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Industrialization in retail banking

von Heiner Offenbächer (Autor) Alexander Lorch (Autor)

Seminararbeit 2006 43 Seiten

BWL - Bank, Börse, Versicherung


Table of contents

List of figures

1 Introduction
1.1 Problem and objective of the paper
1.2 Methodology and structure

2 Underlying concepts and current situation
2.1 Status quo of the German banking sector
2.2 Successful approaches of the manufacturing industry
2.2.1 The history of industrialization
2.2.2 The era of mass production and scientific management
2.2.3 The era of lean production and value chain deconstruction
2.3 Transfer of industry concepts to the banking sector

3 Application of industrialization concepts to retail banks
3.1 Key areas of industrialization
3.2 Process Management
3.3 Outsourcing in the value chain of retail banks
3.3.1 Procurement and logistics
3.3.2 Operations

4 Implications for the retail bank of tomorrow
4.1 Implications for retail bank customers and products
4.2 Implication for retail banks

5 Critical assessment

6 Conclusion


List of figures

Figure 1: The value chain.

Executive Summary

The German retail banking sector faces severe challenges. Global competitors are invading the market with new business models trying to win existing customers. At the very same time, customers become evermore demanding by means of price and quality and are willing to switch banks if it deems advantageous. If failing to act on these problems, the future of many German retail banks is jeopardized.

Other industries, in particular the manufacturing sector, have faced similar crises. They were able to overcome this situation by drastically challenging and rethinking their business logic through industrialization. This encompassed developing and applying new concepts such as process management, focussing on core competencies and involving external providers into their operations. In the light of this success story, industrialization appears to be a very promising mean to respond to the current situation the German retail banks are facing. While foreign institutes have already initiated successful industrialization activities it has only recently come to the attention of German retail banks. Rigorous process management and the concentration on a limited set of core competencies were identified as key areas of industrialization.

In a first step, the bank’s value chain and the underlying processes need to be optimized for improved transparency and manageability. Automation and standardization as parts of process management are major elements of this first step. In a next step, retail banks need to define their core competencies and identify the corresponding processes on which corporate resources can be concentrated. Non-core value chain activities might consequently be outsourced.

If successfully implemented, industrialization will significantly change the German banking landscape. Retail banks will become increasingly focussed on sales and distribution by outsourcing back-office activities. More efficient and focussed usage of resources allows banks to increase both the amount and quality of value creating frontline consulting and customer care. Therefore, industrialization in retail banks must be grasped as more than just plain cost-cutting: It provides the foundation upon which future growth and competitive advantage can be built.

1 Introduction

1.1 Problem and objective of the paper

The German retail banking sector is undergoing a significant transition process that is fuelled by tremendous changes in its external environment. Well-established incum- bents are facing a completely new scenario. Customers and their behaviours have al- tered significantly as they are becoming more demanding by means of price, product and after-sale service. Furthermore, the emergence of e-commerce and advancements in information and communication technologies provide both banks and customers with new channels for doing business. In the light of decreased customer loyalty and low switching cost, changing to another bank is becoming more likely and feasible than ever before. At the very same time the liberalization and globalization of financial markets has also impacted the German retail banks: numerous international competitors have successfully established themselves with new business models. Instead of offering the full range of financial services like German universal banks they focus on dedicated and profit-promising business fields. Due to these developments banks are witnessing high cost pressure and decreasing profit margins. Consequently, companies that cannot with- stand this pressure are absorbed in an ongoing concentration process that manifests it- self in mergers and acquisitions.1 Several consultants, academics and bank as well as industrial managers compare the situation faced by German retail banks to that of the manufacturing industry about twenty years ago. In the 1980’s German manufacturing companies had to cope with similar challenges and managed to successfully overcome their crisis by developing and applying new concepts such as process management, fo- cussing on core competencies and involving external providers into their operations. In the light of this success story, industrialization is becoming more and more appealing to bank managers as a response to the current situation.

This paper will therefore examine whether these concepts can be successfully transferred and applied to German retail banks.

1.2 Methodology and structure

The purpose of this paper is to analyze the potential of industrialization for the German retail banking sector. The course of the analysis will be guided by three underlying questions:

- What can retail banks learn from the manufacturing industry?
- Which key areas have to be considered during the implementation of industriali- zation concepts?
- Which impact will industrialization have on the retail bank of tomorrow in Ger- many?

