The importance of digitalisation

Digitalisation is frequently termed the “digital revolution”. In the literature, revo-lution is commonly defined as a “drastic upheaval leading to severe, profound social and political structural changes”.¹ This very accurately describes the reach of digitalisation. The reason is that what was originally defined quite unspectacu-larly as the conversion of analogue values such as text or music into digital for-mats, i.e. data², is in reality a drastic disruption that affects society as a whole.³

Digitalisation is transforming private life, politics and the economy. It is only in the past few years that this has achieved widespread awareness, although digi-talisation is hardly a new phenomenon. The beginning of the digital age can be charted back quite precisely to the origins of the world wide web at the begin-ning of the 1990s. It is not just the classic internet that has met with rapid glob-al acceptance in the past 15 years. With the advent of smartphones and hence mobile internet use, the web has massively changed many people’s everyday life. It is even beginning to transform the values and norms of societies and communities of nations.⁴

At a political level, digitalisation in the European environment was strategically analysed for the first time in the “Digital Agenda for Europe” in 2010. At a national level, the “Internet and Digital Society” commission of inquiry drew up recommendations for the German Bundestag between 2010 and 2013. This was followed by the “Digital Agenda 2014 – 2017”, which formulated digital policy principles. In the meantime, the issue of digitalisation has now reached the cabinet.⁵ The coalition agreement covering the current federal government has defined a clear focus in this area.

Digitalisation is leading in the economy to a large number of new, data-driven business models. It represents a structural change because tech companies are supplanting traditional companies in the provision of services. Whereas Microsoft was the only tech group featuring as one of the most valuable companies in 2006⁶, companies from traditional industries only accounted for three out of the top ten in 2017. JP Morgan is the only bank still on the list.⁷

Many sectors of the economy – such as the music industry – have already expe-rienced a complete transformation or – for example the financial sector – are in the midst of profound change. The debates in the past about whether digitalisation will have a lasting impact on the financial sector have given way to the question of how institutions can actively meet the challenges of digitalisation and reinvent themselves so that they stay relevant in the future.

But where is the industry today? Opinions about this differ sharply. The index of the level of digitalisation of German companies calculated in the Wirtschaft DIGITAL 2018 (DIGITAL Business 2018) monitoring report published by the Federal Ministry for Economic Affairs reports an above-average value of 61 points for financial and insurance services providers compared with the overall index (54 points). This makes the industry digitally advanced. The banking industry itself is expecting a further rapid rise in digitalisation by 2023.⁸ The index is based on a survey of senior business decision-makers.

On the other hand, a large number of current studies and publications regard progress in digitalisation at credit institutions as still insufficient to successfully master the known and future challenges. In particular, their traditional role as intermediaries is viewed as vulnerable.⁹ Digital applications have the potential to disrupt or otherwise massively transform existing business models.¹⁰

Experts also see a risk that the banking industry will understand digitalisation primarily as a means of achieving productivity and efficiency gains and will act too slowly, as in the past. They also often allege that banks do not take digitalisation seriously and sneer at the challenge posed by online competitors.¹¹ They claim that the industry still underestimates the fundamental transformation triggered and required by the new technologies and runs the risk of losing growing and significant market share in the future to digital platforms, non-traditional competitors and fintechs.¹²

The challenge for the banking industry will therefore be to integrate in its strategy the changing user behaviour of its customers, new technologies and, last but not least, new competitors from the technology arena.

Savings banks and digitalisation

History

Digitalisation has played an important role in the savings banks’ business model for many decades because the “production” process in banking consists “largely of processing information.”¹³ Information technology plays a key role in each of the four relevant sub-processes: “acquisition”, “agreeing transactions”, “settling transactions” and “providing information”.

For many years, for example, the gradual digitalisation of payment transactions remained largely invisible for customers. This changed in 1983 with the official introduction by Deutsche Bundespost, the former state-owned postal service, of BTX (videotex), the first online service in Germany. As early as 1984, customers at many savings banks were able to execute banking transactions on computers at home, view account balances or make bank transfers.¹⁴ However, it was only the development of the world wide web, which started the internet boom, that stoked rapid growth in the importance of online banking for savings banks and their customers.

Starting in the mid-1990s, the savings banks had an internet presence with their first own websites and browser-based online banking services.¹⁵ In the early days, these were still virtual business cards with pure information content, but they were steadily supplemented by interactive elements such as initial self-service advice offerings and expanded by a multitude of additional service and transaction elements.

