Digital transformation, a low interest rate environment and increasing regulatory requirements present major challenges for traditional banks. Those who want to remain sustainable in the market must pursue a clear business model. Here is what banks should learn from the troubled department store company Karstadt.
They were the pride of the German retail trade and emblematic of the German economic miracle of the postwar period: the department stores of Karstadt and Kaufhof. A big city was not a real big city if at least one of these two stores was not a resident in the center. The department store promised a comprehensive range of goods under one roof. There was a single place for lingerie and cooking pots, toys and suitcases, jewelry and haberdashery.
Today, the department store is in crisis – and it has been for many years. Ostensibly, it was the Internet and digitization that put an end to the shopping pleasure in an expensive city center location. Who wants to go to the city in wind and weather, where parking space is scarce and public transport is usually unattractive? Here, there are obvious parallels to the current situation of traditional banks.
The branch – a discontinued model?
The banks view their traditional bank branch as being under pressure from Internet banks and, more recently, from innovative fintech startups. Not only do their customers do their daily banking business online now, or even on mobile devices, of course, but product sales are increasingly being carried out as part of online self-service advice. According to the Bitkom study 'Digital Banking' of May 2018, three out of four Internet users now rely on online banking. On the other hand, fewer and fewer customers are finding their way to the local branch – and if so, then it is rather the so-called unattractive customer groups whose needs are mainly focused on deposits and withdrawals.
All this is causing enough worries for the banks because the branches are generally the main distinguishing feature in the hard-fought contest against the digital competition for the attractive customer groups with great potential for comprehensive product sales. Although the bank branches swear by the advantages of their personal consultation on site, the reality has long since changed. If a product is designed simply enough and then presented online in a low-threshold way and perhaps even explained with short video tutorials, more and more customers are forgetting about the supposed added value of a bank advisor.
At present, what the big department stores have had to experience in the past is being repeated here. They, too, have long clung to the illusion that customers wanted to be able to see and touch goods before they bought them and to have personal advice. The end of the song is well-known: when shopping online, trying on and free returns is typically easy, and advice from a seller is replaced by online reviews and guide sites.
For a long time it has been noticeable in retail: mediocrity is no longer in demand
The perhaps much larger problem, however, is the threat to the banks not from the breadth of the internet, but from in house. And here, too, the department store companies serve as a blueprint for the banks – you just have to want to see it. It's about aligning your own business model with changing customer requirements. A key nail in the coffin for Karstadt and Co. is the lack of focus on relative strengths compared to the competition.
In the past, Karstadt had always positioned itself as a full-range supplier in the mid-price segment. From a button for your pants to a high-end TV, you could buy everything right in the city center. However, this model has been severely disrupted in recent years: from low-cost vendors such as TK-Maxx, Primark or Tedi on the one hand, and premium flagship stores from exclusive brand suppliers such as Apple or Adidas, on the other.
Behind it are two persistent trends in society. For simple goods, customers are barely willing to pay more than necessary. The 'greedy-is-cool' mentality continues to work here and drives customers who want to buy standard goods in consumer paradises, such as TK-Maxx, which have become the price leaders with sparse equipment and below-average paid workers, and therefore, they can significantly undercut the prices of Karstadt.
However, when customers are willing to spend a lot of money, they now demand quality and exclusivity. Flagship stores like Apple or some clothing brand labels promise an appealing shopping experience with well-trained staff, inviting and open ambiences, and more. The department stores seem like a musty office when compared to these quality leaders.
Here we come full circle back to the current situation of the classical banks: they are also active generally as a full-range provider in the market and offer mediocre products in the mid-price segment. This does not remain hidden from their customers, which is why the banks better get ready. Because even in the banking industry there will be no more space in the middle in the long run.
Price or quality – In banking too, the strategy must be clearly aligned
The example of the retail industry shows that banks have to sustainably align their business models with either price leadership or quality leadership. For example, the two largest German banking groups, the Volksbanken / Raiffeisenbanken and the Sparkassen, are optimally positioned neither for one nor the other. Because in terms of quality, it requires a high-quality advisory bank with first-class trained and skilled advisors who provide their customers with advice that has real added value that customers also like to pay for. This is challenging enough, but it is only the minimum condition, but still not sufficient to be perceived as a premium provider here. A strong brand that can rely on exclusivity and consistently high quality products is essential.
The latter do not necessarily have to be their own, but can also be 'bought' by other service providers or banks. Only the absolute top quality counts - and if your own product cannot 'deliver' here, then it is not suitable.
If you do not want to or cannot consistently follow this path, you can only go in the direction of price leadership. In addition to an unconditional focus on lean and cost-efficient processes with modern IT solutions, this also requires renouncing B2C business with end customers on a regular basis. Rather, such banks would have to be understood as product suppliers for the aforementioned advisory banks. Banking-as-a-Service (BaaS) and white label products are the keywords here.
However, this requires massive changes in the structures and processes of the banks which is tantamount to open heart surgery. In many cases, the know-how is not available to a sufficient extent. It will therefore be crucial to use competent service providers from outside that bring along innovative middleware, APIs and front-ends as system providers and integrate them into existing core banking systems.
The German banking industry is facing major challenges due to changing customer preferences. The fate of the formerly large department store companies should serve as a warning example for financial institutions of how immensely important it is to be strategically focused and consistently aligned. Whether as a premium advisory bank without its own products or as an efficient product supplier: the key to success is optimal technical integration using modern and holistic IT system solutions.
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