Open Banking: Major banks between legacy systems and future concepts

What digital strategy is promising for a financial institution depends on its size, among other things. Deutsche Bank recently announced a change in direction: it offers third-party financial products via platforms instead of working with an in-house digital bank via ING-DiBa and the like. Major banks are required to position themselves individually in the open banking environment.

At the end of May, Deutsche Bank presented its new digital strategy: instead of establishing an in-house digital bank as planned, it is using its strong market position to sell third-party offerings via a platform. The financial institution thereby avoids, on the one hand, entering into direct competition with the major direct banks (ING-DiBa, DKB, Comdirect). On the other hand, it retains its existing customers with attractive additional offerings while monetising the model through commissions at the same time.

Gatekeeper instead of digital bank

Tobias Weidemann, editor at IT Finanzmagazin, believes “that Deutsche Bank was inspired by the platform idea, which is currently on trend in many sectors of the e-commerce world”. He considers the change in direction to be only logical: “No bank, not even one of the size of Deutsche Bank, will have to (or be able to) develop everything themselves in the future. Joining forces with fintechs is therefore more than just a compromise.” Instead of trying out a “stylish digital bank”, it skilfully plays the role of gatekeeper with offerings such as the interest rate market.

Just how comprehensively all business units of major banks are affected by digitalisation is shown by av-finance editor-in-chief Herbert Sebald (gi geldinstitute). In his view, all “traditional market areas” at major bank are up for grabs, including investment banking. The streaming service Spotify successfully raised fresh funds in a transparent manner in the spring by going public “in accordance with the web 2.0 auction principle”. “The independently organised balancing of interests via strong IT platforms could gradually replace “deals” via investment banks and affect the previously high remunerations for banks for their market and power monopoly more strongly than many market analysts imagine today.”

Banking IT dominates the business strategy

The financial expert has worked out how much banking IT and business strategy depend on one another: “New co-operation forms of banks for all kinds of core areas with external IT specialists are essential to avoid cheaply selling off the best performers to the agile new competitors. Many a top manager is realising that IT management is no longer the technical outsider, i.e. a few loosely connected programming interfaces to external solution providers (API). This is about radically upgraded process rules for the optimal further operation of the (hybrid) core business.”

To avoid “being banished to the back of the innovation train”, financial institutions should act quickly, recommends Herbert Sebald. “The clock is ticking a lot faster than five or ten years ago at the major banks for a radical upgrade to the core banking systems. A major bank wasting more than a quarter of its total budget on various unproductive IT applications today will ultimately hardly be in a competitive position for the digital change.”

On the agenda: major banks see the potential of open banking

A recent accenture survey of some 100 managers of major banks comes to the conclusion that they are indeed aware of the future-securing significance of open banking. In North America, 60 per cent of respondents said that tapping into new sources of income, cutting costs and improving the customer experience will be strategically prioritised. In Europe this figure was as much as three quarters of respondents (74 per cent). The majority of major players are taking a promising approach to increasing their profitability.

However, they are still far from the figures that Ralph Hamers, Chairman of the Board of the Dutch ING-DiBa parent ING Groep, presents thanks to its consistent digital strategy. The net result rose last year by 5.5 per cent to 4.9 billion euros. “In the last quarter of 2017 alone, it won half a million new customers, and now has a total of 37.4 million customers, mainly in the Benelux countries and in Germany”, says Thomas Klemm in the FAZ. The major bank achieves that with a cost structure of which other financial institutions can only dream: “To earn one euro, ING does not even have to invest 56 cents.”

You can find an overview of the various options for positioning yourself in retail banking with innovative solutions here.

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