APPENDIX 

RETAIL BANKING SUB SECTOR STUDY IN GERMANY 

The weak world economy together with a high level of company insolvencies (equivalent to U.S. 

Chapter 11 bankruptcy) and a declining stock market has led to serious cost and profitability 

problems in the German finance system. To meet the challenges of temporary economic 

problems and structural weaknesses, the German bank system has restructured itself in a 

remarkable way to increase its productivity by establishing lean processes and smarter 

administration. On the other side of the coin, these process changes are accompanied by large 

layoffs in the banking sector, especially among employees in small establishments in the 

customer banking or retail area. 

The service sector (of which banking is a subset) is, in comparison to other industry sectors, 

characterized by low increases in productivity growth. PCs are mainly used in administration or 

for non physical, intermediate goods such as in the finance industry. If PCs truly raised the 

output in the finance sector in unmeasured ways, then the benefits should appear in the output of 

the ICT industry. Such a spillover, however, is not observable. 

The finance and banking business products are mainly information goods which can easily be 

provided in digital form. The underlying ICT driven processes are subject to steady changes not 

due to new distribution channels such as online banking. Changing customer preferences towards 

online banking and online services together with decreasing loyalty are a new challenge banks 

have to cope with. Internet customers are better informed and more price sensitive than offline, 

i.e. traditional, customers. The usage of PCs and the Internet has doubtlessly created consumer 

surpluses, especially with regard to online banking and brokerage services (Gordon, 2000). The 

benefits of these inventions are not as large on the bank side, because they cannot reduce the 

fixed costs mainly deriving from physical branches in the same way.  

The German finance industry is heavily involved in IT and e commerce developments and an 

extensive user of these developments in comparison to other German industries. The challenges 

of developing and implementing a robust and durable IT architecture are of importance for 

sustainable growth in the future; e commerce has become especially important. On the other 

hand, German banks have to cope with a number of difficulties. The IT challenges of introducing 

e commerce successfully are considerable and need to be seen from an overall perspective of 

corporate development. Most banks, especially small savings and loan banks, are not able to 

identify new customers in their systems, nor are they able to calculate the revenue per customer 

or product. Not knowing exactly how much their actual internal cost is for pre products is also a 

widely distributed problem among small banks. But banks have realized that they need more 

control and better internal costs and activity accounting processes based on new IT 

infrastructure. A more industry oriented production approach should help to calculate products 

and services just as the manufacturing industry has been doing for a long time. The so called 

 finance factory  concept should solve these problems in the business processes, mainly enabled 

with new ICT systems. But most financial institutions are becoming careful after numerous bad 

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