„Bank diversity in the conflict between innovation and economic efficiency“

Continuous decline in the number of German banks and savings banks

According to the German Bundesbank, there were 1,823 credit institutions (banks and savings banks) in Germany at the end of 2017; compared with 2007, this represents a reduction of almost 20 percent.

According to the Savings Banks Association, the number of savings banks alone has fallen to 385 (a decline of 28) since 2015. The reduction in the cooperative financial sector in the same period was actually 106, down to 915. The Federal Association, BVR, is expecting further mergers, although at a lower level this year, with a total decline of the number of institutions of 57.

For example, in recent years the number of mergers among savings banks has risen significantly. The drivers are, of course, digitalisation, and also the increasing regulation in the financial environment and demographic developments. It is interesting to note that the total number of savings banks fell from 594 in 1998 to 390 as at 31 December 2017 – without one institution being closed.

The numbers of the past therefore speak a clear language; this is further reinforced by the ongoing reduction of branches in Germany. On the one hand, this is also a reaction to the digital transformation and the resulting less and less stringent requirement of the branch as an information and distribution channel. The digital offerings of banks and savings banks (or alternative marketplaces such as Interhyp, Finanzcheck or Zinspilot) are increasingly becoming the primary “banking channel”. On the other hand, Germany, as one has been reading for years and years, is overbanked. In my opinion this applies especially across all institutes, especially for the number of branches (ok, less and less in rural areas …). It is still not uncommon for three branches of an institute to be found in one street of a major German city.

What’s the next step?
How will the trend develop in the future? Will there be a further development or will the “bank dying” continue? Just by the way: no savings bank or cooperative bank has gone under so far; there has only been mergers within the respective banking group, and only very few can remember the last demise of a relevant private bank – since 2001 the deposit guarantee fund had to bear the costs for only 10 insolvent banks, the last was the Dero Bank in February 2018?

Management consultancy Oliver Wyman paints the future of German credit institutions completely black; it assumes that, due to the increasing importance of FinTechs and the large IT groups such as Google, Apple, Amazon and Facebook, the number of German banks could fall by 2030 to 150.

There have been intensive discussions in (not only) the social media about the prediction of the colleagues and one can think what one wants of the lurid lead story, but all are unreservedly of the opinion that the number of banks will continue to decline. The experts, however, are not in agreement about the consequences of an ever-decreasing diversification of the German banking landscape, and the question should also be put as to whether a merger of two (or possibly several) institutions would solve the fundamental problems that drove these institutions into considering a merger in the first place.

At the moment it is being hotly debated, and some politicians, economists and media even demand that a merger between Commerzbank and Deutsche Bank should come about. The question of the meaningfulness is therefore more important now than ever. This question will be explored in the following with the help of a few (yes, even provocative …) theses.

Does a merger (or a takeover) solve fundamental problems for German banks? What problems does a merger cause?

Thesis I: Mergers do not pay off
There are examples where it is worthwhile for one bank to be taken over by another (or where it is planned that it will pay off …). A current example is the takeover of Düsselhyp, which is currently being wound up, by Aareal Bank. Although this example is not really suitable, as Aareal has no strategic interest in Düsselhyp, but only wishes to exploit positive one-off effects within the framework of the settlement.

In reality, however, the situation is different for real mergers and acquisitions. You only have to think of the ongoing attempts to create a uniform IT platform at Deutsche Bank; Postbank is still largely running on its own. The Magellan project, which was supposed to create the basis for a uniform platform, was stopped by the bank.

The creation of uniform and integrated IT systems is always connected with the change of IT systems and the requirement of process adaptations and data migrations. Although the reason for the change in the core banking system of apoBank (from Fiducia GAD to avaloq) is not a merger, the estimated costs (“low three-digit million range”) serves as a benchmark for the IT consolidation of an institution to be merged. You don’t have to look very far for further examples, you can find them in all sectors of the German banking landscape.

If one now thinks about a merger of Deutsche Bank and Commerzbank, then a merger can only pay off with a uniform IT platform; and here neither bank has a uniform infrastructure when viewed individually. Rather, in a merged institution, components of Deutsche Bank, Commerzbank, Postbank, the former Dresdner Bank and other subsidiaries of both banks would then be found. … This list could be extended to include the fact that the Commerzbank will soon have its securities business handled by HSBC and payment transactions by equens, but the Deutsche Bank is taking a different approach here.

It is difficult to imagine a scenario in which such a mammoth task could ever pay off. Especially since the longed for (at least) European champion for many years would be almost exclusively concerned with itself. A fitting transition to …

Thesis II: Mergers are innovation killers
Innovations have a hard time during a merger project, because the securing of the set goals (standardisation and streamlining) is the highest priority after the securing of the daily business. Innovations (in the eyes of many bankers still only betting on future earnings) are not given sufficient attention and are repeatedly put on hold in such phases, which often means nothing more than their discontinuation.

And even after a merger has been completed, things will not necessarily get any better. There are voices (among others, the well-known “influencers”) that yearn for a comprehensive consolidation of the German banking landscape, in which only a few banks would then have plenty of time, money and leisure to finally devote themselves to the creation of innovative solutions for their customers.

I think this is a misconception; competition is a driver of innovation. If market shares are only distributed among a few providers, banks will become more and more comparable in what they offer. In addition, for reasons of convenience, there is increasingly less the need to win new customers with innovative ideas. Evidence of this is that in recent years innovative ideas have come from the diverse FinTech environment and less (or not at all?) from established banks.

The comparisons repeatedly made with countries in which there is more limited banking diversity are not accurate. A BBVA or an ING is not innovative because there are fewer banks in its markets, but because the structures and the reduced importance of (association) “politics” make it possible (and the entrepreneurial DNA dictates it to them).

Thesis III: Mergers deprive local banks of their regional roots
Regional institutions, and these are in particular (but not only) cooperative banks and savings banks, are defined above all by their connection with (the people and institutions of) their region. This is reflected in the social commitment (e.g. the support of sports and cultural facilities or the supply of structurally weak regions) of these houses and in the loyalty of customers to their banks through generations.

But what is the increasing wave of mergers between savings banks and Volksbanks and Raiffeisenbanks in the region in recent years doing with the people? Suddenly the people in Flensburg and North Friesland have a joint savings bank and the customers of the Volksbanks in Frankfurt, Griesheim and Maingau have a new large joint institute. Will there still be room for regional roots after such mergers? This does not always happen silently; for example, there is a petition to reverse the merger of the savings banks Schweinfurt and Eastern Lower Franconia. The integrity of many houses is no longer guaranteed by the dilution of the regional principle.
These three theses are not intended to present mergers between banks as meaningless, as there can be very good reasons for them. Mergers can serve to save banks and thus to achieve economic stability. Mergers can also make strategic sense. However, there are no automatisms that mergers or acquisitions are always worthwhile; two weaknesses do not make a strong one. The weaknesses of the individual partners (e.g. IT legacy, lack of innovative strength, no future-proof business model) will then only be merged and, possibly, further exacerbated.

A Plea
This contribution is intended to be a plea for maintaining diversity in the German banking market. It would continue to be desirable to have large and small as well as regional and international banks. Traditional institutions and challenger banks, multi-channel and mobile only, investment banking and sustainable banking … everything should continue to be typical for our banks in the future!