“Banks Will Complete Industrialization Quickly”

Feature Article | June 21, 2004 by SAP News

Wolfgang König

Wolfgang König

What are the key points of current discussions on a reorganization of the banking landscape?

König: To be able to survive the harsh struggles with new and old competitors, many banks must lower costs on a grand scale. Industry leaders have already had considerable success here. The financial industry has a lot to learn from the automotive industry. We can expect that broad areas of the financial sector will soon increasingly walk a similar industrial path. Leaders in the industry, such as Deutsche Bank and Postbank, have already taken their first steps along the path into substantial success.

What does this industrialization look like?

König: The revaluation and reorganization of the value chain primarily involves the question of where the optimum level lies for the vertical range of manufacturing. Ultimately, the question is about which services to provide on your own and which ones should involve external partners. Today’s automobile industry has a vertical range of manufacturing of about 25%. It’s often 70% or higher in the financial industry. These figures make clear how much potential remains untapped for specialization and scaling advantages in the banking environment. In this context, processes for payments or commercial paper are typically cited. Here we can anticipate that process factories and the associated specialization and scaling advantages will be exploited. This will, of course, lead to a redesign of the financial value chain.

So the financial sector will also use supply chain management?

König: Exactly. Integrated planning and the execution and processing of service production will move into the foreground to the extent that outsourcing becomes more significant. Banks will react here and increasingly gain knowledge of their business processes and the knowledge they need to optimize the processes. Nonetheless, the automobile metaphor cannot be transferred one to one. One the one hand, the financial industry will probably not have to follow decade-long detours to reach its goal of more efficient processes. On the other hand, at least in the short term, the amount of standardization typical in the automobile supply chain cannot be reached in the financial industry. Interestingly, the same is true for financial processes in industrial companies, where such processes are typically secondary. A current study at the E-Finance Lab on financial chain management among the top 1,000 German firms (excluding banks and insurance companies) shows that two-thirds of the experts questioned in the companies are dissatisfied with their own financial processes. The companies see particularly great potential for improvement in the subprocesses for creating, processing, and paying invoices. At the same time, the persons responsible for industry see banks as particularly competent in solving at least part of the issues linked to this dissatisfaction. The CFOs surveyed listed banks as the most competent partners desired for payment, coverage, and financing.

What role does IT plan in this process of industrialization?

König: Specialization of companies along the value chain and the coordination of the supply chain clarify the significance of standards and high-performance data-processing and communications systems. For example, a joint research facility of the Universities of Frankfurt and Darmstadt has decided to work toward driving this development. Along with our partners – Accenture, Deutsche Bank, Deutsche Postbank, FinanzIT, IBM, Microsoft, Siemens, T-Systems, DAB bank, IS.Teledata, and VR-NetWorld – we’re working on innovative models in the area of the value chain and testing new methods for designing new products in the financial industry. Such innovations can be implemented more easily in this sector with network-based information and communications systems because, in principle, the processes can be universally digitized.

What’s the outlook for the required standards in the financial sector?

König: In the context of integration and standardization problems, banks have a special position. Because of various national and industry-specific factors and IT strategies, IT landscapes exhibit a relatively high degree of heterogeneity. Studies often show that 30 to 40 different systems – and often more – support individual products in a bank. Here, too, a clear trend had emerged in the last few years: industry leaders, at least, have seen the signs of the times and made their systems capable of handling standards. The challenge was and is huge. Last but not least, that’s because of the limited availability of standard software in the past led to a rather high level of in-house development: estimated at 60%. Proprietary software solutions and large media breaks create many opportunities to hinder acceleration and improvement: the processes often have the problem of a high error rate, for example. In general, the level of industrialization of the financial sector and of IT outsourcing in the financial sector clearly lies behind that of other industries, but the levels are increasing.

Do these observations hold true in an international context?

König: Some differences exist between the United States and Europe. Many American financial institutions have not integrated their internal systems. These banks are not internally oriented toward straight-through processing (STP). The situation is clear when you look at the processes for commercial paper in the U.S, where batch processing – processes that do not occur in real time – is especially problematic. The problem involves transferring orders that come from the front office (retail systems) to the back office (processing systems) and even the back-office transactions themselves. Internal STP efficiency in Europe, especially in Germany, is significantly higher than that described in the U.S; you can usually find a network to link the front- and back-office systems and real-time processing of transactions.

What are the consequences for the software industry?

König: The increasing diffusion of procedures and standards tailored to the financial industry opens considerable opportunities to suppler of standard software. Standardization of services is enormously important for outsourcing suppliers. Economies of scale can be realized only when the same infrastructures is available to several consumer so that the price per piece is reduced. Once processes have been harmonized, nothing stands in the way of implementing standard software. With its SAP implementation involving business with mass tractions, Postbank has demonstrated that standard software can also be used successfully in the financial sector.

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