Deutsche Bank AG is working on setting up joint innovation laboratories with technology firms IBM Corp., Microsoft Corp. and India’s HCL Technologies Ltd to improve its digital banking operations and fight-off new market entrants, people familiar with the matter said.
Germany’s largest lender and its partners plan to set up their labs in Berlin, London and Palo Alto, Ca., and cooperate with Internet start-up firms, the people familiar with the matter said. The goal is to send bankers from across all business units to these labs to gain insight in how to enhance clients’ experience or internal processes.
While many other large banks have announced initiatives to address digitalization, little is known about Deutsche Bank’s efforts. The bank said in May that it wants to invest €200 million ($250.5 million) in the digitalization of its client related operations.
The move underscores the massive changes lenders face in the wake of mobile banking applications and the rise of independent platforms that threaten to grab market share from traditional financial institutions.
Senior Deutsche Bank officials have said privately that the lender is aware of the challenges posed by alternative payment systems such as Paypal or Apple Pay. These firms threaten to curb profit at banks’ transaction banking operations. Banks on average earn 0.3% or 0.4% on transactions made with credit or debit cards.
To be sure, the fees from these operations have a relatively small share of banks’ overall income. But the plethora of internet business models might undermine the revenue base of the traditional industry, analysts say. “Digital attackers continue to gain market share … because they better meet … [some] clients’ demands,” Bain & Company said in a recent report, adding that Paypal for example has a 30% market share for e-commerce transactions in Germany.
It’s taking banks some time to launch their own system. “The first bank-backed mobile payment system [in Germany] will be launched late next year,” Gregor Roth, head of operations and services at Germany’s co-mutual lender DZ Bank, said.
Alternative lending platforms such as Rocket Internet 's Lendico bring together private lenders and savers, posing another threat to the deposit and lending business of the traditional banking industry. “P2P lending platforms are trying to eclipse banks entirely,” Bain & Company said.
To avoid being left behind, banks have been launching a wide range of initiatives to engage with startups. Some have earmarked funds to invest in start-up companies or/and set up strategic investment arms, like Citigroup Inc, Spain’s Banco Santander SA and BBVA SA, Germany’s Commerzbank AG and the UK’s HSBC PLC.
Others have launched accelerator programs that funds and works with start-ups in the financial services industry. Barclays PLC for example initiated an accelerator program in collaboration with venture capital firm Techstars, other banks like Lloyds PLC, Rabobank, Intesa San Paolo SpA are some of the sponsors of Startupbootcamp FinTech.
Banks traditionally opted to build the bulk of their technology in-house—even things that weren’t giving them any real competitive advantage. Following the crisis they’ve had to cut down costs and deal with the slew of regulations, so they’ve started to become more collaborative. The financial crisis and the series of benchmark rigging scandals that followed have tarnished the banking industry’s reputation, giving traction to new entrants among consumers.
Chase Gummer and Isabel Gomez contributed to this article.
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