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German Banks Must Enable Customer-Centric Banking Through End-to-End Digital Transformation

The state of the art banking experience exists mostly in the mind of the demanding consumer. And that experience is an amalgam of encounters with the start-up firms that have already caused immense disruption in a number of other industries.

Amazon originally taught customers that they no longer need to visit a physical outlet to buy a book: so consumers have deduced that they should no longer need to do so to open a bank account. Google taught them that they can search for all information rather than rely on intermediaries: so consumers have deduced that they could be their own brokers, and choose the best products for themselves. And Uber taught them that they would no longer need to wait for a taxi but order one digitally in real-time: so consumers have deduced that a bank should be on hand to offer credit on the spot, at the moment that it becomes necessary.

Explaining to a consumer that these life lessons do not apply to banking is no good. And if the traditional banks do not understand this, new banks and fintech companies certainly do. Regulators also do. Through the updated Payment Services Directive, banks will be forced to open their data up to third parties, meaning that one of the main barriers to entry, the closed nature of the relationship between a bank and its existing clients, will be removed.

This leaves traditional banks with no choice but to undergo a fundamental digital transformation of their customer service proposition. They must replicate the revolutions in customer experience that have taken place in other industries and make them relevant to the banking context. And they have to prepare for new, sector-specific regulations such as the second Payment Service Directive, which will force banks to build out their API strategy to meet the requirement to offer third-party access to customer accounts.

The German banking industry is no exception to these iron rules. It is becoming apparent, however, that banks in the German market have focused on the goal of cost-saving for too long. Indeed, 70% of banks cite cost savings as their main route to profitability. There are undoubtedly huge cost pressures on the industry at present. And while cost savings are an undoubtedly worthy end, there is a possibility that this focus is detrimental to the other crucial factors for profitability, such as improving customer service and harnessing innovation.

More than a third of banks describe the lack of control over their IT infrastructure as a barrier to innovation, and this is the flip-side of relying on the shared service model to deliver cost savings. This problem is likely to magnify over time. The message from this is that an overwhelming focus on cost savings has an impact in terms of flexibility and innovation which may leave banks vulnerable to new forms of competition and the other banks that are making strategic investments in their IT systems: and this will harm profitability in the long term.

Moreover, the long term is fast becoming the short term. Startups are beginning to bring fully digital banking propositions to the customers of established banks, while the likes of Android Pay and Apple Pay loom on the horizon.

For the established banks, there is no time to lose. A shift of focus towards innovation is now urgent, with a renewed dedication to customer-centricity. And this requires a truly end-to-end approach to digital transformation.

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