Prague University of Economics and Business (VŠE)
Doctoral Dissertation Thesis
2021 Florian Diener
Prague University of Economics and Business Faculty of Business Administration
Field of Study: Business Administration and Management
Dissertation Thesis
Barriers to Digitalisation in the Financial Services An empirical Study of the German Banking Industry
Author: Florian Diener, M.A.
Declaration of Authenticity
I hereby declare that this thesis is my own work and that, to the best of my knowledge and belief, it contains no materials previously published or produced by another party in fulfilment, partial or otherwise, except where due acknowledgement is made in the text, which was co-authored.
In Prague, on 05.07.2021
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Acknowledgements
I would like to express my sincere thanks to my supervisor, Miroslav Špaček, for his guidance, his willingness to help me at any time and for his support over the last years.
Special thanks also belong to Martin Lukeš, who was always willing to provide me with advice, and the entire department of entrepreneurship who supported and contributed to the development of this dissertation, as well as all the reviewers. I would also like to acknowledge the help of Christian Kammlott, Tufael Ahmed, Andrew Hirst, Pavla and Michael Beithe, Peter Markovič and Maximilian Maas.
Furthermore, I would like to give special thanks to my partner and to my parents for their never-ending support.
Barriers to Digitalisation in the Financial Services – An empirical Study of the German Banking Industry
Abstract
The banking sector is confronted with today’s ever-increasing digitalisation. In this digital change process, banks are facing disruptive innovation that requires the adaptation of almost all cooperative processes. Digital transformation in the financial services is associated with barriers that seem to hinder smooth implementation of digital approaches. In this context, innovative developments, namely FinTech(s), are challenging existing banking business models and literally forcing them to rethink existing structures. In particular, the all-encompassing transformation of existing business models that have been in place for decades represents a major challenge for companies and their executives. This issue has not been adequately addressed in the current academic literature. The main purpose of the study is to qualitatively identify the perceived barriers to digital transformation in the cooperative and savings bank sector from a managerial point of view. The methodology is based on an approach using a combination of contextual interviews with German board members of banks, inductive content analysis, and the exploration of best-practice approaches. The findings reveal multiple barriers that are characterised by several sub-barriers of varying importance for the digital transformation of banks. Furthermore, the study aims to provide a quantification and analysis of implementation barriers that arise in the context of bank digitalisation. Applying exploratory factor analysis and structural equation modelling, the study quantifies a variety of barriers and tests their influence on the degree of digitalisation of banks. In this way, the study promotes the understanding and perception of managers on the topic of barriers to digitalisation.
Keywords: Bank, Barriers, Change, Decision-maker, Digitalisation, Financial Services, Financial Technology, FinTech, Innovation, Management, Perception, Transformation JEL classification: G21, M1, O33
Table of Contents
Page List of Figures ... XI List of Tables ... XII List of Abbreviations ... XIII
1 Introduction ... 1
1.1 Motivation for the Elaboration ... 4
1.2 Objective and Research Questions ... 5
1.3 Purpose of the Study ... 6
1.4 Methodical Proceeding and Structure ... 7
2 Literature Review ... 8
2.1 Conceptual Introduction ... 8
2.2 The Banking Sector ... 10
2.3 The Impact of Banking on Economic Growth ... 25
2.4 Digitalisation in a changing Finance Industry ... 28
2.5 Financial Technology ... 38
2.6 Barriers to Digitalisation and Digital Transformation in Finance ... 55
2.7 Interim Result of Literature Review ... 57
3 Research Design ... 60
3.1 Conceptual Approach – Aim and Scope ... 60
3.2 Methodical Execution ... 61
4 Methodology ... 63
4.1 Qualitative Foundations ... 63
4.2 Quantitative Foundations ... 72
5 Scientific Analysis ... 94
5.1 Qualitative Evaluation ... 94
5.2 Quantitative Evaluation ... 101
6 Research Results ... 126
6.1 Barriers to Digitalisation from the Decision-Makers' Perspective ... 126
6.2 Effects of Barriers on the Degree of Digitalisation of Banks ... 131
6.3 Best-Practices applied to overcome Barriers in Bank Digitalisation ... 135
7 Discussion, Limitations, and Further Research ... 143
7.1 Discussion ... 143
7.2 Limitations ... 146
7.3 Further Research ... 148
8 Conclusion, Implications, and Recommendations ... 150
8.1 Conclusion ... 150
8.2 Theoretical Implications ... 152
8.3 Practical Implications and Recommendations ... 153
References ... 158
Appendix ……….………..……….……… 181
Table of Contents
Page List of Figures ... XI List of Tables ... XII List of Abbreviations ... XIII
1 Introduction ... 1
1.1 Motivation for the Elaboration ... 4
1.2 Objective and Research Questions ... 5
1.3 Purpose of the Study ... 6
1.4 Methodical Proceeding and Structure ... 7
2 Literature Review ... 8
2.1 Conceptual Introduction ... 8
2.2 The Banking Sector ... 10
2.2.1 Macro- and Meso-economic Perspective ... 10
2.2.2 Microeconomic Perspective ... 13
2.2.3 The German Banking System ... 16
2.2.4 Characteristics of the German Banking Market ... 19
2.3 The Impact of Banking on Economic Growth ... 25
2.4 Digitalisation in a changing Finance Industry ... 28
2.4.1 Foundations of Technological Development in the Digital Age ... 28
2.4.2 A Changing Finance Industry: Digitisation, Digitalisation, and Digital Transformation in the Banking Sector ... 31
2.4.3 Digital Destruction/Disruption Innovation in Banking ... 35
2.5 Financial Technology ... 38
2.5.1 Definition and Classification of Financial Technology ... 38
2.5.2 Structuring Perspective ... 40
2.5.2.1 Infrastructure ... 41
2.5.2.2 Offering ... 42
2.5.2.3 Customer ... 43
2.5.2.4 Finances ... 44
2.5.3 Corresponding Business Models ... 44
2.5.4 Development of Financial Technology as a Scientific Object of Investigation ... 47
2.5.5 FinTech Market in Germany ... 50
2.6 Barriers to Digitalisation and Digital Transformation in Finance ... 55
2.7 Interim Result of Literature Review ... 57
3 Research Design ... 60
3.1 Conceptual Approach – Aim and Scope ... 60
3.2 Methodical Execution ... 61
3.2.1 Interpretations of Digital Development in Banking ... 61
3.2.2 Qualitative Approach ... 62
3.2.3 Quantitative Approach ... 63
3.2.4 Combination of the Research Results ... 63
4 Methodology ... 63
4.1 Qualitative Foundations ... 63
4.1.1 Conceptual Approach ... 63