Being close to their customers has always been crucial for the savings banks’ business model. With the introduction of money transmission and clearing and the resulting need for payment sites, the nationwide branch network had become even denser in the 1950s and 1960s, and people were now used to finding a comprehensive advisory offering close to their home. The advent of the internet brought with it a requirement to provide the same quality of services online, from which the savings banks’ multi-channel strategy emerged. This lays down that customer wishes should also be fulfilled across a variety of channels outside the already established self-service areas. The internet and telecommunications sup-plement the channel mix.

The current status of digitalisation in the Savings Bank Finance Group

Today, almost 19 million customers with over 40 million accounts use the option to conduct their banking transactions with the savings banks online. Access via mobile devices such as smartphones and tablets, whose share of the total volume of all transactions was already over 30 per cent in 2017, is becoming increasingly important. The savings banks’ websites are recording 2.5 billion visitors each year, making them some of the most heavily used internet offerings in Germany.¹⁶

Digital offerings have long stopped being limited to offering just information and services online: they also increasingly serve as a distribution channel for selling banking products. Online presences are additionally playing an increasingly important role as central contact points for customer communication via email, audio and video chats, or messenger services.

For many years, the online sales channel supplemented the branch business and was implemented largely in isolation. Qualified personal advice was the domain of the advisers in the local branches. Initial attempts by some savings banks to use digital advisory teams remained the exception at first. The focus of further developments is now increasingly on providing advice using digital channels. It is an integral element of the savings banks’ sales strategy, which lays down that customers should receive all important services across all channels and be able to switch seamlessly between the access routes.

We assume that advisory expertise will remain a key competitive success factor in the future. There is also an evident need in the digital world for high-quality advice by people, for people, especially when it comes to complex financial matters. That’s why for the savings banks, the provision of this advice will not be limited to branches.

The growing and rapidly increasing digital needs of their customers are the driver for the current and future strategy of the savings banks. In the past, the fo-cus was strongly on the technology-driven expansion of digital solutions and on the cost-driven optimisation and centralisation of processes and the IT infrastructure. The spotlight is now on people.

What we are seeing is a clear interrelation, with curiosity and different expectations arising from new technical opportunities. In turn, behavioural changes make a growing number of new digital offerings possible and necessary. This applies to consuming music or videos using offerings such as Spotify and Netflix instead of CDs or TV, to shopping on the internet or to communicating via WhatsApp or FaceTime. In exactly the same way, this is also changing how banking transactions are conducted, namely increasingly online. Although the institutions will continue to be physically present through their branches, there will be a shift in the weightings between the different channels.

We are closely monitoring the new competitors, such as fintechs and other tech companies; we are analysing their strengths and performance promises and are using the results to derive inspiration for our own measures.

The staff and managers of the savings banks are both addressees of and participants in our digitalisation strategy. Technological transformation will directly impact the future working environment of all savings bank staff, and the working environment of customer advisers in particular. Imparting digital expertise is of particular importance so that high-quality advisory services can continue to be provided and employees will accept the digital transformation.

The Savings Bank Finance Group’s digital agenda – An organisational roadmap

The various aspects of digitalisation were summarised in the savings banks’ “Digital Agenda” at the end of 2016. This gave the institutions a roadmap and a tool for overcoming the practical challenges. The Digital Agenda was developed by the “Digitalisation Task Force”, in which various institutions and other companies of the Savings Bank Finance Group participated.¹⁷ Based on the current situation, the aim was “to define the enhancements needed to selectively change or expand the organisational structure and so equip it for the challenges and opportunities offered by digitalisation.”¹⁸

The items on the digital agenda are based on the savings banks’ understanding of their mission to be the central point of contact for their customers for all finan-cial services. Personal and regional closeness continues to be a key point of difference over the competition. Staff are seen as a unique selling point. Customer satisfaction and customer experience are improved by a performance-driven portfolio.

The Digital Agenda more clearly documents the aspiration to align digital solu-tions more systematically with customer needs. Customers should be able to – and can – choose the most suitable contact point for them depending on the circumstances. The multi-channel strategy is the core element of this. A critical success factor is not only being represented in all relevant sales channels, but also integrating them tightly. While the savings banks’ multichannel offering is already quite mature in the retail banking segment, the offering for the corporate banking business must be implemented comprehensively and further expanded both conceptually and functionally.

Based on the savings banks’ business strategy, the Digital Agenda also incorporates the staff perspective and questions of operational efficiency. That is because constant, rapid transformation must be operationally achievable and accompanied by growth in skills and expertise. Both will be enabled or expanded by means of focused measures. In the future, the Savings Bank Finance Group’s market-relevant digital solutions will be defined and developed and then de-ployed by savings banks more quickly so that retail customers, corporate cus-tomers and local authorities across Germany can also use these solutions.

