have access to a self-contained console with a display and a scanner. After they have identified themselves as customers with their EC card, fingerprint or smartphone app, a video stream opens to the customer agent at the service center, and the consultation can begin. Customers can use the scanner to give the service agent copies of any documents to be discussed. Second, several banks can share a branch in which each of them has its own section. The advantage is that they are still accessible to their customers in person and share the fixed costs for the property as well as the technical infrastructure.
It should be noted as well that regulation could also lead to the creation of a shared, standardized IT back end for all financial institutions in Germany. Why not? Presently, banks are routinely investing large sums of money to satisfy new regulatory requirements – based on a technical infrastructure that is now decades old. A common platform would eliminate this burden and allow them to focus more on their actual core responsibilities again.
3. Development of new sources of revenue
Currently, there exist few companies that have such a comprehensive picture of their customers as the banks do. They know about all the payment transactions of their customers going back to the beginning of their accounts. In many cases, they even have copies of complete invoices that have been photographed with a smartphone and transmitted with an app. A bank could analyze this information and then provide a customer with recommendations for alternative electrical companies or cell phone contracts and coordinate the change of providers. Technically, that’s already possible now. But before business models of that kind become a reality, the data privacy issues have to be examined, and there are some cultural obstacles to overcome. German consumers do place great trust in their banks – which was one result of the “EY Global Consumer Banking Survey 2016” – but it will probably be some time before financial institutions can act as brokers of services unrelated to banking.
Author: Editorial team Future. Customer.