The Networked Banks of the Future

The subprime mortgage crisis is the latest development to highlight the need for change in a banking sector that is used to making record profits. In addition to the confusing product constructions in the structured products area, other factors are also forcing structural changes as a result of their complexity. These include the need to comply with regulatory requirements such as the Single Euro Payments Area (SEPA) or the Markets in Financial Instruments Directive (MiFID); rising international competition from countries such as Singapore and Dubai; and the increasing number of non-traditional financial service providers, such as trade and telecommunications companies, that have started to offer financial products. Many banks are asking themselves where their core competences lie, not only as a result of cost competition in transaction, management, and administration fees, but also in terms of differentiation in the range of services that they offer.

In contrast to other industries, such as the automotive or electronics industries, banks’ in-house production rates vary from 40 percent to 80 percent, depending on their business models. This is a relatively high level of internal production. Numerous services provided by banks – transaction settlements, gateways to stock exchanges, and support functions – are not differentiated in any notable way.

Mergers and demergers of areas of companies indicate that the banking sector is becoming more specialized and networked. Reflecting the tier one suppliers in automotive, services are now being offered by banks for banks. Financial institutions are positioning themselves as integrators or providers of subservices for other banks. This is the case with street-side bundling, for example, where a bank’s traditionally internal securities account network and broker network is replaced by an external depository and broker.

Two paths of development

Similarly, a consolidation trend is emerging for business areas that share common characteristics, for example, in processing securities for several banks. This development mirrors the situation in the pharmaceutical industry, with its specialists for agricultural chemicals and specialty chemicals. The banks of the future will develop along two major paths:

  • The collection of services offered by banks will be much more closely tailored to the different customer groups. Firms such as Quirin Bank and Sal Oppenheim are offering comprehensive consulting services that are similar to those provided by private banks. Deutsche Bank, for example, is focusing on innovative retail banking with new branch concepts, such as Q101. New market entrants such as Teambank are concentrating on specialized service packages, while banks such as DAB, Consors, and other specialists are meeting the requirements of online customers.
  • In addition to the specialists for customer-specific service packages, the banks of 2015 also include service providers that are focused on product development and service management. These range from companies that provide a comprehensive set of services – payment transactions, securities, and loans – such as DZ Bank, to providers that specialize in these individual fields, such as Xchanging, Equens, and Kreditwerk.

Application systems traditionally form the backbone of every bank. Although custom-built software maps banks’ processes efficiently, its monolithic structure often limits its ability to implement regulatory requirements, use additional customer channels, or flexibly integrate new products and service providers, for example.

Many banks find that their existing application landscape prevents them from implementing specialized and networked business models. Component-based and service-oriented standard software is increasingly replacing these structures, giving banks the technological infrastructure they need to be networked.

What are the origins of the services?

Ideally, services map parts of a business process in the form of a function module that can be deployed independently and has a standardized interface. One crucial question concerns the origins of services: Are they based on the bank’s services or the technically-driven function modules of the software world?

In the first case, the application landscape recedes into the background. The risk here is that the bank’s specialist competencies could lead to an enormous collection of heterogeneous, tailored services, particularly from a collaborative perspective. Each service has different types of functions and requires different data and call routines. With no standardization, the amount of work and the costs involved in creating the (technological) service architectures is simply too high.

With the second approach, the services are abstracted as they would be in a classic standard software development process. They are not considered in the wider business context, but rather regarded as components of a standard solution that can be merged into one process if necessary. This approach can lose sight of the company and its business needs, thus creating a solution that is of limited use to the bank.

Business processes and application functionalities

Neither approach is sufficient on its own. The services must be designed to reflect their role as the interface between business processes and application functionalities.

This involves not only cataloging all services in a directory, but also in the form of preconfigured clusters of services that map the business process steps. While a directory is closely linked to the application functionalities and therefore enables the systematic development of application landscapes, the service clusters provide a connection to the company’s business and sourcing models that relate to the models of the banks of 2015 described above.

Multilateral initiatives based on neutrality and consensus, such as the CC Sourcing project or the application-oriented Banking Industry Architecture Network (BIAN), have carried out important groundwork for both approaches.

“The Networked Bank of 2015” workshop to be held at the 5th Value Chain Forum on October 9 and 10, 2008 at the University of St. Gallen will explore issues such as interaction in customer consultations and outsourcing and networking models in the financial services industry.

The Competence Center for Sourcing in the Financial Industry (CC Sourcing) is a multilateral research project run by the Universities of St. Gallen and Leipzig. In collaboration with 18 partner companies, the center focuses on developing service architectures that meet banking requirements (

The Banking Industry Architecture Network (BIAN) aims to make it simpler to implement service-oriented architectures in banks and encourage standardization. The association comprises more than 15 leading IT companies and international banks.