4.1.2 Structure of the Interview Guideline ... 64
4.1.3 Sample Selection ... 64
4.1.4 Conducting the Interviews ... 65
4.1.5 Interview Preparation ... 66
4.1.6 Qualitative Analysis Procedure ... 67
4.1.7 Quality Criteria of Qualitative Research ... 69
4.2 Quantitative Foundations ... 72
4.2.1 Conceptualisation ... 72
4.2.1.1 Delimitation of the Digitalisation Concept ... 72
4.2.1.2 Diffusion, Adoption, and Measurement ... 74
4.2.2 Operationalisation ... 75
4.2.3 Quantitative Data Collection ... 77
4.2.4 Derivation of Statistical Methods ... 78
4.2.4.1 Exploratory Factor Analysis ... 78
4.2.4.2 Confirmatory Factor Analysis ... 82
4.2.4.3 Structural Equation Model ... 83
4.2.5 Reliability and Validity ... 86
4.2.5.1 Exploratory Research Approach ... 86
4.2.5.2 Confirmatory Research Approach ... 90
5 Scientific Analysis ... 94
5.1 Qualitative Evaluation ... 94
5.1.1 Data Description ... 94
5.1.2 Internal Study Quality ... 96
5.1.2.1 Quality of Data Collection and Transcription ... 96
5.1.2.2 Quality of Implementation of Qualitative Content Analysis ... 96
5.1.2.3 Consensus Coding ... 97
5.1.2.4 Calculation of Inter-Rater Reliability ... 97
5.1.3 External Study Quality ... 100
5.2 Quantitative Evaluation ... 101
5.2.1 Data Description ... 101
5.2.2 Pre-Test ... 105
5.2.3 Exploratory Factor Analysis – Construction of Scales ... 107
5.2.4 Consistency of Scales ... 116
5.2.5 Hypothesising ... 116
5.2.6 Structural Equation Model – Evaluation of the Research Model ... 118
6 Research Results ... 126
6.1 Barriers to Digitalisation from the Decision-Makers' Perspective ... 126
6.2 Effects of Barriers on the Degree of Digitalisation of Banks ... 131
6.3 Best-Practices applied to overcome Barriers in Bank Digitalisation ... 135
7 Discussion, Limitations, and Further Research ... 143
7.1 Discussion ... 143
7.2 Limitations ... 146
7.3 Further Research ... 148
8 Conclusion, Implications, and Recommendations ... 150
8.1 Conclusion ... 150
8.2 Theoretical Implications ... 152
8.3 Practical Implications and Recommendations ... 153
References ... 158
Appendix I Interview Guideline, German ... 181
Appendix II Interview Guideline, English ... 184
Appendix III Data Protection Regulation ... 187
Appendix IV Qualitative Code Definition ... 189
Appendix V Variable Summary ... 201
Appendix VI Variable Definition, German ... 203
Appendix VII Variable Definition, English ... 209
Appendix VIII Questionnaire ... 214
Appendix IX Questionnaire Coding Definition ... 225
Appendix X Descriptive Quantitative Data Statistics ... 227
Appendix XI Statistical Output of the EFA, Pre-Test ... 228
Appendix XII Statistical Output of the EFA ... 236
Appendix XIII Statistical Output of the Cronbach’s Alpha ... 248
Appendix XIV Statistical Output of the CFA/SEM ... 251
List of Figures
Page
Figure 1: Methodical Proceeding and Structure ... 8
Figure 2: The Structure of the Core Banking System ... 9
Figure 3: The Principles of Banking Systems ... 12
Figure 4: Industry Structure Analysis – Five Forces, by Michael Porter ... 16
Figure 5: Structure of the German Savings Banks and Giro Association ... 22
Figure 6: Structure of the National Association of German Cooperative Banks ... 24
Figure 7: The Revolutionary Innovation Cycle ... 29
Figure 8: Adjustment Speeds of different Systems in the Digital Age ... 30
Figure 9: Drivers of Digitalisation in Banking ... 32
Figure 10: The Disruptive Innovation Model ... 37
Figure 11: FinTech Segments ... 40
Figure 12: Principles of Business Model Canvas ... 41
Figure 13: FinTech, Worldwide interest over Time in GoogleTrends and SpringerLink 2004–2021 ... 49
Figure 14: FinTech, Worldwide Interest in Web of Science Core Collection and Scopus 2012–2020 ... 49
Figure 15: Total Investment Activity by Venture Capital, Private Equity, and M&A in FinTechs in Germany 2017–2020 ... 51
Figure 16: FinTech Users in Germany 2017–2025 by Segment ... 52
Figure 17: Total Transaction Value in Germany 2017–2025 by Segment ... 53
Figure 18: Average Transaction Value per User in Germany 2017–2025 by Segment 53 Figure 19: Conceptual Approach ... 61
Figure 20: Interview Preparation Process ... 66
Figure 21: Interview Process ... 66
Figure 22: Sequences of the Inductive Content Analysis ... 69
Figure 23: Sequences of Quantitative Methods ... 78
Figure 24: Coefficient Kappa ... 99
Figure 25: Share of valid Test Subjects by Age ... 103
Figure 26: Professional Experience of valid Test Subjects ... 103
Figure 27: Preliminary Structural Equation Model ... 119
Figure 28: Adjusted Structural Equation Model ... 121
Figure 29: Estimated Standardised Structural Equation Model ... 125
Figure 30: Summary of the Study – Part 1 ... 152
Figure 31: Summary of the Study – Part 2 ... 156
List of Tables
Page
Table 1: Bank Branches by Bank Groups 1997–2018 ... 20
Table 2: Employees by bank groups 1997–2019 ... 21
Table 3: Share of Payment Instruments in Germany ... 25
Table 4: Statista Information Approach ... 52
Table 5: Category Dimensions ... 68
Table 6: Quality Criteria of Quantitative Research ... 70
Table 7: Interpretation of the Kappa Value ... 72
Table 8: Capturing Digitalisation - The Scales ... 76
Table 9: Conditions, Exploratory Factor Analysis ... 86
Table 10: KMO Coefficient Reference Values ... 88
Table 11: Significant Factor Loadings based on Sample Size ... 89
Table 12: Conditions, Confirmatory Factor Analysis ... 91
Table 13: Goodness-of-Fit Indices ... 93
Table 14: Numerical Interview Data Description ... 95
Table 15: Code Consistency between Documents ... 99
Table 16: Valid Test Subjects ... 102
Table 17: Highest Qualification of valid Test Subjects ... 102
Table 18: Descriptive Statistics ... 104
Table 19: Pre-Test – KMO and Bartlett's Test ... 105
Table 20: Pre-Test, Rotated Factor Matrixa ... 106
Table 21: EFA, KMO and Bartlett's Test ... 107
Table 22: EFA, Rotated Factor Matrix(1st order, Varimax) ... 108
Table 23: EFA, Rotated Factor Matrix(2nd order, Varimax) ... 109
Table 24: EFA, Rotated Factor Matrix (3rd order, Varimax) ... 110
Table 25: EFA, Rotated Factor Structure Matrix (1st order, Oblimin) ... 111
Table 26: EFA, Rotated Factor Pattern Matrix(1st order, Oblimin) ... 112
Table 27: Factor Analysis Matrix ... 115
Table 28: Cronbach’s Alpha-Test ... 116
Table 29: Model Fit Measure ... 119
Table 30: Modification Indices ... 120
Table 31: Adjusted Model Fit Measure ... 121
Table 32: Un-/Standardised Model Estimates ... 123
Table 33: Covariances and Correlations ... 124
Table 34: Category Summary ... 127
Table 35: Hypotheses and Statistical Results ... 132
Table 36: Facing Digitalisation – Best practices ... 142
List of Abbreviations