In an attempt to answer these questions, the further analysis unfolds into five consecu- tive parts. Following the introduction, part two begins with an analysis of the underlying assumptions for the industrialization of retail banks in order to accurately define and set the scope and direction of this paper. First, the current situation of retail banking in Germany will be overviewed. Then, the approaches that were successful in the manu- facturing industry over the last decades will be analyzed. Examples from the automotive industry will be used to derive a clear and mutual understanding about the aforemen- tioned industrialization concepts. Furthermore, ways to transfer these concepts to retail banking will be discussed.

Having explained the underlying concepts and the current situation, part three will expand upon these findings and focus on the industrialization of retail banking in Germany. The paper will discuss the most promising fields of industrialization in greater detail. Analogous to the manufacturing industry, industrialization occurs in two evolutionary stages. Through process management manual production is replaced by mass production. In the later stage as a concentration on core competencies increases, an increasing share of value chain activities is outsourced.

As the ongoing industrialization process will have significant impacts on the operations of retail banks, the implications for retail banks, their competitive business environment and their customers will be discussed in chapter four.

Analogous to the two areas of industrialization, chapter five will uncover and discuss possible disadvantages of industrialization before arriving at a final conclusion in chap- ter six.

2 Underlying concepts and current situation

2.1 Status quo of the German banking sector

As outlined in the introduction, the German retail banking sector is actively considering industrialization methods as a way to improve its operations. Whilst these concepts have been around for decades (see chapter 2.2 - successful approaches of the manufacturing industry), it is important to understand the underlying reasons why the implementation of industrial concepts has only recently drawn top management’s attention. The German banking landscape is operating in a drastically changing business environ- ment.2 Market conditions have altered and German banks are facing new and serious challenges. There is wide-spread acceptance that the German banking sector is in tur- moil due to inadequate structures leading to insufficient earnings and skyrocketing costs.3 As a direct result of the recent economic downturn, many firms got into financial distress making it impossible to service existing loans and to repay the principal. Con- sequently banks were forced to write off or depreciate significant sums of outstanding loans.4 Whilst the number of bankrupt companies in Germany accounted for 36.843 in 2005, experts expect this negative trend to aggravate.5 Inherent with the economic re- cession, capital markets stagnated and led disappointed and anxious private customers to withdraw their funds. In line with these developments initial public offerings, merg- ers and acquisitions occurred less frequently, leaving banks with excess capacities in their investment banking divisions.6

In the light of these adverse conditions, banks are rediscovering the importance of retail banking.7 Nevertheless, the retail banking business is under intense pressures due to increasing rivalry and eroding margins. Furthermore, the role of the customer has changed significantly.8 Due to new technology platforms such as the worldwide web, improved transparency and information asymmetries decreased as customers can now instantly access product information online, improving their relative power.9 Further- more, customers have become ever more demanding and expect more service and features at lower cost. Noteworthy, they are more willing to switch providers if they feel a competitor might better meet their expectations.10

The German banking system has historically grown and can be divided into three differ- ent pillars (Drei-Säulen-Modell): public savings group, co-operative banks and private banks. The public savings group, which makes up 20% of all German banks, has in the past profited from “triple A ratings” resulting in cheap access to the capital markets. These advantages were mainly rooted in the fact that their liabilities were covered by their public founding entity. Whilst this privilege has recently been eliminated by the European Union, the influence of the public founding entity is still prevailing since pub- lic banks are obliged by the savings bank laws to serve public interest of their region. Public savings banks are therefore not necessarily seeking to maximize profits. This is further accentuated by non-competition rules: each bank is assigned a local area within which it may exclusively offer its services. The co-operative banking group emerged as a way to bring together the members of it co-operative to match their depositing and borrowing needs. Today it represents 60% of all German banks. It consists of multiple layers. At the bottom credit co-operatives serve the retail banking needs of their local markets, whereas more complex services such as clearing, access to global financial markets and the likes stem from their central institutions WGZ Bank and DZ Bank. The remaining 20% of banks in Germany are represented by private banks. This sector is mostly dominated by the four players Deutsche Bank, Dresdner Bank, Commzerbank and Hypo- und Vereinsbank, which recently was taken over by Italian Unicredit Group. Due to the profit seeking nature of private banks and the increasing global competition invading their home-markets, private banks face an increasingly difficult market envi- ronment. This is further accentuated by pressures arising from capital markets to im- prove their return on equity. Noteworthy, heavy consolidation is occurring within each of the three pillars.11

Another typical characteristic of the German banking sector is the broad range of prod- ucts offered and the underlying “Universalbank”-principle. As opposed to the Anglo- Saxon banking structure consisting mostly of specialist banks, many German banks of- fer the full range of banking and financial services in various segments.12 Whilst this constellation provides vast potentials for extra sales through cross-selling activities, it impedes the banks’ strategic agility.