The Digital Agenda sets ambitious standards in the following dimensions:

Innovation

Measured in terms of market-leading drivers of digitalisation in the financial ser-vices market, the Savings Bank Finance Group endeavours to be at least a fol-lower, and also to be a pioneer for selected issues. Compared with traditional competitors, it generally aims to be a pioneer.

Economic efficiency

The opportunities offered by digitalisation to cut costs and boost earnings, as well as for rationalisation and process automation, will be systematically lever-aged.

Relevance

The savings banks are the central point of contact for their customers for all fi-nancial services. They use digitalisation to safeguard jobs in the region as attrac-tive employers. Digital expertise is also deployed for the benefit of the municipal trustees and the public.

Moreover, the Digital Agenda defines the following core beliefs as guiding princi-ples:

• The savings banks continue to consider themselves to be multi-channel banks; we do not wish to become an (online) direct bank.
• Staff should also remain relevant in the digital world, where they will be beacons of digital expertise.
• There is a need for new, relevant added value that will be rewarded by the customers.
• We offer all of our customers simple solutions to meet their needs.
• Savings banks are organisations that use data. We place the protection of our customers’ personal privacy above our own economic interests.
• The information security of our systems has the highest priority.

The Digital Agenda has created a range of tools for the savings banks to achieve the defined ambitious standards and to allow the guiding principles to be meas-ured. They help determine the current status and identify concrete measures to systematically leverage the digitalisation concepts and solutions already available today.

However, the Digital Agenda also indicates

• how contact with customers will be organised in the future,
• which innovations are necessary to do this
• and how the Group – including together with its customers – can develop and provide competitive offerings faster and continuously enhance them.

The individual tools are explained in greater detail in the following.

The customer perspective in the Digital Agenda

Innovation management and customer centricity

“Customer is King” wasn’t invented by digitalisation, and was always the aspiration of successful business undertakings. Customer centricity has a long tradition at the savings banks. The heart of the savings banks’ entire business model is customer-centric, as this reflects the mission and roots of the savings banks. In fact, a large part of the creative power of digitalisation in society is because it makes people’s everyday lives easier and more comfortable and allows individuals to directly notice the benefits of this revolution.

In the branch-based world, the advisers were the sole intermediaries and translators between the customers and the supporting IT systems. In the digital world, customers interact directly with IT. Systems must therefore be as self-explanatory as possible and usable without effort and expert knowledge. It is true that the financial sector, and the savings banks in particular, have caught up in this respect. However, it cannot be denied that improvements are still needed.

This also means that classic product-centric practices must be challenged when new offerings are being developed using the waterfall model. That is because successful digital companies put new releases, updates or features into operation in rapid succession. In turn, this enables them to respond swiftly to customer feedback. It is no longer enough to bring new products to market in planning and implementation processes that may last for years – hoping that the original assumptions still hold true: all the more so because new technologies and user trends continue to evolve at high speed. What this means is that the longer the production times are, the greater the economic uncertainty will be.

The Savings Bank Finance Group is meeting these challenges at a variety of lev-els. What is important in the first instance is to have better knowledge about cur-rent technology trends in- and outside the financial sector, as well as about the success factors driving successful providers. That is why innovation hubs were established at various points in the Finance Group. One example is the Hamburg-based “S-Hub”, launched and sponsored by Finanz Informatik. Other institutions such as Deutscher Sparkassenverlag, the German Savings Banks Association (DSGV) and a range of enthusiastic savings banks also support the S-Hub with financial and human resources.

Besides identifying trends and evaluating existing fintech solutions (market screening), the primary mission of the S-Hub is to develop new product ideas to-gether with customers and to develop prototypes: “by customers for customers”, as it were.

In doing so, the S-Hub systematically deploys agile methodologies such as de-sign thinking. More than 20 prototypes were developed in product discovery pro-cesses over the past 18 months, and some of them are currently being trans-formed into real products. The aim here is to obtain customer feedback as early as possible in the design and development process so as to minimise the risk of developing products that fail to meet customer requirements. In early 2019, the S-Hub launched a central tester community for the savings banks that will signif-icantly expand early prototype testing.

However, agile methodologies are not only being used in the idea generation and prototyping phase. A growing number of projects are also being implemented us-ing agile elements, for example from SCRUM, to upgrade core systems, for ex-ample for the savings banks’ online presence called Internet-Filiale¹⁹, to the ex-tent that this complies with the conditions defined by the regulator. The devel-opment and testing of decentralised innovative ideas by individual savings banks is also purposely desired and is being encouraged.²⁰

The standing conditions for implementing creative innovations are that they do not visibly breach the law or ethical principles, or harm the brand, the philosophy, the reputation, the regional principle or the business strategy of the savings banks. Common guidelines were developed in the Group for this purpose.

