Increasing competition and changing customer behavior in the German financial services sector

MA-Thesis / Master von Ulrich Thaidigsmann

Abstract:

Within the last few years, dramatic changes took and still take place in the retail banking business. On the supply-side competition for cooperative banks is increasing due to various reasons. New competitors with different business models have entered the market. There is no doubt that they pose a serious threat to cooperative universal banks (which were the focus of this dissertation) and whose market share is declining constantly. Furthermore, „non-banks“ and „near-banks“ have to be considered in this respect, too, as these entities' business models are increasingly targeting customers of universal banks.

On the demand side, changing customer behavior has accelerated transformation processes in recent years. An increased willingness to change suppliers can be noticed as consumers are placing more and more importance on price. A strong price awareness is changing market conditions in many business sectors in Germany. Decreasing customer loyalty forces universal banks to push sales activities and to intensify their personal relationship with the customer.

The main objectives of this dissertation are the following:

Work out a strategy within today’s typical structure as a universal bank. Identify key success factors and evaluate this strategy for its chances for success.

Derive the consequences for the future business model of a cooperative bank. Determine the change steps necessary to strengthen the competitiveness.

Furthermore, the prerequisites of such a change process will have to be worked out.

An inductive approach was chosen to achieve the aims of this thesis (Gill & Johnson). Firstly, an in-depth analysis of existing literature was carried out in order to gain an overview on current developments such as a) customer behaviour, and b) the competitive situation of the financial services sector. The results were to produce not only an explanation for current trends but also allow the prediction of future trends over the course of the next years. The environment in which cooperative banks are operating was described in detail. This approach provides a good basis to identify the relevant factors and to work out the necessary consequences for cooperative banks.

In order to examine possible conclusions, interviews with 12 experts in the field were conducted. The target groups were CEOs of cooperative banks and representatives of cooperative bank associations. It is those people who are confronted with new challenges by the market on a daily basis and hence forced to develop an adequate response on behalf of their bank or their member banks.

The interviews were conducted freely, allowing for open and direct questions. The author prepared them by designing a rough sketch for the conversation beforehand. Some alternative methods were not to be applied: he amount of data to be gathered was deliberately limited to a doable number of oral interviews. It would have been of course be possible to obtain more data by using written interviews or questionnaires or holding workshops. This method is likely to have widened the breadth of views and opinions.

However, the author felt to gain more useful results by focusing on personal, in-depth interviews with key business leaders and experts. Moreover, in large surveys respondents often fail to overcome their inhibitions to talk about business strategy. This effect can be reduced in personal one-to-one interviews as confidentiality can be guaranteed, hence more openness. This method follows the „principle of concentration to gain information“ developed by Ch. Niedereichholz and should yield sufficient results.

The weak point of this methodology is that due to the small sample the focus of the investigation was put on certain aspects of the problem. It has to be noted as well that perhaps the persons interviewed may have been unwilling to provide the author with all the information solicited and relevant for this thesis.

The scope of this analysis is limited to cooperative banks. Other entities such as universal, savings or commerce banks have to be ignored here as including them would mean to examine specific aspects of their business models in detail. Furthermore, it has to be born in mind that the approaches detailed below cannot be implemented one-by-one by any cooperative bank, irrespective of its size, location and structure, all of which often differ from each other enormously. However, cooperative banks have enough in common to draw general conclusions and to develop generally applicable guidelines. For time reasons, it was not possible though to elaborate a detailed implementation plan for the strategy in the framework if this dissertation.

It can be stated (given the current structures) that a clear differentiation into two business models (price and quality) under one roof would be needed to meet the customer expectations. But, due to the typical size of the cooperative banks, it would be difficult to successful (and permanently) implement this. Especially, it does little to resolve the central problem among cooperative banks, which is the great complexity. Today’s business model is caught in a trap. A completely different solution has to be found.

The author worked out that cooperative banks have to go about two major strategic shifts. Strategic Shift number 1: Cooperative Banks can come closer to the real needs of their customers through innovative, future oriented service offerings. Therefore it is important to recognize and systematically convert interesting trends into business. This way, a small competitor can keep its market position. Perhaps not always in today’s (financial) products and services, which are to a large extent exchangeable in the industry, but in the subjects of „life management”, which truly matter to their clients.

Strategic Shift Number 2: In parallel, the value added chain has to be drastically reduced. By means of super regional product and services centers almost all subjects with the exception of sales and strategic tasks will be bundled into new units. The newly developed vessels allow for an increased capacity and lower per-unit costs, which in turn is the prerequisite of a lasting sales success. The banks can become competitive again through reducing the complexity of the business model and cost structures by outsourcing all other functions. In fact, it will lead to a new business model with a strong focus on the core competence „sales”.

Summarizing, the results mean a revolution in the cooperative sector and a dramatic shift in the structure and self-conception of the small banks. But if the necessary change process will not be started within the next three to five years, the cooperative sector would face existential problems Table of Contents: