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This is a study of the Sectoral e-Business Watch, focusing on ICT and e-business usage in the banking industry (hereinafter the BI). The study objectives are to describe how companies in this industry use ICT for conducting business, to identify opportunities and barriers for ICT adoption, and to assess impacts of this development for firms and for the industry as a whole. The analysis is based on a literature review, expert interviews, case studies and the Eurostat Community Survey on ICT usage in the financial sector. Moreover, results of an econometric analysis of ICT drivers and impacts is included and analysed in the study.
For the study purpose, the banking industry is defined to cover the following business activities: NACE Rev. 1.1 65.12 "Other monetary intermediation" (Rev. 2 64.19), and 65.22 "Other credit granting" (Rev. 2.0 64.92). The BI employs about three million people in the EU (European Central Bank) and generates about 490 billion euros in value added (latest available figures – 2004, Eurostat). Within the EU, the financial services sector is relatively largest in the UK, which generates just over one fifth of the total value added (21%).
Major trends in the industry include the renewal of branch and processing capabilities, a focus on improving and innovating customer relationship management strategies, and the renewal of the automated teller machines. Major challenges to be addressed by the industry include anti-money laundering, i.e. the fight against the misuse of the BI. Important issues with regard to ICT are ensuring data protection (notably in online transactions), abilities of disaster recovery, and the provision of ever more sophisticated e-banking services in response to increased customer expectations in this domain.
NACE Revision 2 is a four-digit classification of business activities. It is a revision of the “General Industrial Classification of Economic Activities within the European Communities”, known by the acronym NACE and originally published by Eurostat in 1970. NACE Rev. 2 replaced version Rev. 1.1 on 1 January 2008.
Productivity growth rose in the EU from the year 2000 onwards, while average working hours per employee were decreasing in most countries. ICT capital investments are largely substituting labour, particularly in retail banking. This is done by standardising ordinary financial services and having customers perform basic financial services online, thus rendering the tellers redundant. However, the econometric analysis also shows that the ability to empower the work force by appropriate investments in training and skill-formation is very important. Without sufficient capabilities of the human workforce to use the ICT-investments efficiently, the costly investments bear a high risk of becoming ineffective.
Case studies (see Section 5) provide examples that banks have retrained the tellers so that they are now able to perform more complicated financial services and have thus not dismissed any tellers. That the personnel are retrained is also indicated by the econometric analysis, which shows that ICT has a significant skill-bias especially towards medium-skilled labour, which is what tellers become once they are retrained.
The analysis and the case studies developed for this study could not provide conclusive evidence regarding shortage of personnel with ICT skills. The survey data indicated no gap between availability and demand for ICT-skilled labour. This can partly be explained by the labour dynamics presented above, as much low-skilled labour is retrained to become medium-skilled labour, which can perform the necessary services in the bank. Sourcing can be another explanation as banks are increasingly outsourcing or co-sourcing large ICT-investments to ICT-firms, in order to focus on their own core competences.
The introduction of ICT in the European BI has had a significant impact on banks operating with physical branches. Especially the internet has made it possible for banks to cut cost by offering online banking at a lower cost. The econometric analysis show that ICT use is positively correlated with firm restructuring activities. Thus, ICT enables companies to redefine the boundaries of their organisations and possibly gain a competitive advantage.
A prevalent change in the branch structure in the BI is the dual combination banking. With dual-combination banking, traditional manual banking services can now be performed online while the more sophisticated banking services are still performed in the branch bank, thus taking advantage of the low-cost nature of e-banking and the face-to-face advisory services of the branch bank. Numerous case studies support this trend.
The process of branch renewal may however encounter some barriers. When traditional banking services are performed online the role of the teller is diminishing, why staff re-education and skills development is essential to a successful transformation of a traditional teller-intensive branch office towards an advisory-based branch bank network. As mentioned, the econometric analysis and the case studies indicate that this largely takes place.
SEPA gives benefits to different elements of the banking value chain. The benefits for the industry, as seen from the point of view of the legislators, comes from increased transparency, less risk of money laundering, increased transactions across borders and access to new markets. It is however observable that the business case for SEPA, seen from a bank’s perspective, may not be as clear. Due to uncertainty about the actual role of SEPA, many banks are settling for minimum solutions that only implement the basic, required SEPA instruments but do not make full use of the embedded potential in SEPA.
