1. Be a driver, not a passenger
Implications of Web 2.0 for financial institutions
Think Tank of Deutsche Bank Group
Dr. Stefan Heng, September 2008
2. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 2
3. 1 Joe Six-pack live on stage
Web 2.0 has many drivers and facets
Technology
- Broadband, convergence
Society
- Need to communicate, individuality
Business
- Globalisation, project work
S. Heng ,·September 2008 · p. 3
4. 1 Joe Six-pack live on stage
“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.
S. Heng ,·September 2008 · p. 4
5. 1 Joe Six-pack live on stage
Lively exchanges via web platforms
Number of German articles on Wikipedia, '000 Wikipedia
– New articles per day: roughly 8,000
750 – Number of edits per article: about 20
LEO
600
– Responses to forum questions:
within about 10 minutes
450
Volumes on P2P lending platforms
300 – Prosper (US): roughly EUR 100 m
since start in Feb 2006
150 – Smava (DE): roughly EUR 3 m
since start in March 2007
0 Consumer assessments on rating
01 02 03 04 05 06 07 08 sites (ciao, dooyoo etc.)
Source: Wikipedia, 2008
– DB: roughly 1,000; DreBa, CoBa:
roughly 300
S. Heng ,·September 2008 · p. 5
6. 1 Joe Six-pack live on stage
Participatory network: Users trust users
Source that German web surfers
trust, % Opinion-based knowledge becoming
more important than fact-based
Newspaper
article knowledge
– Quality of report can often only be
Customer
assessment
estimated on the criterion of topicality
Quality is critical in terms of
Private blog
– Accuracy
– Completeness
Commercial
Corporate
e-mail
Management
information
0 5 10 15 20 25 30 35
Multiple responses possible
Source: Ipsos, 2006
S. Heng ,·September 2008 · p. 6
7. 1 Joe Six-pack live on stage
Market transparency drives down prices
Clients who shop around for financial Average price development, 2005 vs. 2006,
products, % Euro area, % yoy
55
Cash
utilisation
45
Monetary
transactions
35
Account
management
25 Exceptions
handling
15 -20 -10 0 10 20
2002 2003 2004 2005 Source: Cap Gemini, 2006
Source: Forrester Research Inc., 2005
More and more customers comparing offers on the web
Prices of standardised products coming under pressure
S. Heng ,·September 2008 · p. 7
8. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 8
9. 2 Communication form is a challenge to entrepreneurs
Promising outlook at the intra-company level
Corporate investments in Web 2.0 worldwide, Global investments about
USD bn
EUR 400 m in 2007;
2.0
Social networks
CAGR2007, 2013 : + 47% p.a.
– North America expanding its lead
RSS/ widgets/ podcasts/
1.6
mashups – Social networking leads by far
Blogs/ wikis
1.2 Especially internal Web 2.0
applications are gaining ground
0.8 – Blogs may reveal insider knowledge
CAGR2007,2013 :
+47% p.a.
– Wikis serve as internal stores of
0.4 knowledge
Objective for internal applications:
0.0
2007 2008 2009 2010 2011 2012 2013
Have employees identify with their
Source: Forrester Research Inc., 2008
product and company
S. Heng ,·September 2008 · p. 9
10. 2 Communication form is a challenge to entrepreneurs
Companies have big plans for customer contacts
Web users who post information them- Intensify customer contacts
selves, Germany, % of age cohort, 2008
– Create emotional ties to product/
50 company
Expand customer contacts
40
– Establish contact also with groups that
30
have not yet been reached
Manage reputational risk
20 – “It’s better if consumers speak with us
than they speak about us.”