Despite the currently adverse market conditions, new privately held competitors have successfully entered the retail banking sector with innovative and more focused busi- ness models. Since 1990 the amount of foreign competitors increased from 60 to 84.13 Being free of historically grown structures such as antique IT-architectures or over- dimensioned branch networks, new competitors are more agile than traditional “univer- sal banks”.14 Especially the emergence of new technology has given rise to new distri- bution channels such as the internet, mobile phones and the likes that have lowered in- dustry entry barriers and allow new entrants to efficiently launch them into profitable positions of the German market.15

Still, the influence of globalization does not only limit itself to market rivalry: Interna- tional shareholders are no longer willing to accept below-average returns, but funnel their funds to banks that provide higher returns on equity. A comparison of cost/income ratios underlines these findings: According to information by HB-research and Data- stream, operations in German banks are by no means as efficient as in their European industry peers. While the cost-income ratio of industry benchmark Royal Bank of Scot- land accounts for only 41.8%, costs eat up around 67% of sales in German banks such as Hypo Vereinsbank, Postbank and Commerzbank, 74.5% for Deutsche Bank or even 89.4% for Dresdner Bank.16 Consequently, the German banking sector is still consolidating. Within each of the three pillars the number of active players was reduced by 25% to 40% since 1990 as a result of mergers and acquisitions.17

It has become apparent that the German banking sector is forced to fundamentally change its structure as it can no longer withstand the pressure arising from changing customer behaviour and an increasingly global competitive landscape. While the e- commerce boom hid the symptoms of the current ineffective system, today’s situation leaves German banks with little alternatives but to respond to these problems, ponder about their existing business strategy and get in line with the new competition.18 Whereas most banks have already started to reduce excess capacities in their work force and branch network, the potential of short-term cost-cutting does not suffice. Banks are actively pursuing the application of industry knowledge as a promising mean to further improve their cost structure and prepare their companies for tomorrow’s challenges.

2.2 Successful approaches of the manufacturing industry

2.2.1 The history of industrialization

When talking about the industrialization in retail banking it is important to have a clear understanding of the concept of industrialization. The following chapter wants to give a brief overview over industrialization as a socio-economic phenomenon and the basic underlying ideas of standardization, automation and the resulting lower degree of value creation.

Industrialization first developed about two hundred years ago in England and it funda- mentally changed the social and economic situation in Europe. Often this first occur- rence is referred to as “the” industrialization, while it is now historically seen as the First Industrial Revolution. Industrialization as such must be seen as an ongoing evolu- tionary process that emerged and is continuing until today. Industrialization is often described by the division of labour, the replacement of human workers by increasing- returns-to scale technologies and the emergence of new products such as steel, railroad, planes and computers which fundamentally changed life and business of their respective time.19 But most importantly, industrialization has seen the development of new produc- tion techniques and a scientific approach to production, more efficient processes, and a decrease of a company’s degree of value creation. Over the past two hundred years, one could observe the development from manual work to mass production to lean produc- tion.20 At first, Taylor’s scientific management approach and Ford’s form of mass pro- duction significantly influenced and amplified industrialization. Production processes were decomposed and analyzed and a task-oriented optimization process was developed that led to a great increase in productivity and a reduction in costs.21 Industrialization is first of all an economic-technological development of production processes. Central elements were the change from manual assembly to machine assembly, mass production and the corresponding organisational structures as well as the diffusion of highly pro- ductive methods of assembly due to an increasing use of technology.22 Compared to the situation in the early 80s, the manufacturing industries noticeably changed; lean proc- esses, a reduced degree of value creation and a stronger customer focus are all the result of the continuous industrialization process over the past two decades.23 The most prominent example of industrialization is the automotive industry, since it introduced and successfully implemented most of the leading concepts of the respective times. In two major eras, it moved from manual assembly of cars through craftsmanship to a standardized and automated process at the beginning of the 20th century with a strong focus on professional process management and engineering. In a later era, a con- centration on core competencies and a reduced degree in value creation through in- creased outsourcing was achieved. For better understanding, these two eras will be de- scribed briefly in the following.