API ... Application Programming Interface app ... application B ... Barrier BVR ... National Association of German Cooperative Banks C.R. ... Critical Ratio CAGR ... Compound Annual Growth Rate CFA ... Confirmatory Factor Analysis CIBP ... Confédération Internationale des Banques Populaires Corr. ... Correlation Coefficients Cov. ... Covariance Value CRM ... Customer Relationship Management DSGV ... German Savings Banks and Giro Association e.g. ... exempli gratia EBA ... European Banking Authority EFA ... Exploratory Factor Analysis ESFS ... European System of Financial Supervision ESMA ... European Securities and Markets Authority et al. ... et alia etc. ... et cetera FA ... Factor Analysis GOF ... Goodness-of-Fit I ... Interpretation i.e. ... id est IOSCO ... International Organisation of Securities Commission IRR ... Inter-Rater Reliability IT ... Information Technology KMO ... Kaiser-Meyer-Olkin criterion KWG ... The German Banking Act ML ... Maximum-Likelihood Factor Analysis MSA ... Measures of Sampling Adequacy p. ... page PA ... Path Analysis PAF ... Principal Axis Factor Analysis PCA ... Principal Component Factor Analysis pp. ... pages RQ ... Research Question S.E. ... Standard Error SEM ... Structural Equation Model SMC ... Squared Multiple Correlations
1 Introduction
Digital transformation and the adoption of new technologies are increasingly raising questions about changes that traditional companies and their management have to face and answer strategically (Hess et al., 2016). Of particular interest here are topics such as strategic decision-making approaches and entrepreneurial processes; these need to be examined in the age of digital transformation and digitalisation (Heavin &
Power, 2018; Hossfeld, 2017). The application of new technologies and their adequate implementation to improve business performance or reach is turning out to be an important issue for companies nowadays (Ismail, Khater, & Zaki, 2018; Westerman, Bonnet, & McAfee, 2014). These complex transformations have proved to be influential from both internal and external perspectives, such as strategic direction, competitiveness, the business model itself, decision-making, innovation, entrepreneurship and productivity, as well as customer relations (Aydalot & Keeble, 2018; Cohen, Amorós, & Lundy, 2017; Li et al., 2017)
Due to continuous technological development and the associated increase in digitalisation, lifestyles as well as the behaviour and expectations of customers are changing (Alt, Beck, & Smits, 2018; Puschmann, 2017); the world is becoming ever more informed, transparent and efficient. Thereby, ‘digitalisation’ is transforming industries, business models and processes and creating innovation, not only within single companies, but also within whole industries (Niemand et al., 2020) and on multiple levels (see section 2.4.2). Here, ‘digitalisation’ refers to analogue service provision being replaced or supplemented, in whole or in part, by service provision in a digital, computer-based approach (Wolf & Strohschen, 2018). It can be applied in and exert effects on, for example, value creation processes, human resources, tasks, products, services, companies and other organisations (Dapp, 2017; Wolf &
Strohschen, 2018). In banking, it is worth mentioning that competition in the market caused by digitalisation is nowadays triggered by new digital competitors (Brandl &
Hornuf, 2020). The degree of digitalisation of a company plays a key role in its future competitiveness (Rossato & Castellani, 2020); hence, a company's digitalisation alignment can be assessed on the basis of its level of digital maturity, in terms of concrete progress in the areas of strategy, products and services, marketing and sales, organisation and culture, as well as IT, and the anchoring of related aspects in the company's management (Groberg, Vetter, & Flatten, 2016; Teichert, 2019).
It is precisely this overall transformation in banking that is creating new sales and service markets, in which technology and customer behaviour are continuously evolving (Hendershott et al., 2021). As a result, traditional business models in different industries are now not only competing with each other, but also with new models that are outside their business field (Lee & Shin, 2018). To cope with these market-driven
changes, companies have to adapt to their environment, specifically the markets themselves, with their products, services and customers, by rethinking their traditional base and reforming it when necessary (Chen, Wu, & Yang, 2019; Gomber et al., 2017a). For this process, Schumpeter (1943) defined and popularised the term 'creative destruction'. Christensen and Bower (1996) and, later, Christensen, Raynor, and McDonald (2015) added the term ‘disruptive innovation’; both describe symbolically the phenomenon of the development process of displacement and the associated dangers at the entrepreneurial level (see section 2.4.3) in times of change, including in financial services (Julapa & Kose, 2018). Their insights into these potential dangers should ultimately be taken into account.
With regard to practice, within a few years, numerous new digital business models have emerged in various sectors, including the financial industry (Gimpel, Rau, & Röglinger, 2016; Lee & Shin, 2018; Zavolokina, Dolata, & Schwabe, 2016).
Previously, there were only a few innovative approaches, especially in the financial services industry; today, however, numerous and diverse creative ideas are also being implemented here. Most young digital companies are nowadays referred to as
‘Financial Technology Companies’, ‘Financial Services Technology’, or ‘FinTechs’ for short (BaFin, 2019). They often have new technology-based business cases or transform existing traditional business approaches; in this, Germany is lagging behind its global peers (Jünger & Mietzner, 2020).
Basically, in so doing, FinTechs challenge long-established companies within the financial services sector and create uncertainty on several levels: for the financial companies themselves, for customers, but also for entire financial systems and governments (Vives, 2019). First analyses have already been conducted with regard to the interaction between banks and FinTechs (Hornuf et al., 2020). In order to understand these interrelationships and developments in greater depth, especially in Germany, one of the potentially largest financial and FinTech markets in the world (Dorfleitner, Hornuf, & Wannenmacher, 2020), it is important to take a closer look at digitalisation in today's financial industry and the impact of FinTechs on traditional financial service providers (Schueffel, 2016). In this, a distinction has to be made in financial services between the organised and the informal capital market, also called the grey capital market (Werner & Burghardt, 2006, pp. 45–46). Companies that want to offer products and services on the organised capital market are, at least in Germany, subject to authorisation; they need a licence from the Federal Financial Supervisory Authority (BaFin). On the other hand, companies that choose not to obtain a licence, or simply do not need one, operate in the grey market, where they face little or no regulation or official supervision.