10
Forecast business development in
0
the physical world
14 - 29 30 - 44 45 - 59
age
Source: Bitkom/ Forsa, 2008
S. Heng ,·September 2008 · p. 10
11. 2 Communication form is a challenge to entrepreneurs
Heed critical factors in web applications
Content and functionality that US customers General demands on int./ ext. appl.
want on bank sites, %
– Ensure long-term maintenance
Customer – Content, response time for inquiries
ratings
– Style and content must be authentic
Price – For customers, information ranks far
comparisons
ahead of pure entertainment
Discussion
forum
Demands on internal applications
– Create incentives for employee
Quizzes/
games
participation
– Leapfrog hierarchies in exchanges of
Product
videos
information
0 10 20 30 40
Demands on external applications
Source: Forrester Research Inc., 2008
– Establish guidelines for employees’
communications
– Ensure compliance with regulations
S. Heng ,·September 2008 · p. 11
12. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 12
13. 3 Web promotes product diversity
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
S. Heng ,·September 2008 · p. 13
14. 3 Web promotes product diversity
New payment systems struggling for market share
Worlwide eBay payments initiated by PayPal, Roughly 40 innovative payment
USD bn systems in Germany
45
– Continuing dominance of pre-payment,
40 invoice, cash on delivery, direct debit
CAGR2003, 2007: and credit card
35
+ 39% p.a.
30 The most promising models …
25 – embrace the particular features of e-
20 commerce,
15 – are supported by established
companies in the value chain,
10
– convey their unique value added
5
2003 2004 2005 2006 2007*
* Q1 annualised
Source: eBay, 2007
S. Heng ,·September 2008 · p. 14
15. 3 Web promotes product diversity
International web of online lending platforms
S. Heng ,·September 2008 · p. 15
16. 3 Web promotes product diversity
Lending platforms changing the face of the business
Web brings together lenders and
Bank takes risk
borrowers
Bank – Procedure: e.g. reverse auction,
internal matching
Personal relation
– But: private persons not allowed to
P2P lending
lend commercially
– Additional information from knowing
why customer needs loan
– However: private creditors find it hard
Peer pressure
to assess risks rationally
P2P lending online
Diversification
P2P lending online
Source: DB Research, 2007
S. Heng ,·September 2008 · p. 16
17. 3 Web promotes product diversity
P2P lending has particular default risk
Default ratios for Prosper loans* by credit Smaller default risk thanks to …
quality, % of total loans
Personalised credit relationship
40
Formation of borrower groups aiming
30 Borrower is not a group member
to improve conditions for members
Borrower is a group member via group reputation
– Group membership a signal for lenders
20
about the creditworthy
– Group membership brings social
10 pressure helps ensure punctual
repayment
0
AA A B C D E HR NC
* From term of 6 months
Source: Prosper, 2007, DB Research
S. Heng ,·September 2008 · p. 17
18. 3 Web promotes product diversity
High-risk category suffering from market breakdown
Share of funded loans and average lending Interest rate and share of funded loans
rate, by credit rating, Prosper, %
hinge mainly on risk class of borrower
35
Platforms mainly arrange micro-loans
30
Share of funded loans But: nearly 90% of loans requested are
25 not funded
– Probability of loan approval for
20
AA credit rating: 30%,
15 HR credit rating: 3%
10
Lending rate
5
0
AA A B C D E HR NC
HR = high risk; NC = no credit score
Source: LendingStats, 2008
S. Heng ,·September 2008 · p. 18
19. 3 Web promotes product diversity
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
S. Heng ,·September 2008 · p. 19
20. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 20
21. 4 Conclusion: Be a driver, not a passenger
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
S. Heng ,·September 2008 · p. 21
23. Dr. Stefan Heng
Senior Economist
Deutsche Bank Research
Theodor-Heuss-Allee 70
D-60486 Frankfurt a.M.
Tel: +49 69 910-31774
Fax: +49 69 910-31743
stefan.heng@db.com
http://www.dbresearch.com/eresearch
S. Heng ,·September 2008 · p. 23
25. 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
Think Tank of Deutsche Bank Group
Dr. Stefan Heng, September 2008