2.2.2 The era of mass production and scientific management

Before the era of mass production, cars were prototypes that were custom-made for only a small number of customers. These producers were not very efficient, had a very low output (1,000 cars were produced yearly) and covered the entire value chain them- selves.24 Henry Ford rang in the era of mass customization that completely changed the manufacturing world. A clear process orientation was at the core of this revolutionary approach. Ford used highly standardized parts and processes to produce his Model T, which was only available in one colour. Ford’s factory practices and later Sloan’s mar- keting and management techniques at General Motors institutionalized industrialization and mark the heyday of mass production where car design was mainly focussed on manufacturability. In an attempt to assure control and independence Ford vertically in- tegrated all the value chain activities. He even cultivated rubber on his own farms to produce tires. Ford’s stroke of genius was then in 1913 the introduction of the moving assembly line which perfected his idea of standardization and automation. These two concepts as the underlying principles of the era of mass production shall be understood as follows:

A standard is a uniform identification that is agreed on by several parties. A lot of mod- ern standardization principles are based on Taylor’s scientific management approach.25 Industrial standardization shall be understood as “the process of establishing agreement on uniform identification for definite characteristics of quality, design, performance, quantity, service and so on”.26 The benefits of standardization are numerous as it en- ables mass production, mass customization and, at a later point, improved supplier co- ordination for example.27

Automation is the transfer of work from humans to machines with the aid of technologi- cal progress.28 With the progress of mechanics, steam engines were developed and more and more production processes were transferred to machines which enabled mass pro- duction. Today, computers and information technology play an important role in auto- mation and many products are manufactured in assembly halls without the aid of hu- mans at all. Automation allows a manufacturer to unite manufacturing processes with a high degree of division of labour to comprehensive process chains. With the develop- ment of microprocessors and computers the “intelligence” of machines could be decen- tralized as well and automated processes are controlled from afar.

2.2.3 The era of lean production and value chain deconstruction

The third phase in the industrialization called lean production was developed by the Japanese Toyoda and Ohno. Lean production is described as a combination or synthesis of the advantages of manual work and mass production, with highly automated proc- esses and a standardized yet customizable product. It avoids the general problems with mass production such as inflexible structures of assembly and the highly standardized products that hinder responding to individual customer needs.29 While Ford and the other American car manufacturers were highly vertically integrated, this did not hold true for their Japanese competitors, who were facing completely different conditions. As capital and machinery resources were scarce, they had to come up with ways to effi- ciently use what they had.


1 Cf. Pfohl, H.-C. /Walter, S. (2002); Sokolovsky, Z. (2005), pp. 35-36.

2 Cf. Türk, B. (1996), p. 143.

3 Cf. Betsch, O. (2005), pp. 5-6.

4 Cf. Güttler, A. /Hackethal, A. (2005), p. 4.

5 Cf. Statistisches Bundesamt Deutschland (2006); Koh, P. (2006), p. 1.

6 Cf. Sokolovsky, Z. (2005), p. 35; Moerler, C. H. /Uwer, J. (2004), pp. 107-108.

7 Cf. Moerler, C. H. /Uwer, J. (2004), pp. 107-108.

8 Cf. Steria Mummert Consulting /F.A.Z.-Institut (2005), pp. 4-5, 8.

9 Cf. Porter, M. E. (1998), p. 6; Lamberti, H.-J. (2005), p. 2.

10 Cf. Steria Mummert Consulting /F.A.Z.-Institut (2005), pp. 4-5.

11 Cf. Hackethal, A. (2003), pp. 4-17; Steria Mummert Consulting /F.A.Z.-Institut (2005), pp. 9-10.

12 Cf. Hackethal, A. (2003), p. 4.

13 Cf. Steria Mummert Consulting /F.A.Z.-Institut (2005), p. 9.

14 Cf. Hackethal, A. (2003), pp. 20-21.

15 Cf. Güttler, A. /Hackethal, A. (2005), pp. 6-11.

16 Cf. Häring, N. (2006), p. 1.

17 Cf. Steria Mummert Consulting /F.A.Z.-Institut (2005) p. 9.

18 Cf. Dostal, W. /Rieck, M. (2005), p. 116; Hackethal, A. (2003), p. 35.

19 Cf. Bartmann, D. (2005), p. 15.

20 Cf. Ciccone, A. (2002), p. 1; Petzel, E. (2005), p. 50.

21 Cf. Petzel, E. (2005), p. 41.

22 Cf. Bullinger, H.-J., et al. (2005), p. 23.

23 Cf. Betsch, O. (2005), p. 15.

24 Cf. Womack, J. P., et al. (1991), pp. 21-26.

25 Cf. Liker, J. K. (2004), p. 140.

26 Burt, D. N., et al. (2003), p. 252.

27 Cf. Ibid., pp. 254-255.

28 Cf. Thommen, J.-P. /Achleitner, A.-K. (2003), p. 732.

29 Cf. Womack, J. P., et al. (1991), pp. 26-28.


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Institution / Hochschule
European Business School - Internationale Universität Schloß Reichartshausen Oestrich-Winkel
Industrialization Retail Banking Europe



Titel: Industrialization in retail banking