The financial platform: the digital ecosystem of the savings banks

The Internet-Filiale and the savings banks app give the savings banks online points of contact that are regularly used by 17 million customers to conduct their banking transactions and contact the savings banks. The savings banks also seek to retain or expand the direct customer interface in the platform economy, and not to revert to the status of a pure infrastructure service provider, for ex-ample for fintech offerings.

The current account is therefore being embedded in a digital platform and devel-oped into an ecosystem that is the digital home for all users (retail and corporate customers) and their financial needs, and aims to make life easier. The term “user” is used here consciously because this platform is not only open to customers of the Savings Bank Finance Group, but also, prospectively, to customers of other institutions. The financial platform is also intended to provide a regional and na-tionwide services offering outside of the core business.

The Internet-Filiale 6 currently used by the savings banks is being developed into a financial platform iteratively and also increasingly with the direct and continuous involvement of customers. A multi-banking capability was additionally made available to customers there in August 2018, thus laying the foundation for the further expansion of the platform:²¹ customers can now manage accounts with other (non-savings) banks in the online banking solution offered by their savings bank. In December 2018, the multi-banking capability was expanded to include interactive transactions such as credit transfers and standing orders, as well as the first functionalities of a personal financial management feature. Additionally, the first components from partnerships with fintechs will be integrated by savings banks nationwide in their online presences in the first half of 2019.

As well as their own ecosystem, the savings banks also want to offer a customer experience in the ecosystems of other providers. Some examples of this have already been implemented, such as the integration of savings bank branch and ATM addresses in Google Maps and other navigation systems, or the placement of real estate offerings in the large internet portals.

The API²² strategy of the Savings Banks Finance Group

The German banking industry has had powerful interfaces since 1996 in the shape of the Home Banking Computer Interface (HBCI) and its successor, Financial Transaction Services (FinTS). They are primarily used by retail customers to access their banking data using third-party products. In particular, these interfaces can also be used to create a multi-banking capability.²³

The scope of FinTS functions was progressively expanded over the years. The technical specifications now cover more than 130 transactions from all areas.²⁴ There is also a range of interface standards for the corporate banking business, of which the Electronic Banking Internet Communication Standard (EBICS) is the best known. This replaced the former File Transfer, Access and Management (FTAM) protocol in 2008.²⁵

Whereas mainly classic banking software products used these interfaces in the past, FinTS is predominantly used in the savings bank sector today by smartphone apps for iOS²⁶ or Android²⁷ devices to enable mobile banking for customers. Especially mobile banking is becoming increasingly important. For exam-ple, more than 30 per cent of the savings banks’ online banking customers al-ready regularly use their smartphone to access their account. However, the FinTS interface was and is increasingly being also used by internet companies or third-party service providers as a basis for providing their services.

The Second Payment Services Directive (Payment Service Directive II – PSD2) is bringing in new challenges and requirements for the savings banks, affecting their relationships with both customers (and in particular access to online banking) and with competitors such as fintechs, and above all with international tech giants. From the viewpoint of the savings banks, however, PSD2 also makes an important contribution to legal certainty because it defines how third parties can access online banking data. The same applies to the “Regulatory Technical Standards on strong customer authentication and common secure communication” (RTS) published by the European Commission in early 2018. The RTS expand on the requirements of PSD2. Both rulebooks make clear that screen-scraping²⁸ is prohibited. Because of this, and because of the requirement for strong customer authentication (SCA), they make an important contribution to the security of online transactions. At the same time, the exemptions from SCA defined in PSD 2 meet the need of many customers for enhanced user friendliness.

The savings banks therefore also view PSD 2 as an opportunity for a customer-centric upgrade to their digital services through their online offering. The intro-duction of multi-banking in the institutions’ financial platform is a first step in this direction. The statutory requirement to make interfaces available to other sectors (e.g. to tech groups) would be an important step towards a level playing field.

The Savings Bank Finance Group actively participated in the creation of the PSD interfaces right from the start through its significant involvement in the devel-opment of the NextGenPSD2 API by the Berlin Group, a European standardisation initiative.²⁹ The specifications implement a cross-border standard for an interface that meets the requirements of PSD2 and enables data interchange with account information service providers, payment initiation service providers and third-party card issuers in compliance with the legal requirements. As stipulated by law³⁰, the first tests will be made possible starting on 14 March 2019. The system is expected to go live on 14 September 2019.

Besides the legally stipulated interfaces in PSD2 and the established FinTS infrastructure, the Savings Bank Finance Group is working on a comprehensive API infrastructure for all application areas.