The BI has as of yet taken only the minimum measures required to comply with SEPA. This has to do with the fact that in the short term the BI is expected to make significant ICT-investments in order to comply with SEPA, which can make the short-term benefits of SEPA harder to reap for the BI. However, SEPA is expected to bring substantial benefits in the long term for end users, businesses and banks in Europe, and product innovation such as the development of e-Invoicing is could also happen as a result of ICT-investments.
The impact of ICT on market structure
The market structure in the BI is changing as a result of mergers and acquisitions. The recent mergers and acquisitions seen in the BI have called for an increased investment in ICT in order to integrate the different banking systems, as can be seen in the case of the National Irish Bank (NIB). However, ICT also helps implementing the merger more smoothly, as the IT-system from Danske Bank could be implemented directly in NIB, thus providing a common ICT-ground for the employees from day one. Mergers and acquisitions also happen as a result of ICT, when large branch banks acquire innovative Internet-only banks in order to obtain both a well-known brand from the traditional bank and an innovative business model from the Internet-only bank. For instance, the UK-based Egg bank was acquired by Citibank because of its ICT-capabilities.
Customer and bank readiness for the use and provision of e-banking
e-Banking has now developed into an advanced ICT solution where most everyday banking can be conducted online. The statistics do, however, indicate that e-banking across Europe is still not widely implemented among both private and corporate customers. Basic understanding of and confidence in the Internet is required to adopt e-banking and not all Member States may have reached a critical mass of behavioural change among customers. Moreover, not all banks are ready for e-banking either. According to the Eurostat survey, 56% of the banks provide online financial services to customers via the Internet, and 46% offer online payment services.
The case studies suggest that the ICT uptake differs greatly across the Member States. In Slovenia, an Internet bank is a great achievement in itself, while in the UK Internet-only banks are acquired by traditional banks in order to provide innovation to the banks. A study by Deutsche Bank Research showed that offline customers still perceive online banking to be unsafe, despite the objective fact that online banking has proven to be very secure. However, due to the significant differences in ICT-uptake across Member States, and in an effort to increase customer’s perception of safety, a pan-European initiative to either increase safety to an equal level in all Member States or to promote the high security level towards customers could be beneficial.
Reinforce standardisation and harmonisation to increase efficiency
Increased e-business harmonisation is expected to help obtain a more effective BI, as for instance payments will be carried out in the same way no matter which country in the European Union the banks and/or their customers are doing business with. SEPA and e-invoicing are two of the recent initiatives in this area discussed in this report.
The expected gains from increased harmonisation such as a well-functioning SEPA and standardised procedures for e-invoicing are numerous. Companies with substantial numbers of cross-border payments can benefit both from the standardised payments and standardised e-invoicing and payments procedures can also lead to easier market access for the companies in question. Banks are expected to gain from the easier work processes, as there will be less paper-based work related to the transactions. If banks are able to take the SEPA principles and develop them further to include other business processes, such as e-invoicing, they might even gain a competitive advantage. As illustrated in Section 3.2, the overall success of the SEPA initiative rests on the adaptation by banks and in achieving critical mass in the number of transactions within a reasonable time frame.
Despite the benefits, banks still only opt for the minimum requirements in complying with SEPA. The case studies show that banks need to substantially invest in ICT in order to reap the benefits from SEPA, but the banks have difficulties in seeing that these ICT-investments can be compensated by the potential gains from SEPA.
In order for the BI – and Europe in general – to reap the potential benefits stemming from increased standardisation and harmonisation, the European Commission could play a more active role along with industry organisations. For instance, the industry organisations could support ICT development projects in the BI by bringing banks together and helping the banks in deciding what is needed in order to fully reap the benefits of the SEPA or e-invoicing. Moreover, the industry organisations could facilitate a forum where banks could cooperate on developing the ICT systems needed for further harmonisation, and thereby share the costs. Discussions on how these ICT-investments could be used for further product innovation in the respective banks could also be discussed in these forums. The European Commission could support the initiatives from the industry organisations with grant schemes, if needed.
Increase customer’s perception of safety
The general uptake and use of ICT in the BI is rather high. For instance, 99% of the banks in the BI have access to the Internet and about 5 in 10 banks use a computer connected to the Internet every day. Hence, the preconditions for increased e-business in the BI are in place. But in order to conduct e-banking, the safety measures must also be in place.
