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German banks invest in digitisation to boost revenue

But some moves have been criticised as one-dimensional and poorly thought through

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The 50 top German lenders will spend as much as six billion euros by 2020 to develop their digital initiatives, according to a study by consulting firm Oliver Wyman.

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GERMAN banks - jostling for position in one of Europe's most competitive markets - will plough billions of euros into digitisation over coming years to boost revenue. The question is how many will get their money back.

The 50 top lenders will spend as much as six billion euros (S$9.5 billion) by 2020 to develop their digital initiatives, according to a study by consulting firm Oliver Wyman provided exclusively to Bloomberg. That represents about 12 per cent of their total revenue last year and excludes regular information technology (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 suite, creating chief digital officers and considering cooperations with financial technology (fintech) companies, it remains to be seen how many of these investments will pay off, Oliver Wyman said.

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"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 per cent on average.

"Digitisation is here, and it's moving at a brutal pace," Joachim Olearius, spokesman for the three partners of Hamburg-based private bank MM 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 digitisation.

According to Deloitte LLP's recent publication 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 criticised one-dimensional digitatalisation 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 digitisation strategy that encompasses all business areas".

According to the Oliver Wyman study, many banks rely on fintechs to take their digitisation initiatives forward. They are supposed to compensate for missing abilities. The way that the banks integrate fintechs, however, has changed over time. "Initially, fintechs were often bought, but then got lost in the company," Mr 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.

Digitisation should replace regulation, growth and costs as the most important topic in the boardrooms of German banks, Wyman's Mr Oeztuerk said. "We have identified insufficient knowhow, lack of innovation governance and high risk aversion in addition to the lack of integration into the overall strategy as obstacles to successful digitisation," he said. BLOOMBERG