One-System-Plus (OSPlus), the savings banks’ core banking system, already en-ables a range of options for integrating such offerings, for example through single sign-on mechanisms and access to technical banking processes and data. In addition to public interfaces that can be used freely, the future API infrastructure will again offer private APIs that could be made available to certified contractual partners based on a defined framework.

The overall contractual, content-related and technical conditions for future ac-cess to the API infrastructure are currently being defined with the participation of various stakeholders. This could contribute to the more rapid integration of mar-ket solutions. However, it would also make it easier to develop market-ready pro-totypes in quick succession outside the traditional development cycles at the central data centre. In this way, product innovations in the form of MVPs³¹ that still comply with the legal and regulatory requirements could be tested for cus-tomer acceptance as quickly as possible, trialled at individual savings banks and, if successful, introduced nationwide in the Group.

Fintechs – partners or competitors?

In recent years, a large number of new providers offering financial services on the internet have emerged in the market for financial services. The importance of these companies, which are often referred to by the media as “fintechs” and are frequently start-ups, has grown significantly.³²

A particular feature that is typical of fintechs is their high level of technology ex-pertise. They systematically remove individual processes from the value chain of traditional credit institutions and optimise them for the digital world. Right from the start, they opt for a different approach than existing financial service provid-ers have used in the past.

Fintechs endeavour to maximise the focus on customer needs when they devel-op digital solutions and to involve customers in every phase of development. They automatically employ rapid development cycles so that they can quickly identify and respond to undesirable or new developments. Their approach there-fore differs significantly from the classic development methodologies typically used by the savings banks. As a result, fintechs are often quicker to bring digital solutions to market. In individual cases, however, a higher propensity for taking legal risks and, connected to this, economic risks, can also be observed (e.g. in money laundering checks).

Although the savings banks claim that they have always had a customer-centric business model, this is not necessarily the case with every technical solution. They identified the new competition from fintechs at an early stage. However, the first phase of mutual antagonism, which was talked up especially in specialist circles, is long gone. In fact, we see many opportunities how both sides can ben-efit from each other: fintechs score with their undoubted digital expertise, which manifests itself in a short time to market and the often high quality of the cus-tomer front ends. In addition to their large customer base and long-standing customer relationships, credit institutions contribute personal closeness to cus-tomers and the high quality of their advisory process, well-functioning and scal-able support structures, and profound regulatory expertise.

The innovation hub described in the section entitled “Innovation management and customer centricity” plays an important role in the alliance between savings banks and fintechs. The hub employs the same methodologies as digital companies to develop product ideas jointly with customers. They also invite selected fintechs to contribute their expertise and solutions as part of their trend scouting activities. This has already resulted in the first partnerships. For example, more than 230 savings banks use video legitimation to simplify the account opening process, relying on proven so-lutions from fintechs. The institutions have also integrated external solutions for switching accounts.

The savings banks wish to further expand their partnerships with fintechs, for example, through their participation in the federal government’s Fintech Council or as a sponsor of the German Startups Association.

To safeguard collaborative partnerships in the future, the savings banks see a need for European standardisation based on legal requirements for which there is currently no common understanding. In particular, the development and use of interfaces to account and banking data can only be sufficiently driven forward if the legal environment allows the necessary infrastructures to be refinanced by their co-users.

The savings banks’ perspective in the Digital Agenda

In addition to the customer perspective, the Digital Agenda concentrates on the savings banks’ digital fitness. To do this, it provides a range of tools that are de-signed in the first instance to help the savings banks capture their status quo – and then to support them in making further improvements.

These tools are presented in the following.

• Minimum digital standards – Where does the savings bank stand com-pared with the average for the Group?
• Digitalisation compass – A digital reference resource for savings banks that provides concrete, institution-specific recommendations for action.
• Documentation platform– A central information offering for exchanging digital ideas and innovations.

Minimum digital standards

The minimum digital standards set out how the institutions expect digital solu-tions to actually be used in the dimensions of customers, savings banks and staff. The measurement criteria defined to this end are worded in such a way that they can be achieved with centrally provided solutions and support measures. The minimum standard is defined as the average level of digitalisation across all savings banks. This means that the standard is not a fixed level, but continues to grow.

The minimum standards are calculated once a year. Today’s average will be to-morrow’s minimum requirement. This ensures the continuous, consensus-based dynamic development of the level.

Digitalisation compass

Based on the values it has achieved for the minimum standards, each savings bank can decide whether and, if so, in which aspects, it intends to make further progress in digitalisation. The digitalisation compass tool reveals potential solu-tions for the concrete need for action. The digitalisation compass is designed as a digital reference resource that also supports the savings banks in the process of transformation and cultural change in the direction of digitalisation.