Despite the measures taken by the BI to secure safe e-banking, the analysis shows that the customers currently not using e-banking (offline customers) are not entirely ready to embrace e-banking. While online customers’ (customers already engaging in e-banking) perception of security is on the rise, the same cannot yet be said for offline customers. This obviously has to be seen in the light of the fact that e-banking is one of the most well-developed e-services, and that many customers are increasingly using e-banking as part of their everyday banking routines. Nevertheless, this study shows that it is still possible for the BI to improve consumer confidence for especially offline customers, a finding supported by a recent Deutsche Bank study.
There are two aspects of increasing consumer safety in the BI. The first is related to what banks can do and the latter is related to what customers can do. With respect to the first aspect - what banks can do - it seems from the survey and the analysis conducted in this study and referred to above that banks are in general doing what is needed in order to ensure safe e-banking. This finding is also supported in the aforementioned study by Deutsche Bank Research. However, one way for the banks to enhance customer safety could be to establish clear audit trails (clear overview of the processes in all transactions, in order to ensure increased transparency), which could provide the customers with increased transparency. The Commission could support this by promoting the establishment of such audit trails in cooperation with the industry organisations, or make it mandatory for the banks to establish such trails. It should however be further investigated if this is the right way to go for the banks in increasing consumer confidence.
With respect to the second aspect, customers can take reasonable safety measures before engaging in e-banking, by for instance applying anti-virus software to their computers. The Commission could help facilitate responsible behaviour on the Internet and increase consumer knowledge on how to behave responsibly when engaging in e-banking by promoting a “Safety on the Internet”-campaign in all Member States. For instance, in the Netherlands a campaign called 3XKloppen was initiated, educating customers to “check for three things”, namely if it is a secure connection/if the user’s software is up to date, if the web site actually what it says it is and if the total amount or order is correct. This campaign could be looked further into and possibly be used for inspiration. National governments could also be responsible for this campaign; however, this would not help align customers’ perception of safety across the Union.
It should be mentioned that as the global reach of the Internet implies that financial services can increasingly become borderless and global, a pan-European initiative for could increase customer confidence, as certainty for customers that all banks are protected in a similar fashion may increase the customer’s perception of security.
Support the skills development among bank personnel
e-Banking and ICT have caused the traditional branch-based banks to change the service offerings in their branches. The business model of dual-combination banking (banks offering internet-banking and branch-based banking) is emerging, which implies that customers are increasingly performing basic banking tasks online while relying on bank branches only for more sophisticated, advisory tasks. The dual-banking model can give traditional branch banks the opportunity to adjust their branch network towards advisory functions and away from traditional teller services, thus adding value to their customers from direct and customised bank advisory services.
This development however means that an increasing number of jobs are being changed from traditional tellers to branch advisors/counsellors. Bank staff is increasingly asked to provide highly qualified financial advice rather than perform simple teller functions. As both the econometric analysis and the case studies show, bank staff is being retrained to perform such tasks. From the econometric analysis it can be seen that ICT usage in financial services have a significant skill-bias towards medium-skilled labour, which corresponds very well with the findings from the case studies, which shows that tellers are increasingly being retrained to perform more advanced financial services in the banks, thus moving from the low-level skill class to the medium-level skill class.
Thus, restructuring of branches and using ICT to increase process efficiency may not necessarily result in a decrease of the work force. In the BI, it can be seen from the econometric analysis and the case studies that there is not a shortage of qualified staff, rather, it is a question of ensuring that the existing personnel in the banks are retrained so that their skills can be used to create high value for the banks. In order to maintain and reinforce this positive development, it is recommended that trade federations and industry associations play an active role in skills development among branch bank staff to prepare them for the new role of the branch banks. The industry organisations could arrange training courses for the staff in risk of becoming redundant in order to ensure that they are able to perform the more sophisticated tasks which add value. It is believed to be vital that these training courses to upgrade the bank personnel’s skills to be able to perform more advanced advisory functions in the banks are arranged by the industry organisations, as it is not likely that banks would want to share their training courses with each other, as this would mean revealing to the competitors how they add value to their banks. However, industry organisations could arrange forums where banks could meet and possibly exchange best practises to the benefit of the entire BI. Training courses by the industry organisations will ensure that the positive trend of retraining redundant tellers continues. The European Commission could support these training courses, for instance in the form of grant schemes to develop the curricula, or facilitating exchange of best practise.