FinTech business models appear very diverse (Omarini, 2017; Thakor, 2020).
Depending on their specific business structure, they also do not need a licence to carry
out their activities and are, therefore, not subject to the overall supervision and licensing requirements of the financial authorities (Hodson, 2021). Especially if there is no regulation by BaFin, they can operate within applicable legal norms and place their offers more easily than can traditional financial service providers. The result is a non-transparent financial market that puts financial institutions under increasing pressure (Hendershott et al., 2021). This development is favoured by (1) the effects of existing and planned financial market regulations at the European level (e.g., Basel III/IV, Solvency I/II, etc.), which additionally increase the cost pressure for institutions (Weitert, 2014); (2) the ever-increasing competition with global market participants that are increasingly entering the financial market (e.g., Apple, Amazon, Google, etc.);
as well as (3) changes in customer behaviour and the demand for traditional financial offers (see section 2.2.4) (Diener & Špaček, 2021). Accordingly, based on the combination of all these influences, competition in the financial market is increasing and traditional market participants, in particular their decision-makers, have to react to this development in order to enable long-term corporate positioning and to remain competitive. This seems possible, above all, through the digitalisation of offers and business models.
Traditional financial service providers seem to be becoming increasingly digital (Omarini, 2018); in practice, however, the main problem remains that no all- encompassing and rapid digitalisation is equally possible in all banks. As a result, institutions often offer an incomplete range of digital services and face multiple barriers in the digital transformation process (see section 2.6 and 6.1). On the other hand, there are new digital competitors (FinTechs) with innovative concepts, products and services that create demand (Nemet, 2009) and address customers in multiple ways, especially with a modern, multi-channel approach to sales, communication and marketing (Drasch, Schweizer, & Urbach, 2018). In this way, these business models have gained market share on a large scale. Recent research confirms the growing influence of these business models on the financial industry (Dorfleitner & Hornuf, 2016; Dorfleitner et al., 2020).
If traditional companies and their industries are slow and ineffective in adapting to modern, changing circumstances, or at worst pay no attention to change, there is a high risk of disruption by new technologies and business models (Christensen & Bower, 1996; Christensen, 2006). If such changes are neglected in systemically important financial institutions, specifically banks, it is currently impossible to predict how this will affect the banking industry, financial services in general and the economic system as we know it.
Ineffective or mismanaged adaptation to changing markets can manifest itself on many levels, e.g., in the form of divergent customer targeting that results in lost customer groups, or in the form of missed technological developments, as was the case
in other industries in the past, e.g., IT-development (Christensen & Bower, 1996), the music industry (Bundesverband Musikindustrie, 2017; Dolata, 2008), etc. Many banks and their decision-makers have already recognised the need for fundamental changes in their business model and have started to rethink or reform their approach and procedures (Braun, 2016; Mohan, 2015).
Nevertheless, overall, this raises the question of how new entrepreneurial approaches, management behaviours and technologies in the banking world will influence and change a long-established financial system. In order to be able to shape these changes effectively, knowledge about change processes and the associated barriers within digital transformation is crucial (Kotter, 2012; Stouten, Rousseau, & De Cremer, 2018); more precisely, knowledge about barriers that occur within the digitalisation process at banks and ultimately influence their degree of digitalisation.
1.1 Motivation for the Elaboration
The main motivation for this study to focus on future-oriented topics is the interest of every individual in a stable, sustainable and secure living environment, as well as the ambivalent role of financial institutions, which, on the one hand, provide for the revival of economies in crisis (see the role of banks during the COVID-19 pandemic) and, on the other hand, can also trigger financial crises (as happened in 2008–2009).
Existing interdependent structures can only continue to contribute to a stable living environment by maintaining a long-term stable economy, with all its economic sectors1 and related industries2. The viability of financial services, which are one of the essential pillars of today's society, is of great importance in this regard and has to be preserved and protected. The omnipresent desire for security and stability stimulate further research into the stabilisation and preservation of economic sectors, and thus, also into research in the tertiary economic sector; in particular, in the banking and insurance sector, also generally referred to as the 'financial services industry'. The concern for stability, in addition to continuous research into business and economic interrelationships, is motivated by the multiple, historically documented risks posed by banks in the context of overall systemic maintenance. Evidence of this risk is clear from the fact that banking has already led to multiple depressions worldwide and is exposed to continuous risk (Bergk, 2019, pp. 49–66).
With regard to the banking sector, the research field of digitalisation is still very young, and the findings on the role of the state, financial centres and the uneven development of traditional and new innovative financial service providers are still very limited (Knight & Wójcik, 2020). The thematic orientation and motivation of the
1 Primary Sector (primary production), secondary sector (industry sector), tertiary sector (services sector), quaternary sector (information services).
2 Officially defined by: International Standard Industrial Classification (ISIC) (United Nations, 2008) and Statistical Classification of Economic Activities of the European Community (NACE) (Eurostat, 2021).
study is thus based on a lack of knowledge and the fundamental importance3 of banking institutions and the banking sector in general for the preservation of national and international stability and the security of the economic system. Particularly in view of ever-stronger competition, as well as an increasingly digital and fast- developing environment, which ultimately also affects the banking sector, this study is all the more urgent to examine the topic of digitalisation and related implementation barriers in order to preserve the banks and banking in the long term.
1.2 Objective and Research Questions
Current technological development and trends lead to the assumption that the market itself and new business models are transforming financial services. Thereby, one of the oldest and most important industries in the world – banking – is facing potential disruption by modern business models, their innovations and digital technologies, as well as changes in customer behaviour, so that banks ultimately need to adapt to the digital markets. The topic of digitalisation in banking is discussed from multiple perspectives, as described in detail in the following chapters; based on the identified literature, however, it became apparent that the investigation and identification of barriers to digitalisation in banking have been insufficiently addressed from a scientific and methodological point of view.
Breidbach, Keating, and Lim (2020) identified management challenges in digital transformation in an analysis of 1,545 published articles related to financial technology and innovative business models in financial services. In doing so, they emphasised the complexity of digital financial services systems, the orchestration of value creation through cooperation with FinTech and the development of elastic infrastructures, models and markets. Following on from this, taking into account the complexity of digital finance and FinTech, as well as further potential research directions (Gomber, Koch, & Siering, 2017c), it seems to be more important than ever that decision-makers should have a clear perception and understanding of possible barriers to the implementation of digitalisation in the process of banking transformation, as well as a general understanding of the context of digital hurdles to adaptation. Here, Jorge, Mosconi, and Cadieux (2019) analysed bank managers' understanding and the impact of digital transformation and disruptive technology on their daily routine.
