web 2.0 for financial institutions

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

22

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


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


“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

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


0

150

300

450

600

750

01 02 03 04 05 06 07 08Source: Wikipedia, 2008

Number of German articles on Wikipedia, '000


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


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, %


Market transparency drives down prices

More and more customers comparing offers on the web

Prices of standardised products coming under pressure


-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, %


Communication form is a challenge to entrepreneurs22

11

33

44 Conclusion: Be a driver, not a passenger





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


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


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


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


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, %


22

11

33

44







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


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


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


International web of online lending platforms



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


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


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


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


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%


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, %


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




22

11

33

44






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


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



Dr. Stefan HengSenior Economist

Deutsche Bank Research

Theodor-Heuss-Allee 70

D-60486 Frankfurt a.M.

Tel: +49 69 910-31774

Fax: +49 69 [email protected]://www.dbresearch.com/eresearch


© 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

web 2.0 for financial institutions

Economy & Finance