web 2.0 for financial institutions
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Dr. Stefan Heng, September 2008
Think Tank of Deutsche Bank Group
Be a driver, not a passengerImplications of Web 2.0 for financial institutions
S. Heng ,·September 2008 · p. 2
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11 Joe Six-pack live on stage
33
44
Communication form is a challenge to entrepreneurs
Conclusion: Be a driver, not a passenger
Web promotes product diversity
Implications of Web 2.0 for financial institutions
S. Heng ,·September 2008 · p. 3
11
Web 2.0 has many drivers and facets
Joe Six-pack live on stage
Technology- Broadband, convergence
Society- Need to communicate, individuality
Business- Globalisation, project work
S. Heng ,·September 2008 · p. 4
“Web 2.0 is an attitude, not a technology”
Dissatisfying attempts to define the phenomenon via …– Consultant-speak, e.g.:
– Citizen journalism, crowdsourcing, long tail, swarm intelligence, viral marketing
– Technology, e.g.:– Atom, AJAX, API, RSS, SVG, XML,
XUL etc.
11 Joe Six-pack live on stage
S. Heng ,·September 2008 · p. 5
11
Lively exchanges via web platforms
Wikipedia – New articles per day: roughly 8,000– Number of edits per article: about 20
LEO– Responses to forum questions:
within about 10 minutes
Volumes on P2P lending platforms– Prosper (US): roughly EUR 100 m
since start in Feb 2006– Smava (DE): roughly EUR 3 m
since start in March 2007
Consumer assessments on rating sites (ciao, dooyoo etc.)– DB: roughly 1,000; DreBa, CoBa:
roughly 300
Joe Six-pack live on stage
0
150
300
450
600
750
01 02 03 04 05 06 07 08Source: Wikipedia, 2008
Number of German articles on Wikipedia, '000
S. Heng ,·September 2008 · p. 6
11
Participatory network: Users trust users
Opinion-based knowledge becoming more important than fact-based knowledge– Quality of report can often only be
estimated on the criterion of topicality
Quality is critical in terms of– Accuracy– Completeness
Joe Six-pack live on stage
0 5 10 15 20 25 30 35
Managementinformation
Corporate e-mail
Commercial
Private blog
Customerassessment
Newspaperarticle
Source: Ipsos, 2006
Multiple responses possible
Source that German web surferstrust, %
S. Heng ,·September 2008 · p. 7
Market transparency drives down prices
More and more customers comparing offers on the web
Prices of standardised products coming under pressure
11 Joe Six-pack live on stage
-20 -10 0 10 20
Cashutilisation
Monetarytransactions
Accountmanagement
Exceptionshandling
Source: Cap Gemini, 2006
Average price development, 2005 vs. 2006,Euro area, % yoy
15
25
35
45
55
2002 2003 2004 2005Source: Forrester Research Inc., 2005
Clients who shop around for financialproducts, %
S. Heng ,·September 2008 · p. 8
Communication form is a challenge to entrepreneurs22
11
33
44 Conclusion: Be a driver, not a passenger
Web promotes product diversity
Joe Six-pack live on stage
Implications of Web 2.0 for financial institutions
S. Heng ,·September 2008 · p. 9
Promising outlook at the intra-company level
Global investments about EUR 400 m in 2007;CAGR2007, 2013 : + 47% p.a.– North America expanding its lead– Social networking leads by far
Especially internal Web 2.0 applications are gaining ground– Blogs may reveal insider knowledge– Wikis serve as internal stores of
knowledge
Objective for internal applications: Have employees identify with their product and company
22 Communication form is a challenge to entrepreneurs
0.0
0.4
0.8
1.2
1.6
2.0
2007 2008 2009 2010 2011 2012 2013
Social networks
RSS/ widgets/ podcasts/mashupsBlogs/ wikis
Source: Forrester Research Inc., 2008
CAGR2007,2013 : +47% p.a.
Corporate investments in Web 2.0 worldwide, USD bn
S. Heng ,·September 2008 · p. 10
Companies have big plans for customer contacts
Intensify customer contacts– Create emotional ties to product/
company
Expand customer contacts– Establish contact also with groups that
have not yet been reached
Manage reputational risk– “It’s better if consumers speak with us
than they speak about us.”