3 Global systemically important banks: As the most important intermediaries of the financial market, banks occupy an outstanding position due to their functions within the national economy. Financial institutions distinguish themselves, on the one hand, through extensive credit relationships and, on the other hand, as trading partners between capital market participants. The insolvency of global systemically important banks can affect other banks through the interconnectedness of the money, capital and credit markets and even lead to a collapse of the entire banking system, and thus of the bank-based payment system. The consequence would be adverse effects on both the financial and real economy (corporates and private households) in the form of a credit crunch (difficulty in obtaining credit) and disruption of the payment system. Losses in the financial system and the real economy, triggered by contagion and feedback effects, are considered to be a financial institution's contribution to systemic
Their findings suggest that managers' perceptions are mostly related to risks and uncertainty. Innovative manners to interact with clients demand managers' personal time to create and retain strong relationships. Moreover, increased workload and accelerated pace of work blurred the frontiers between personal and professional lives, leading to technostress. (Jorge et al., 2019)
Since executives have a significant influence on their bank and its strategic orientation and success (Curi & Murgia, 2018), the present study focuses on digitalisation in detail from a decision-maker’s perspective.
Against this background, the study's main objective is to identify the implementation barriers to bank digitalisation from the bank manager's point of view, both from a qualitative and a quantitative perspective, in order to facilitate and support the digital transformation.
Due to the omnipresence and similarity of cooperative and savings banks sector in German banking, both are the main focus of the study.
This objective raises the following main research questions (RQ), which are of qualitative (RQ1 and RQ3) and quantitative (RQ2) nature and will be answered sequentially throughout this study.
RQ1: What are the barriers to digitalisation in an increasingly technological banking environment?
RQ2: What effect do barriers to digitalisation have on the degree of digitalisation of banks from the perspective of decision-makers?
RQ3: What are the ‘best practices’ applied in the digitalisation of banks?
1.3 Purpose of the Study
The changes and developments in the financial and banking market, digitalisation and FinTech as a research area are ‘[…] full of controversies, ripe and in need of geographical research‘ (Knight & Wójcik, 2020). Thus, this study contributes with a detailed analysis that not only addresses the digitalisation of banking itself, but also takes into account, specifically, the transformation of the German banking industry and the awareness of its decision-makers regarding the degree of digitalisation of banks.
By examining in detail the barriers that influence digitalisation, both qualitatively and quantitatively, and taking into account the perception of implementation barriers by decision-makers and experts, this study not only addresses an essential issue of technological progress and development in banking, but also aims to sensitise an entire service industry to its changing and evolving business models, as well as technologies.
The insights gained from this analysis are intended to provide decision-makers, experts and banking institutions with an initial summary of potential barriers to digitalisation in changing market and business situations. Further, the combination of qualitative and quantitative aspects aims to provide recommendations on how to face and overcome barriers to digitalisation. As a result, executives should be enabled to adequately fulfil their role as decision-makers and make decisions that enable their institutions to align themselves with market developments in the long term, through a consistent perception of digital change. This should contribute to a stable economy, the preservation of banking institutions and jobs, and ultimately the fulfilment of customer requirements for products and services through increased digitalisation.
Furthermore, the thesis will provide a methodological approach to identify and analyse implementation barriers to digitalisation in banking and to measure internal digitalisation from the individuals' point of view. However, this approach should not only be exclusive to the banking sector, but with some simplification could also be applicable to other industries in terms of methodology and content.
1.4 Methodical Proceeding and Structure
First of all, the present study focuses, in Chapter 2, on the German banking sector, its development and current composition, as well as its overall economic importance.
Furthermore, digitalisation in today's financial industry is thematised and the topic of financial technology is dealt with in particular. Within the framework of the thematic focus, the existing findings on digital transformation challenges are also addressed, from now onwards referred to as barriers. The chapter thus provides the fundamental basis that is indispensable for a clear understanding of the topic and hence of the study itself.
Chapter 3 provides the first summary description of the conceptual research approach, as well as of the methodology of execution related to the procedure.
Chapters 4 and 5 are subdivided into their respective qualitative and quantitative methodological approaches. In terms of content, the qualitative research approach is always discussed first, followed by the quantitative one. Chapter 4 describes the methodological foundations and Chapter 5 focuses on the scientific analytical execution.
Chapter 6 provides the result section of the study. The separation of qualitative and quantitative results is also applied here. Furthermore, practical measures based on the qualitative result are interpreted in relation to the quantitative findings of the study.
Chapters 7 and 8 cover the discussion, limitations and further research, as well as the conclusion and implications of the findings from a theoretical and practical point
of view. Furthermore, practical implications are supplemented with recommendations for action.
Figure 1 illustrates the structure of the study once again.
Figure 1: Methodical Proceeding and Structure
Source: Original representation by the author.
2 Literature Review
42.1 Conceptual Introduction
This chapter gives a literature-based insight into the approach of digitalisation and banking in Germany, following the methodological approaches described by Snyder (2019) and Tranfield, Denyer, and Smart (2003). First, this section focuses on the banking industry in general, starting with a specific focus on the economic
4 Several parts of this chapter were taken from articles by the author of this study. For more details, see Diener and Špaček (2021; 2020a; 2020b; 2019) and Diener (2020).
perspectives (section 2.2). Following this, the next section focuses in more detail on the economic impact of banking and its importance for the economic system (section 2.3).
To create a better understanding of the topic and its importance, the next section focuses on digitalisation in a changing finance industry (section 2.4). Based on previous information, an even greater level of detail and understanding of the specific topic will be achieved through the thematisation of financial technology in the banking industry (section 2.5). Digitalisation and technology are the main focus of this study (see the lowest level of ‘Technology’ in Figure 2). After this, information is provided on the barriers to digitalisation and digital transformation in finance; this forms part of the theoretical framework of the study (section 2.6). Finally, the findings of the literature review are summarised as an intermediate conclusion of the chapter and interpreted in the overall context (section 2.7).
Figure 2 gives initial insights into the banking system in Germany and the main focus of this work; however, it focuses only on the structure, in order to illustrate connections within it. Here, Figure 2 represents the structural set-up of the following sections of Chapter 2 from the top to the bottom. In particular, the study focuses on the level of individual institutions (i.e., commercial banks [cooperative and savings banks] and FinTechs) as well as on the technology level (i.e., technological, innovation and digitalisation) and describes their interrelationships step-by-step. Knowledge gained from this chapter is the basis for further investigation.
Figure 2: The Structure of the Core Banking System
Source: Original representation by the author based on Tanda and Schena,
2.2 The Banking Sector
The banking sector dates back to the 4th century BC. At that time, Athens was the first and largest banking centre in the Greek world. Municipal and private banks are recognisable from Hellenic Greece: among other things, these issued guarantees, mortgages and ship loans (Rostovtzeff, 2013, pp. 1028–1036).