Documentation platform

The documentation platform is a web-based information offering that gives the savings banks a central overview of the innovation ideas that already exist, are available or are under development, as well as the available digital solutions of the Savings Bank Finance Group and its service providers. This explicitly includes solutions that individual institutions have identified on their own initiative or want to develop with others.

The documentation platform is designed to bring together idea providers, poten-tial investors and implementers, and hence to support the development of fur-ther investments. At the same time, it serves to document what is already there. This aims to help avoid parallel developments in the Group as far as possible.

Users of the documentation platform can also have their project proposals re-viewed – for example with regard to legal and trademark questions and the regulatory environment.

Staff digital expertise

Advancing digitalisation will substantially change the world of work and hence the working environment of savings bank staff. The savings banks see a need for highly qualified personal advice in the future digital world as well, while pure-play service activities could be increasingly superseded by automated processes. The same principle applies here: customers decide which services and which per-formance features they want to use on which channel.

To successfully master this change, the staff and managers of the savings banks must also develop digital expertise. As well as a natural understanding of the savings banks’ own digital offerings, this also extends to a greater willingness to embrace constant change. That is why staff professional development and an open approach to the necessary changes are critical for success.

The Savings Bank Finance Group is addressing the necessary cultural change through a range of measures at centralised and decentralised levels. The digital expertise status quo is made transparent by the staff perspective in the minimum digital standards (see 3.2.1).

Staff qualification is enhanced through a series of training measures. The digital skills of applicants are becoming ever more important when it comes to recruit-ment and the selection of young talent. The Group’s own professional develop-ment concepts and training offerings are being increasingly digitised and made accessible to staff through electronic media such as tablets. The reform of the German bank clerk (Bankkaufmann/-frau) occupational profile is also particularly important for the savings banks.³³

Automation

Another important aspect of digitalisation is the automation of process and deci-sion-making steps and, related to this, the reduction of the need for manual ac-tivities by staff and customers.

The advantages of automation are self-evident. Processes are more customer-centric, faster, less error-prone and more cost-effective. Banks and savings banks still lag behind other sectors in these areas. In recent years, the savings banks and their central service provider Finanz Informatik have selectively extended process automation for both internal processes and transactions initiated directly by customers on the internet platforms. The aim is to implement as many completely end-to-end and hence seamless transactions as possible or to streamline processes to the best extent possible through automation. With this in mind, further efforts are being made and new technologies such as Robotic Pro-cess Automation (RPA) are being used. The aim of the DSGV’s current “Operating Strategy of the Future” project is to significantly reduce the savings banks’ ad-ministrative effort, among other things by more intensively using suitable auto-mation measures and selectively developing new ones.

Trust in the digital world – cybersecurity as a competitive factor

The rise of digitalisation is making resilience to cyber risks (cyber resilience) an increasingly important factor. Cyber risks have now emerged as one of the top business risks.

The savings banks’ Internet-Filiale, online banking and the savings bank apps are among the most attractive targets in Germany for hackers and cybercrime because of their high customer acceptance and the intensity with which they are used. A total of 12,000 cyberattacks reports were recorded in the first six months of 2018, at times 1,000 per week.

The security of the IT systems used for digitalisation is therefore one of the highest priorities for the savings banks and a deciding competitive factor. Cus-tomers trust that the savings banks will not only handle their data, and ultimate-ly their money, with care, but will also protect them from unauthorised access by third parties. Cybersecurity contributes significantly to this trust.

The Savings Bank Finance Group is facing up to the challenge of adequately safeguarding the operational, technical, financial and reputational aspects of cyber risks in its risk management processes. Over the past few years, comprehensive organisational measures have been implemented and substantial amounts have been invested, for example to continuously enhance Finanz Informatik’s multi-level security architecture and the savings banks’ information security systems and processes.

Cybersecurity is a crucial interdisciplinary field and an integral element of the Savings Bank Finance Group’s strategies. The internal measures adopted by the savings banks to ensure a high level of data and process confidentiality, integrity and security are aligned with the arrangements in place to safeguard a high level of system availability and reliability and the information security systems of the central service providers, not least through the “Secure IT operation” (Sicherer IT-Betrieb) application.

However, cybersecurity also means working together with partners, market play-ers and networks that advocate greater security on the internet. For this reason, the central cyber defence team at the Savings Bank Finance Group works very closely with the Federal Office for Information Security (BSI) and other govern-ment institutions to preemptively counter cyber threats. In 2017, the central cyber defence team sent 170,000 reports of dangerous malware, Trojans and phishing sites to anti-virus manufacturers, thus improving the protection offered by the anti-virus systems used by many savings banks and their customers.

