German Banks Betting Billions of Euros on Tech
The 50 top lenders will spend as much as 6 billion euros ($7 billion) by 2020 developing their digital initiatives, according to a study by consulting firm Oliver Wyman provided exclusively to Bloomberg. That represents about 12 percent of their total revenue last year and excludes regular IT spending.
Banks such as the Netherlands’ ING Groep NV have garnered customers in Europe’s biggest economy through a strategy focused on internet and mobile banking. While other lenders are following suit, creating Chief Digital Officers and considering cooperation's with so-called fin-tech companies, it remains to be seen how many of these investments will pay off, Oliver Wyman said.
“If someone creates a mobile app, then everyone creates a mobile app, whether it makes sense or not, but an app ultimately costs money,” Goekhan Oeztuerk, a financial services partner at the firm, said in an interview. “What’s been invested has often not been properly thought through. For example, whether a product makes itself felt on the revenue side.”
From a cost perspective the rationale for creating low-cost platforms for banks to build out their offering may well make sense: according to the Oliver Wyman study, costs at many German banks have been increasing with revenues in recent years, with an increase in the cost-income ratio to around 70 percent on average.
“Digitization is here, and it’s moving at a brutal pace,” Joachim Olearius, spokesman for the three partners of Hamburg-based private bank M.M.Warburg & CO, said in an interview. His company recently launched a robo-adviser. Last week, Germany’s cooperative banks announced that they will invest 500 million euros in digitization.
According to Deloitte LLP’s recent "Digital Banking Maturity Study EMEA", Germany’s banks have only a moderate degree of digital maturity. In international comparison they are only 24th out of 38 countries, the study found.
Marcus Dahmen, head of banking transformation at consultant Horváth & Partners, has also criticized one-dimensional digitatalization strategies. “We found that many banks limit themselves to individual measures to become more efficient,” he said. Instead they should “dare to develop a comprehensive digitization strategy that encompasses all business areas.”
According to the Oliver Wyman study, many banks rely on fintechs to take their digitization initiatives forward. The way the banks integrate fintechs, however, has changed over time. “Initially, fintechs were often bought, but then got lost in the company,” Oeztuerk said. “Today, the model of cooperation is coming to the fore.”
One such example of cooperation between a traditional financial service provider and a fintech firm is the digital asset management offering of Fuerstlich Castell’sche Bank. Bavaria’s oldest bank joined forces with Berlin-based Elinvar GmbH while implementing the project. “This has significantly accelerated the development,” CEO Sebastian Klein said.
Digitization should replace regulation, growth and costs as the most important topic in the boardrooms of German banks, Wyman’s Oeztuerk said. “We have identified insufficient know-how, lack of innovation governance and high risk aversion in addition to the lack of integration into the overall strategy as obstacles to successful digitization,” he said.