In Europe, the first pan-European banks were established around the 13th and 14th centuries, when Florence became a trading power and a banking business started to develop there. As the original wholesalers, commission agents and forwarding agents, the first bankers specialised in lending and exchange business related to commodity trading.
The Bardi family from Florence was one of the first and most important banking families of the 13th century, but, as a result of financial problems, their influence waned and the Medici family became established instead. Named after the family, the Medici Bank was Europe’s first and most active financial institution. The bank was founded in Italy and operated between the 14th and 15th centuries (1397–1494) (Webback Machine, 2019). At that time, it was the largest and most recognised bank in Europe.
Over the course of the following centuries, numerous business models and a large number of different institutions established themselves in the financial market.
These have traditionally been used since then because, in a national economy based on the division of labour, the services of economic entities are exchanged using money.
In order to present a holistic view of the banking system, macro- and meso- economic, as well as microeconomic perspectives have to be taken into account;
sections 2.2.1 and 2.2.2 discuss both and make a detailed distinction between the two.
Due to the work’s focus on the German banking industry, its composition is also presented in the subsequent sections, 2.2.3 and 2.2.4, and a clearer distinction is made between the currently dominant banking business models. Hence, starting with an initial overall perspective, the reader is presented with an increasingly detailed characterisation of the banking sector throughout the following sections.
2.2.1 Macro- and Meso-economic Perspective
Public claims are the sum of individual interests and can be understood as the functionality of our system from an economic point of view (Dia & VanHoose, 2017).
From this perspective, banks can be considered an important part of our economy, our economic system and its macroeconomic value-creation process (Ingrao & Sardoni, 2018, pp. 1–15). Consequently, every economic entity is affected by a functional banking system.
For historical reasons, banks typically serve as intermediaries in the financial market (Hartmann-Wendels, Pfingsten, & Weber, 2019, p. 2). In carrying out their duties, they act as mediators by transferring capital from investors to capital seekers.
Four central economic functions are assigned to the banks, which Gramlich et al. (2012, p. 125) identified as follows:
(1) Lot size transformation: The balance between the supply of a large number of small deposits from customers and the demand for large loans that banks achieve through the pooling of all investments and loans.
(2) Maturity transformation: The balance between the maturity interests of debtors and creditors. Ideally, the amount and maturity of the loans granted by a bank will correspond to the deposits made available to the bank.
(3) Risk transformation: Reconciles the different risk appetites of debtors and investors, e.g., through portfolio formation or equity and liability monitoring.
(4) Information transformation: Ensures that banks' knowledge of the market enables them to provide timely information about the financial market to clients, and vice versa, e.g., to pass on information to regulators for regulatory purposes.
With these macroeconomic functions, the banking system performs functions for non- banks, i.e., private and business customers, as well as public organisations. The four transformational approaches mentioned above are reasons for the great interest that today’s general public has in a functioning banking system. In this context, the functionality of banks includes the scope of their products and services and their quality as an intermediary within transaction and transformation functions. In particular, Levine (2005, p. 869) mentioned that financial systems and banks:
(1) ‘produce information ex ante about possible investments and allocate capital,
(2) monitor investments and exert corporate governance after providing finance, (3) facilitate the trading, diversification, and management of risk,
(4) mobilise and pool savings,
(5) facilitate the exchange of goods and services.’
In the banking system, which is regulated by the central banking system and banking supervision, two basic bank typologies have emerged. Both are defined on the basis of corresponding regulatory provisions and historically evolved institutional frameworks for the actors involved (the banks and non-banks). Here, a distinction has to be made between a separate banking system and a universal banking system (Tolkmitt, 2007, p. 19). In the former, banks specialise in certain banking services, as was the case for the US investment and retail client market until 1999, and as is the case in England and France today. On the other hand, continental European banking systems, such as Germany, Austria, and Switzerland, tend to have a historically
developed universal banking system, in which banks can choose to specialise without being obliged to do so. This system is dominated by banks with a broad business structure, which offer all services derived from banking functions with a full banking license (Alt, 2016, p. 10).
In addition to the commercial banking system, national and international central banks constitute another element of banking systems. They are responsible for planning, managing, and controlling the money stock and monetary policy instruments for an economy (Alt, 2016, p. 10).
One of the major German banking regulators is the BaFin, which has the primary objective of ensuring a functioning and stable system that operates with integrity. Europe’s international regulators are the European Banking Authority (EBA), the European System of Financial Supervision (ESFS), the European Securities and Markets Authority (ESMA), and the International Organisation of Securities Commission (IOSCO) as an international association of stock exchange authorities.
Figure 3 presents the principles and interrelationships in banking holistically, distinguishing between the commercial and central banking systems and the supervisory authorities.
Figure 3: The Principles of Banking Systems
Source: Original representation based on Deutsche Bundesbank (2017, pp. 88–129) and Alt (2016) who refers to Mugler (2014, p. 18).
2.2.2 Microeconomic Perspective
In addition to the macro- and meso-economic perspectives, the micro-economic perspective of banking has to be addressed. According to Porter’s approach (2008;
1979), the industry structure analysis is used to determine the attractiveness of an industry from a microeconomic perspective. The so-called industry structure model offers an analytical grid with which the microeconomic structure of an industry and the competitive situation can be systematically investigated. Based on the development of the competitive situation within an industry, it can be deduced whether this is attractive for companies and if it would, therefore, enable long-term profitable development. In particular, the competitive situation between traditional financial services providers and new innovative companies has to be taken into account. Porter’s model is based on an economic approach to industry, but it can also be applied to analyse other industries, including the banking sector. It is assumed that the attractiveness of an industry for a company already operating in it is determined by the market structure, as this influences the behaviour of market participants. When determining the attractiveness of an industry, the following five components of industry structure, also referred to by Porter (2008; 1979) as the ‘Five Forces’, are decisive and allow for a more detailed analysis of the banking sector.
(1) Bargaining power of suppliers: The bargaining power of suppliers (this refers to the so-called FinTechs5, which offer state-of-the-art financial solutions and services – including for banks, e.g., ApplePay – and at the same time act as both provider and competitor) determine to what extent they can enforce their interests in a business relationship with the respective financial institutions. If these state-of-the-art companies have a high degree of bargaining power, it usually leads to higher fees for their products and services, or to the provision of products and services of lower quality, or to a limited extent at the same price to banks and customers. Since this has a negative effect on the profit potential, an industry is all the more attractive when the bargaining power of suppliers is lower (Porter, 2008). FinTechs benefit from high differentiation of their offerings; for example, they can place their offerings on the market in multiple ways. In contrast, existing banks face high costs for switching their offerings or systems; for instance, if they wish to change existing offerings or systems with which the customer is familiar. There may also be a low level of substitution possibilities; FinTechs often offer unique financial solutions and services which can only be substituted at great expense. All these factors argue for the existence of strong bargaining power on the part of FinTechs (Werth et al., 2020).
