Innovation and Digitalization in Banking – Topics and Trends 2013

• Introduction

• Developments within the banking segments

• Developments of and options for market participants (excluding banks)

• Overarching topics and trends

• Financial service providers in light of innovation and digitalization

Introduction
2012 was without a doubt a challenging year for banks. A crisis of confidence, scandals and down-sizing, on the one hand, were juxtaposed with comprehensive modernizations and the first inklings of an opening up for innovations on the other hand. While finance institutes in the retail sector are more focused on their own development due to their size, subsidiary structure, technology foundation, and regulatory system, digitalization means that innovators are moving into the market with new concepts, leading to a further diversification of the market.

The combination of innovations and digitalization in banking will intensify in 2013. This intensification will depend on the increase in the level of maturity of the innovative developments and the simultaneous noticeable interest of banks in innovations. Furthermore, its impact will increase with the entrance of new players into the previously identified banking sectors of the market and the opening up of additional areas for attacks.

The following overview of the innovation topics in banking, mainly driven by digitalization, will first take a look at the individual banking segments as well as the specific market participants. This structure allows us to illuminate different development stages and perspectives specific to each segment and actor. Next, the overarching topics will be discussed in order to pinpoint the relevant points for finance institutes.

Developments within the Banking Segments
In the Payment Transactions segment, the smartphone and the extent to which it qualifies and establishes itself as a payment method on the customer side will be of great significance. The recently somewhat marginalized Near Field Communication (NFC) will be a big topic in this area, as will QR/Codes and so-called “digital wallets”, whose functionality will in some cases go beyond pure payment transactions (“Google Wallet”) and in other cases does not yet include the payment process (Apple’s “Passbook”). On the side of the technology providers, a major topic will be the further development of the Point of Sale (POS). At the moment, the POS in the stationary (proximity), online (remote), and mobile fields are separated for the most part. 2013 will bring with it indications of the direction in which the technologies and business models of acquirers, payment service providers (PSP), and providers of mobile card readers available on the market will develop.

In the Personal Finance Management segment, the developments could reach a level of maturity that leads an increasing number of banks to integrate the corresonding tools into their service portfolio and to thereby expand the classic account statement with finely tuned analytical tools. In 2013, it will become clear whether individual PFM providers can assert themselves as individual providers in competition with banks or whether banks will implement these services to such an extent that they become the standard of banking services within a few years. For finance institutes, it will be of the utmost importance whether or not they can provide services across banks and to what extent they possess a technological foundation that enables rapid implementation of functional and multifaceted PFM tools.

The area of Lending Operations will be characterized, first, by the growth of new financing channels, namely Peer-to-Peer Lending and Crowd Funding. In the second field in particularly, new constructs that enable participants to circumvent the minimum limit will open up new options. Second, the continuing emancipation of the client due to higher market transparency will play a significant role. This will mainly affect the territorial expansion by credit brokering portals that function as intermediaries between borrowers and lenders. Here, it will be important for finance institutes to ensure market transparency for banking consultants and to ensure need-appropriate and information-based credit brokering. With regard to the last point, we will have to wait and see whether the consideration of new solvency criteria based on digital social networks will again be as harshly rejected as occurred in 2012. Finally, a further major topic will be the development of the credit sector in contrast to the bond market in the context of corporate finance.

The Asset Management segment is not as advanced in its development as the other areas. It is possible that the topics of Crowd Investing – as the counterpart to Crowd Funding – or trading portals with automatic follow-up options will become prominent in due time. However, even if the concepts try to operationalize the intelligence of the mob, they will still remain niche topics. This could be different in the case of investment consulting services, which could create new impulses in the discussion on commission-driven and salary-based consulting forms. In general, we will have to wait and see to what extent Asset Management is able to establish itself as an independent segment prone to attack.

Developments of and Options for Market Participants (excluding banks)
In light of the multifaceted topics and lucrative prospects of innovations in banking, it is necessary to complement the technical overview of the individual segements with a review of the additional market participants outside of the banking landscape. The non-banking actors will position themselves even more clearly in 2013 than in previous years.

Telecommunications and internet companies will continue to concentrate on the segment of Payment Transactions. With regard to the previously rolled out or announced „digital wallets“, it will become clear to what extent they actually offer customers added value and whether the companies will be able to more heavily integrate the wallets into everyday situations.

Retail companies will also focus on the area of Payment Solutions. For them, the most important thing is to provide customers with the lowest possible threshold for seamless payment transactions, including checkout. In terms of the chances of success of the individual models, the advantage of retailers in contrast to other actors lies in the fact that they are best able to address customers’ wishes for simple and comfortable transactions, as such transactions most directly correspond with the interests of retail. Furthermore, some large retail corporations that already possess payment solutions will also take on the segment of lending operations.

Investors will play an increasingly significant role. In the field of private equity, it has mostly been venture capital that has been flowing into innovative companies. The more that development flourishes, meaning the more individual companies that are successful, the more capital pushes into the market, capital that doesn’t come just from venture capital firms. This new capital will even be used to avoid risks and to build up portfolios. At the same time, however, further development also means that the market will become more diverse. As a result, it will become more difficult for investors to differentiate promising concepts from less attractive ones. This will lead to increased efforts for transparency, in which the use of operating numbers will confront innovators with new demands and will enable a comparison of individual concepts.

For the non-banking Innovators active in the market for financial services, further market penetration and the opening up and expansion of business areas is central to their success. Until now, innovators in banking have mainly focused on individual banking services. This means there are three possibilities for their further development: First, they can achieve a breakthrough in the field they are addressing with their service; second, they can become interesting partners in the sense of collaboration for other, larger players; or they can expand their business possibilities in the banking sector. At the moment, each of these options is being realized on the market. It will be interesting to see whether innovators will continue to limit themselves to specific banking services or whether they will being to formulate more comprehensive banking service packages.

Overarching Topics and Trends
In this complex situation, and in light of the asynchronous development standards both within the segments as well as of the market actors, three topics and development trends stand out.

• Developments are expanding in the field of business-to-business (B2B), while many innovators had first begun with a clear focus on the end customer in the business-to-consumer (B2C) field.

• Physical offline and virtual online worlds are growing together – or, in the opposite sense, the boundary between them is becoming blurred. This development reflects the new level of digitalization, which previously referred to the transfer from analog to digital formats but today points to the new options resulting independently from the digitization of technology, and thereby also impacting and transforming analog technology.

• Big Data will play an increasingly important role in innovative banking concepts. This trend can be traced across those segments that are increasingly information-driven and that thereby make use of data not just about individual topics, but draw on information that is based on a mass of data.

Finance Service Providers in Light of Innovation and Digitization
The current constellation of segments, actors and trends of digitization and innovation in banking is confusing. For banks, much depends on whether they will use the openness of the current situation in order to expand their focus on classic topics and to gain experience with innovations and innovators. Selected areas such as Personal Finance Management offer excellent opportunities in this regard.

In order to transform these experiences into a long-term action strategy, banks require a coherent innovation concept that, based on the compentences and interest of the individual finance institute, differentiates between the options of adaption, innovation and cooperation, on the one hand, and, on the other, takes into consideration the hard-hitting topics of a sustainable subsidiary structure, an expandable technological foundation, and the regulatory system. For banks, the decisive question regarding their future business is to what extent they are able to use the possibilities arising from the digitalization and innovations to their own benefit.