Reflecting the growing cyber threat situation, lawmakers and regulators have continuously adapted and expanded on the requirements applicable to information security guidelines and information security processes at banks and savings banks. PSD2, which was primarily transposed by the German Payment Ser-vices Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG), and the Minimum Requirements for Risk Management (MaRisk) issued by BaFin – supplemented by Circular 10/2017 (BA) “Supervisory Requirements for IT in Financial Institutions (BAIT)” – are the key requirements here.

The Savings Bank Finance Group follows the ISO27xxx series of information se-curity standards. In addition, all of these statutory and regulatory requirements for information security and a standards-based information security manage-ment system for the institutions of the Savings Banks Finance Group are manda-torily modelled by the “Secure IT operation” (Sicherer IT-Betrieb) application.

A large number of measures are necessary to implement these statutory and regulatory requirements. The Savings Bank Finance Group’s central cyber de-fence team supports the savings banks and Landesbanks in implementing them. The cyber defence team consists of a reporting office that receives warnings of cyber attacks, a situation centre that visualises the overarching impact of the attacks and a special defence unit that counters the attacks. As a complementary measure, a central anti-fraud team for the institutions of the Savings Bank Fi-nance Group was established at Finanz Informatik.

The Savings Bank Finance Group is expecting a comparably high number of cyber attacks in 2019. It also expects that PSD2 will lead to more access to accounts by third party providers (account information services and payment initiation services), which will see a rise in the number of attacks and scamming attempts using targeted phishing and social engineering attacks.

New business models for the Savings Bank Finance Group

Big Data, Artificial Intelligence and blockchain attract intense debate and analysis today when new business activities for the financial industry are being considered.

Big Data/Artificial Intelligence (BDAI)

BDAI – Big Data and Artificial Intelligence (AI)– are critical digitalisation technologies because they help meet two key expectations for the benefits of digital transformation: they increase the speed with which requests and orders can be dealt with. And they can be used to optimise internal processes, checks and as-sessments. There is a general presumption that BDAI can make a significant contribution to massively transforming value chains and leveraging significant efficiency gains.³⁴

The customer-centric use of data shapes and transforms financial services. The savings banks have a strong starting basis in this respect. Data from more than 50 million customers gives them a wealth of data. Data analytics (“Savings Banks Data Analytics” – SDA) and data-based applications allow them to better understand customer needs and behavioural patterns. Building on this, services and value added for the customers can be improved or actually made possible for the first time, for example by means of individual advisory approaches. Another development stage is the “next best action”, which is used to offer customers exactly the right solution at the right time that meets their needs in every situation and in every channel.

In its data analytics, the Savings Bank Finance Group strictly ensures that only data whose use the customer has explicitly consented to in the form of a specifically detailed declaration of consent can be accessed within the limits laid down by law. The institutions’ strategy is guided by both principles: compliance with the statutory and the supervisory requirements, and in particular the General Data Protection Regulation (GDPR), and safeguarding the interests of customers when using their data. The already high consent rate of 30 per cent demonstrates customer trust in the savings banks.

In the past, data was analysed using classical statistical methods (for instance multivariate analyses), for example to determine probabilities of default or prod-uct affinities using score cards. The computing power of IT systems has risen sharply in the past few years. Systems and processes based on Artificial Intelli-gence are thus also becoming more important.

New algorithms and machine learning will not only offer automatic, continuous optimisation of existing processes, but will also open up completely new applications and areas where they can be deployed. The conditions for this are training using existing data and the creation of closed loops in which the results of analyses and the events that have actually occurred are fed back into the system in order to make it more accurate by means of this reconciliation.

The Savings Bank Finance Group addresses the issue of Artificial Intelligence in a variety of fields. Neural networks are already being used today in particular in areas such as cybersecurity in order to ward off or minimise losses. We can also see applications in the automation of business processes that can be trialled in projects, for example to identify and classify incoming correspondence across different channels. The Group has also gathered initial experience of using bots and voice services in the area of direct customer contact. For example, the first savings banks are now using chatbot systems that not only answer customer questions about standard problems, but also optimise themselves autonomously based on their dialogue history.³⁵

The DSGV is currently developing a comprehensive Artificial Intelligence strategy for the Savings Bank Finance Group. Besides the legal and economic perspective, it will also address ethical principles and thus provide guidance to the Group on a broad range of issues.