However, this requires that the services are ultimately also accepted by the financial market as well as the customers, and that they can actively be exploited.
(2) Bargaining power of buyers: As with suppliers, the bargaining power of customers determines to what extent they can assert their interests in a business relationship with the company. The high bargaining power of customers will usually result in requests for either lower prices or better quality for the same price. Such behaviour has a negative effect on companies’ potential profits; thus, an industry is more attractive when customers have reduced bargaining power (Porter, 2008).
The IT-based design of the innovative business models of FinTechs often simplifies the overall process, reduces costs and accelerates the processing times of large customer enquiries for the respective companies. However, if this is not yet the case and FinTechs rely on financial institutions to integrate their offerings and services, or they are in their start-up and development phase and have not yet been accepted or used by the customer, then banks have complete bargaining power (Chishti & Barberis, 2016, pp. 179–182). This is once again confirmed by the predominantly selective implementation of FinTech solutions within banks. High availability of substitutes (e.g., other equivalent FinTech solutions), low differentiation of offerings (e.g., few FinTech companies with the same services) as well as low influence of the product on the cost position or the banks’ opportunities for differentiation are also indicators of the high bargaining power of banks.
However, this premise is only valid if FinTechs have not (yet) established themselves in the financial sector, whereas the bargaining power of banks is minimised as customer acceptance and implementation increase (Werth et al., 2020).
(3) Threat of new entrants: The entry of new competitors into the market usually leads to increased price pressure. The supply and demand ratio will become unfavourable;
in order to make full use of their capacities and gain new customers, new competitors contribute to a fall in prices, which, in turn, reduces the attractiveness of the industry (Porter, 2008). The risk of new competitors entering the market depends on the level of market entry barriers. Higher barriers mean a more secure position for existing competitors and increase industry attractiveness. Existing market entry barriers to new banking offerings may include increased capital requirements in the context of FinTechs’ corporate financing, which is (often) minimised through financial support from investors (see Figure 15, p. 51).
However, access to customers, as well as the acceptance of the respective new offerings, also leads to problems. The threat of competition increases as a result of market uncertainty, the increased financial and administrative support which FinTechs receive, as well as the continuous power of innovation. Numerous FinTech start-ups have established themselves and developed into serious competitors (e.g., N26, PayPal, ApplePay, etc.) (Romānova & Kudinska, 2016).
(4) Threat of substitute products: Substitutes are to be understood in a broad sense, i.e., financial solutions that meet similar customer needs but are currently perceived by customers as being different, as well as those which address different customer groups, or which are currently distributed only in other regions. Such alternative products have a negative effect on the attractiveness of an industry, as customers might switch to other products if needed, provided they are available on the local market (Porter, 2008).
The banking sector currently faces the following situation: FinTechs offer products and services that bank customers (can) use. Often, there are special solutions tailored to customer needs, which are used individually by the customers, but banks do not offer a full range of them (Werth et al., 2020), so customers leave.
In addition, traditional banking services, such as the use of bank counters, are being used less and less today (see Table 3, p. 25), which points to a further movement away from long-established structures and could ultimately lead to their substitution.
(5) Rivalry among existing competitors: The fifth and final factor that influences industry attractiveness is the intensity of the competition, which Porter calls the rivalry among competitors. A high level of competition manifests itself either as price competition (competitors undercut prices) or as performance competition (competitors outdo each other in terms of product quality and additional services, thereby increasing costs). Both forms of competition have a negative effect on potential profits and thus on market attractiveness (Porter, 2008).
The increased implementation and use of FinTech solutions, changing customer behaviour (see Table 3, p. 25) and existing product differentiation between current traditional bank offerings and competing novel FinTech solutions, lead to ever-growing rivalry among competitors (Romānova & Kudinska, 2016). This is not just the case with FinTechs and banks, but also between the banks themselves, who are increasingly trying to operate digitally in order to avoid being forced out of the market (see section 2.4 and Chapter 4). This is accelerated by developments in the financial market in recent years, in particular by past and current crises (e.g., the financial crisis in the mid-2000s or the COVID-19 pandemic), which have additionally increased and intensified the rivalry as a result of the changed market conditions.
Figure 4: Industry Structure Analysis – Five Forces, by Michael Porter
Source: Original representation based on Porter (2008, 1979).
In a microeconomic view of the banking sector, taking into account the focus on the German banking market in this study, three pillars and four functions can be distinguished on the basis of the prevailing corporate organisational structure on which the products and services of banks are oriented (von Stein, 1998).
The three pillars have developed over time and can be traced back to the earliest private bankers, which, in turn, form the first pillar, i.e., private banks. The second pillar comprises the savings banks and so-called Landesbanken, which are comparable to state-owned banks. They have been created in order to meet the needs of low- volume money transactions and other demands of the less affluent population. As financial needs and volumes grew in the wake of advancing industrialisation and global activities, equity banks and credit cooperatives were created, forming the third pillar. This three-pillar form is typical of the German market, but there are also multiple mixed forms of banks, some of which cannot be clearly sorted into this organisational system.
2.2.3 The German Banking System
The German banking system can be classified into private commercial, publicly owned credit institutions, and cooperative banks (Tolkmitt, 2007, p. 33).
Private commercial banks are organised under private law institutes. They include major banks such as Deutsche Bank and Commerzbank, but also regional and private banks.
Publicly owned credit institutions include all credit institutions that are organised according to public commercial law. These include state and savings banks, as well
as other legal forms of bank business models under public law. The state banks fulfil the central bank function for the local savings banks. Savings banks focus on regional or municipal bonds, orientation towards the common good, and cooperation in connection with other institutions of the Savings Banks Finance Group6. In doing so, they act in accordance with the principles of public service, business restrictions and management, as well as regional principles. In addition to the restrictions of the regional principle, savings banks are subject to restrictions on their business activities.7 The institutional authorities for these organisations are usually the cities, municipalities and/or districts.
Cooperative banks are predominantly organised according to the Cooperatives Act and have the legal concept of the economic association, i.e., organised self-help. They can be run as a legal form of a cooperative or stock corporation and belong to a cooperative banking group.8
Freixas and Rochet (2008, p. 2) further differentiated between four functions within the banking system: the payment transactions function, investment function, credit function and service function.
Payment transactions function describes the takeover and settlement of national and international payments. In addition to ensuring and maintaining cash payments through the issuing of physical banknotes, their duties include the maintenance of cashless, electronic payment transactions, such as bank transfers, credit cards or mobile payment through smartphones.
Investment function; through this function, banks receive savings deposits from customers and invest them in securities and/or in equities, funds, etc. In addition, banks are responsible for the administrative processing, purchase and sale of securities dealings on the stock exchange.