Forecast business development in the physical world
22 Communication form is a challenge to entrepreneurs
0
10
20
30
40
50
14 - 29 30 - 44 45 - 59
Source: Bitkom/ Forsa, 2008age
Web users who post information them-selves, Germany, % of age cohort, 2008
S. Heng ,·September 2008 · p. 11
Heed critical factors in web applications
General demands on int./ ext. appl.– Ensure long-term maintenance
– Content, response time for inquiries– Style and content must be authentic
– For customers, information ranks far ahead of pure entertainment
Demands on internal applications– Create incentives for employee
participation– Leapfrog hierarchies in exchanges of
information
Demands on external applications– Establish guidelines for employees’
communications– Ensure compliance with regulations
22 Communication form is a challenge to entrepreneurs
0 10 20 30 40
Customerratings
Pricecomparisons
Discussionforum
Quizzes/games
Product videos
Source: Forrester Research Inc., 2008
Content and functionality that US customerswant on bank sites, %
S. Heng ,·September 2008 · p. 12
22
11
33
44
Web promotes product diversity
Conclusion: Be a driver, not a passenger
Communication form is a challenge to entrepreneurs
Joe Six-pack live on stage
Implications of Web 2.0 for financial institutions
S. Heng ,·September 2008 · p. 13
New payment systems developing in tandem with e-commerce
B2C e-commerce: gaps between goods delivery and payment in terms of time and location
Payment systems must factor in particular circumstances of impersonal virtual world– Buyers and sellers who do not know
each other are particularly wary of the payment procedure
33 Web promotes product diversity
S. Heng ,·September 2008 · p. 14
33
New payment systems struggling for market share
Roughly 40 innovative payment systems in Germany– Continuing dominance of pre-payment,
invoice, cash on delivery, direct debit and credit card
The most promising models …– embrace the particular features of e-
commerce,– are supported by established
companies in the value chain,– convey their unique value added
Web promotes product diversity
5
10
15
20
25
30
35
40
45
2003 2004 2005 2006 2007*
* Q1 annualised
Source: eBay, 2007
CAGR2003, 2007:+ 39% p.a.
Worlwide eBay payments initiated by PayPal, USD bn
S. Heng ,·September 2008 · p. 15
International web of online lending platforms
33 Web promotes product diversity
S. Heng ,·September 2008 · p. 16
Lending platforms changing the face of the business
Web brings together lenders and borrowers– Procedure: e.g. reverse auction,
internal matching– But: private persons not allowed to
lend commercially– Additional information from knowing
why customer needs loan– However: private creditors find it hard
to assess risks rationally
33
Source: DB Research, 2007
Web promotes product diversity
Bank
Bank takes risk
Peer pressure
Diversification
Personal relation
P2P lending online
P2P lending online
P2P lending
Bank
Bank takes risk
Peer pressure
Diversification
Personal relation
P2P lending online
P2P lending
P2P lending
S. Heng ,·September 2008 · p. 17
P2P lending has particular default risk
Smaller default risk thanks to …Personalised credit relationship
Formation of borrower groups aiming to improve conditions for members via group reputation– Group membership a signal for lenders
about the creditworthy– Group membership brings social
pressure helps ensure punctual repayment
33 Web promotes product diversity
0
10
20
30
40
AA A B C D E HR NC
Borrower is not a group memberBorrower is a group member
Source: Prosper, 2007, DB Research
* From term of 6 months
Default ratios for Prosper loans* by credit quality, % of total loans
S. Heng ,·September 2008 · p. 18
High-risk category suffering from market breakdown
Interest rate and share of funded loans hinge mainly on risk class of borrower
Platforms mainly arrange micro-loans
But: nearly 90% of loans requested are not funded– Probability of loan approval for
AA credit rating: 30%,HR credit rating: 3%
33 Web promotes product diversity
0
5
10
15
20
25
30
35
AA A B C D E HR NC
HR = high risk; NC = no credit score
Source: LendingStats, 2008
Share of funded loans
Lending rate
Share of funded loans and average lending rate, by credit rating, Prosper, %
S. Heng ,·September 2008 · p. 19
Virtual world builds bridge to new customer groups
The virtual world lays the groundwork for business in physical world
Objective for virtual engagements:generate emotional ties to product/ company in the physical world– Instrument: entertainingly and informative
presence
33 Web promotes product diversity
S. Heng ,·September 2008 · p. 20
Conclusion: Be a driver, not a passenger
22
11
33
44
Communication form is a challenge to entrepreneurs
Web promotes product diversity
Joe Six-pack live on stage
Implications of Web 2.0 for financial institutions
S. Heng ,·September 2008 · p. 21
Web 2.0 brings pressure to bear in many areas
Opportunities– Realise trends at an early stage– Improve emotional ties to product/
company– Emergence of new business areas (e.g.
payment systems, lending platforms)
Challenges– Market transparency squeezes margins
on standard products– Ensure maintenance (esp. of content,
response times on inquiries)– Style must fit (corporate culture, image,
regulatory regime)– Manage reputational risk
44 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 22
44
“Do today what others only think of doing tomorrow, for only change is constant.”Heraclitus of Ephesus, philosopher, 540 - 475 B.C.
© S. Heng, 2008
Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 23
Dr. Stefan HengSenior Economist
Deutsche Bank Research
Theodor-Heuss-Allee 70
D-60486 Frankfurt a.M.
Tel: +49 69 910-31774
Fax: +49 69 910-31743stefan.heng@db.comhttp://www.dbresearch.com/eresearch
S. Heng ,·September 2008 · p. 24
© Copyright 2008. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanz-dienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.
Disclaimer
Dr. Stefan Heng, September 2008
Think Tank of Deutsche Bank Group
For more on the digital economy and structural change
• Telecom regulation in the EU facing change of tack (2008)• Be a driver, not a passenger – implications of Web 2.0 for financial institutions (2007)• E-commerce settles for established payment systems (2007)• Media industry facing biggest upheaval since Gutenberg (2006)• RFID chips: Future technology on everyone’s lips (2006)• Rising stars in information and communication technology (2004)
http://www.dbresearch.com/digitaleconomy
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