Additionally, the DSGV has examined in detail the BaFin study “Big data meets artificial intelligence – Challenges and implications for the supervision and regu-lation of financial services” and participated actively in the dialogue launched by BaFin as part of the consultation exercise.³⁶

In light of the diverse application areas and the new business models that can now be observed, for example in areas related to credit ratings, sentiment analy-sis and automated customer contact, the Savings Bank Finance Group also sees – in addition to the tremendous opportunities – the need to monitor any risks at a conceptual level, to analyse them and to incorporate them swiftly into the regulatory system. In this context, we believe that it makes sense for business models and companies emerging from BDAI to be treated in line with the principle of “same risks, same rules”, resulting in unrestricted equality of treatment to ensure a level playing field and safeguard consumer protection.

Blockchain

Blockchain, and in particular distributed ledger technology, has the potential to create an even more digitally networked global ecosystem. Digitalisation is already breaking up formerly fixed system and process boundaries and decentralising value chains. Blockchain and distributed ledgers can significantly accelerate this trend and thus encourage the development of dynamic new digital value networks (ecosystems).

Developments in the area of blockchain technologies and applications accelerated considerably in 2017. New blockchain-based business models, applications and consortia are currently emerging at a fast pace. A growing number of banks and insurance undertakings are recognising the concrete potential of this technology and are investing in corresponding projects or participating in consortia. There is a particular focus here on combinations of private or consortium-based blockchains with the “smart contracts” concept.

The Savings Bank Finance Group has launched a range of initiatives since 2015 to evaluate the significance of blockchain and to test the suitability of prototype blockchain-based business models and applications. One example is the development of a blockchain-based platform for promissory note issuances by Landesbank Baden-Württemberg (LBBW) in 2017 (Daimler) and 2018 (Telefonica Deutschland).

Blockchain-based promissory note issuances enable direct, secure and transparent financial transactions in real time because data sets are only updated by a consensus. The decentralised storage of data blocks and cryptographic signatures make transaction processes more transparent, more secure and more efficient. However, these examples also highlight the current legal restrictions on establishing blockchain promissory note transactions as a genuine option for corporate finance activities. To achieve this, there would have to be sound legal confirmation of the option to securitise debt securities by means of digital certificates. In the case of the current blockchain-based promissory note transactions, the conventional issuance route was used in parallel to ensure the legally compliant documentation of the terms and conditions of the bonds in accordance with the German Skripturprinzip, which requires the terms and conditions of the bond to be incorporated in the bond certificate.

Once these promissory note transactions had been settled using blockchain technology, LBBW and the Stuttgart Stock Exchange created a marketplace for the end-to-end digitalisation of the promissory note process under the “Debtvision” brand. A large number of institutional investors such as savings banks, banks, insurance undertakings and occupational pension schemes (Pensionskassen) have already joined this platform. Over the next few months, blockchain will be integrated into the platform, which will see the entire value chain being transferred to this innovative technology.

In 2017, NordLB developed a blockchain prototype together with the Fraunhofer Gesellschaft to optimise processes for documentary credits. It joined JP Morgan’s Interbank Information Network (IIN) in September 2018. IIN is based on JP Morgan’s blockchain “Quorum®” database and is specifically tailored to international payment transactions.

A multi-institutional initiative was also launched in 2018 by BayernLB, Helaba, LBBW and S-Servicepartner Berlin to establish a blockchain-based platform for the institutions of the Savings Bank Finance Group, based on which trading/financing processes as well as alternative financial products in the area of trade finance can be innovatively digitised and supported more efficiently.

The Savings Bank Finance Group is in close contact in the case of all these developments with the European savings banks, in particular with Erste Bank Group, CaixaBank and Swedbank, which are also operating blockchain initiatives.

Nevertheless, blockchain technology is still in its early stages technically and economically. The majority of the applications identified in the financial sector to date are currently at the conceptual or test phase, so they are still a long way from commercial use in the mass/volume business. Nevertheless, in particular the potential for improving process transparency and efficiency is driving forward development. For example, we can see opportunities to use blockchain as an efficient way of reporting to the supervisory authorities, for example to demonstrate the accuracy and completeness of transactions of various types.

Outlook

Digitalisation poses a multitude of challenges for the savings banks in different dimensions that they are addressing with a variety of measures at centralised and decentralised levels. The savings banks’ Digital Agenda has defined ambitious standards and created tools to help the institutions to stay relevant in the future.

It is evident that digitalisation is not a static goal. Rather, digitalisation is a process that requires the ability not only to react promptly to changes, but also to shape them actively. The legal and regulatory framework is also particularly im-portant. It plays a crucial role in deciding whether the institutions will be able to compete in the future with the technology groups – some of which are still not yet regulated in Germany – that increasingly offer finance-related services, or whether they will have to hold their own in a legally unlevel playing field.

The savings banks are fully aware that digitalisation is an opportunity to change and enhance their business model, while maintaining the essence of their business – being close to their customers. The customer experience in particular will be the decisive factor for acceptance in the digital world.

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