Banking in Crisis. Fabian Brunner
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The main catalyst for this development is the ubiquity of mobile devices in everyday life in China. In 2018, Chinese customers already used their mobile devices for 83 percent of their payment transactions.12 Many people no longer even carry any physical currency. In the processing of payment transactions, the Chinese market has largely bypassed the age of the credit card and moved from a cash-based economy to a digital economy dominated by mobile phones.
It is easy to predict what that could mean in specific terms for the banking sector in other economies. In China, customers now simply scan a QR code (Quick Response code) with their mobile phone in shops, hotels, restaurants and taxis, even at roadside stalls, in general everywhere where goods and services are sold in the country.13 It is merely a matter of time before this technology is replicated and established as a standard application, especially in view of the fact that the technology companies already provide what many customers expect, that is speed, accessibility and seamless service.14 Customers just take for granted the ethical principles of the banking business, security and reliability.
This development is reinforced by a further effect. For some time now, a small but extremely vocal group of customers and shareholders in the mature economies have been calling vehemently for companies to act with greater social and environmental responsibility. Irrespective of the fact that the significance and limits of responsible action are extremely difficult to define and possible side-effects of certain specific changes in behavior have not yet been investigated using scientific methods, this message has been further reinforced by the media and has become a significant issue on the political agenda.
Although this may seem harmless at first glance, this development may lead to self-limitation on the part of banks, which would then gradually change their image, their services and their products as well as their business model. It is true that a bank, like any other company, bears economic and social responsibility. It is also correct that the demands and expectations of the various stakeholders or society as a whole may change over the course of time. To this extent, it is legitimate for the changing expectations faced by banks to be reflected by their corporate decisions.
Nevertheless, however important topics such as climate change may be, banks face a real dilemma if these small groups in society pose quite specific demands, such as calls for banks to discontinue financing for coal-fired power plants.15 The banks which react fastest to such calls may gain a genuine edge while other banks may find it difficult to follow their example. With respect to such issues, the generation Z has become even more sensitive than the millennials were. Going forward, especially those banks which project a modern media and social profile and the implementation of socially aware business practices via good corporate communications will benefit from this development. Technology companies like Amazon, Apple, Alibaba or Google are already working intensively to earn this reputation and therefore enjoy a high degree of brand loyalty and trust throughout the world. The overall business model of the big technology companies (BigTechs) is based on communications tailored for specific target groups. For this reason, it is highly probable that small and medium-sized banks will have problems in this area compared with their new competitors.
It is difficult to predict the timing of this disruption. However, there is no doubt that banks will need to adjust to this scenario and to develop appropriate reactions as a matter of urgency. It is also clear that this development will have an impact on the economic value of banks. To put it simply, banks will probably no longer reach such high valuations. However, there is a far more serious consequence; in this context, the raison d’être of commercial banks will increasingly be called into question. The abolition of cash is being seriously discussed, which would lead to the “glass citizen” that politicians want. Crypto-currencies would no longer be exotic.16 Changed expectations of customers as regards service levels and corporate responsibility are among the developments that affect the basic monetary policy functions of banks – batch sizes and maturity and risk transformation.
It is therefore hardly surprising that the global banking industry is frantically attempting to adapt its own strategic profile to the changed conditions. This is associated with the need for continuous transformation and innovation in all facets of the sector. FinTechs, which were seen by many banks as a genuine threat for some time, have now become pacemakers for banking business thanks to their innovative power and technological openness. Although they originally set out to revolutionize banking, many FinTechs are now attempting to gain a banking license or access to such a license. They are therefore cooperating rather than competing with established banks.
Nevertheless, banking in its present form will disappear in the future. The next two years will show how correct Bill Gates was in the statement he made in 1994: Banking is necessary, banks are not. This assertion, which was probably intended to be provocative at the time, is now truer than ever before.17
Approach
This is the starting point for this book, which is divided into two parts:
The first part establishes a theoretical basis in order to make well-founded predictions for the future. The detailed presentation of banking issues in the first part of the book paves the way for the conclusions presented in the second part. The chapter The valuation of banks – a special case (Part 1) outlines the special features of valuation for banks and the main factors that have an impact as well as outlining a number of different valuation methods.
Starting from the impending far-reaching changes in banks’ strategies and business models, the chapter Banking business models (Part 1) explores the effects of strategy and regulation on the economic value of a bank. Various possibilities of making strategies clear for corporate valuations are highlighted.
The second part focuses on the assessment and context of the theoretical results obtained in the two preceding chapters. For this purpose, the chapter Strategy and competition (Part 2) investigates the attractiveness of the German banking market, which is taken as an example, and develops an opportunity/risk profile. In addition, the competitive position and structure of the two banks taken as case studies, Commerzbank and Deutsche Bank, are presented at the levels of the entire bank and of divisions.
The chapter Value creation analysis – case studies (Part 2) then analyses the relationship between the individual strategy selected by a bank and its economic value. The effects of strategy and regulation on the intensity of competition and the competitive advantage that can be gained are demonstrated on the basis of a survey conducted by the author.
Finally, the results obtained in the course of the book are summarized in the Conclusion (Part 2).
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