Credit function represents the granting of loans by banks. Basically, a distinction has to be made between loans for private and corporate customers. Well-known examples from the private customer sector are consumer or mortgage loans, as well as the financing of investment or loans for goods in the business customer sector.
6 In German: Sparkassen-Finanzgruppe.
7 Savings banks are only permitted to operate in those areas of business that are permitted and listed as permissible under the respective savings bank ordinances and statutes; this is also known as the ‘enumeration principle’. As such, business restrictions on pension schemes no longer apply today, as savings banks are now public-law universal banks that undertake the usual banking transactions with private individuals and companies.
8 These include the so-called Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken, including specialist institutions such as promotional banks, the German Cooperative Bank (DZ-Bank) and its affiliated companies (e.g., the Bausparkasse Schwäbisch Hall AG; which is a building society). Internationally, they work
The service function includes customer service for private and corporate clients and institutions. The development and sale of financial products, as well as risk management are equally included. Other services taken over by banks are often bank-related tasks, such as the distribution and support of insurance products and real estate services.
In practice, different customer groups and the alignment of these functions has led to three ideal types of banking that serve not just clients in the non-banking sector, but, due to their specialisations, also those in the banking sector itself. According to Gruber and Bouché (2017, p. 33), Lieberknecht (2016, p. 35), and Röhrs (2009, p. 5), a distinction is made between the following types of banks:
Universal banks offer a wide range of banking functions, products and services for an equally broad customer base. In accordance with the conceptual understanding of the (macroeconomic) universal banking system, they are active in both investment banking and the traditional banking business, and they serve private, corporate and institutional clients. Examples include Deutsche Bank or Credit Suisse.
Retail banks focus on largely standardised basic services for smaller-scale private customers (standardised retail banking). These include services from the functions of payment transactions, investment and lending business, which have no or only a small advisory component. Customers in this group are accustomed to banks which have many local branches and, therefore, a broad branch network. Examples include the cooperative banks, i.e., the Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken.
Private banks distinguish themselves from standardised mass customer business by offering individualised services. These include personal advice from an expert, or customised financial products. A distinction has to be made between the retail and the private banking client, whereby the boundaries between the respective classifications and the associated support are fluid in private banking and vary from bank to bank (Alt, 2016, p. 14; Galasso, 1999, p. 24).9 In general, these private banking relationships are characterised by their long-term, trust-and-discretion-based nature and the high degree of customisation of service provision, whereas less affluent customers in retail banking are, as part of standardised private customer business, not offered individual solutions and are primarily sold standard products (Degen, 2010, p. 59; Röhrs, 2009, p. 5). The latter is understood as a product- or production-
9 Private banking is usually tied to a minimum fixed asset, which is typically over EUR 100,000. Financial institutions focusing on this client segment include small private bankers (e.g., Berenberg), as well as large banks (e.g., UBS), and they also include savings banks and cooperative banks.
centred, standardised mass business, with mass customers who have a comparatively low income.
Direct banks complement the offer at the electronic level – the Internet – and often have no or limited possibility to offer direct or personal face-to-face counselling, or they explicitly do not follow this approach. Typically, they have no branch network and are not present locally; however, personal support and advice are constantly improved and simplified through the use of modern technologies (e.g., advice via video link) and the further development of new digital financial business models.
2.2.4 Characteristics of the German Banking Market
The German banking market is characterised by a clear organisational structure, in which legal models and concepts are clearly defined and separated from each other.
The Banking Act (KWG10), a law in Germany whose purpose lies in market regulation and market organisation of the credit system. It was initiated in 1934 in response to a German banking crisis and enforced in its first iteration in 1935, setting the framework conditions of the German financial market (KWG, 2021). This federal law is intended to ensure and maintain the functioning of the banking industry; it also serves to protect creditors of the credit institutions from losing their deposits.
In addition to the macro-, meso- and micro-economic classification, a distinction has to be made in the German banking market among the multiplicity of banks, which, as outlined in the previous sections, are essentially characterised by their different structures and main areas of activity. They are all part of the banking market and are described in the following pages on the basis of their prevailing market dominance and ubiquitous presence, using the classifications: savings bank sector, cooperative sector, private banks and building societies, and other banks (see Table 1 and Table 2).
The German Federal Bank11 is an exception to the definition, which will not be analysed further in this study; however, it provides the data for the following section.
It serves as the financial intelligence unit of the banking system, allowing for a general overview of the German banking market based on publicly available bank information. In order to ensure the comparability of the market/company data and an equally comparable year-round view, due to system-related data availability, and despite official regular bank reporting, a sub-year data deadline was chosen; Table 1 and Table 2 are therefore based on the respective banking years and banking month statistics of the German Federal Bank, as of the month of January.
Historical data shows that volatile market developments, and possibly also technological advancements, lead to changes in the industries and the individual
10 In German: Kreditwesengesetz.
companies. Thus, banking institutions are exposed to, and affected by, these developments, just like any other economic entity. A closer look at the German banking market reveals a negative development of the branches, which, however, is not only applicable to specific long-established institutions and/or sectors, but rather points to a universally valid feature of development (see Table 1). Across all sectors, a decentralised, regional branch network is steadily declining. This development points to a negative trend in terms of regional attractiveness, as a result of which customers also experience a decline in the physical accessibility of their bank.
Table 1: Bank Branches by Bank Groups 1997–2018
Bank branches 1997 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR3 Savings bank
sector1
19.8 13.9 13.7 13.5 13.2 12.8 12.3 11.4 10.6 10.1 -3.15 %
Cooperative sector2
19.2 13.2 13.1 12.9 12.6 12.3 11.9 11.1 10.4 9.8 -3.15 %
Private banks and building societies
27.2 12.8 12.7 11.6 12.1 11.9 11.6 11.1 10.7 9.4 -4.93 %
Other banks 0.6 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 -3.25 % å 66.8 40.2 39.8 38.3 38.2 37.3 36.0 33.9 32.0 29.6 -3.62 %
1 Savings banks and state banks in thousands
2 Credit cooperatives and cooperative central banks
3 Compound Annual Growth Rate (CAGR) 1997–2018
Source: Deutsche Bundesbank (2020; 2019; 2018b; 2016; 2015b; 2011; 2009b; 2000).
With 288,400 employees, the savings bank sector was, along with all private banks and building societies (approx. 246,000 employees), the banking sector with more than 50
% of the employees in 1997. The cooperative sector also recorded a high demand for personnel in 1997. Further historical examination revealed that the need for employees in the cooperative and savings banking persisted until 1997, and that the number of employees increased until that year; since then, however, a continuous reduction in the number of persons has been evident in both sectors (AGVBanken, 2020).
Apart from other banks, where staffing levels have hardly changed over time in direct comparisons between sectors, the negative development in the period under consideration cannot be downplayed by temporary positive counter-developments or interpreted as a periodic peak situation (see Table 2).
