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Deutsche Bank’s public contraction is a major landmark for fintech

German bank is cutting costs overall but is investing more in the latest digital technology as fintechs chip away at banking business

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Deutsche Bank’s recent announcement of thousands of job cuts and €13bn investment in digital transformation across the group is an overt sign that financial technology (FinTech) is slowly eroding the banking monoliths.

The 18,000 job cuts are part of a plan by Deutsche Bank to compete with fintech companies. A more surprising part of the plan is that its overall IT spend will fall from €4.2bn this year to €2.9bn in five years’ time, with gradual declines each year in between.

The German banking giant is one of the biggest companies in the world. It will still have more than 70,000 employees after the cuts. It wants to reduce its annual costs to €17bn in 2022, compared with €22.8bn last year. IT spend as a percentage of total costs will remain unchanged at 17%, according to the bank.

The arrival of a new breed of tech-led financial services suppliers, with the backing of the industry’s regulators, has started to damage the once impenetrable foundations of banking across Europe.

Big banks are shielding their vulnerabilities through public displays of affection for fintech operations, but they face deep challenges. The trouble at Deutsche Bank is a public display of the difficulty that large banks have competing in the digital world.

After announcing the job cuts, Deutsche Bank was clear that it cannot continue in its current form. The bank believes a combination of its experience and the introduction of new technology could set it apart.  

CEO Christian Sewing said in a presentation to investors: “Deutsche Bank’s aim is to position itself as a technology company, be a leader in digital banking with new ideas, and establish systematic research and development for innovations through combining state-of-the-art technology with analyst know-how.”

A carefully constructed “don’t worry, we are on it” statement, but brutal in its honesty about changing the status quo. No mention of banking products.

The €13bn the bank has set aside for digitising all its businesses through to 2022 will see a new division created. “Digitisation offers new competitors, such as cross-industry entrants or financial technology companies, market entry opportunities,” said Sewing. “We thereby expect our businesses to have an increased need for investment in digital product and process resources to mitigate the risk of a potential loss of market share.”

The bank has also recently named Neal Pawar as group CIO to help “modernise and simplify technology for the benefit of our clients”, according to chief operating officer Frank Kuhnke. Bernd Leukert will also join the bank with responsibility for technology, data and innovation. The former SAP man has 25 years’ experience in product development.

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But it doesn’t matter how clever a bank’s fintech apps are – if it has huge operational costs, it simply cannot compete with new players on price. Fintech companies are tech-heavy and people-light. Robots cost a fraction of their human counterparts.

Deutsche Bank has not been blind to this. In September 2017, then CEO John Cryan said: “A big number of staff will eventually be replaced by robots. In our banks, we have people behaving like robots doing mechanical things. Tomorrow, we’re going to have robots behaving like people.”

In his presentation, Sewing showed slides on how Deutsche Bank would cut its operating costs. In IT, these included a total of 5,000 outsourced roles being brought back in-house at a lower cost, consolidation of its IT services suppliers, and €1.4bn a year in savings from synergies between the bank and Post Bank, which it acquired in 2008 along with millions of account holders and 2,700 branches. 

“Banks are faced with the task of making their existing business efficient and profitable while developing new business opportunities,” said Sewing.

Peter Schumacher, chief executive at Frankfurt-based management consultancy the Value Leadership Group, said Deutsche Bank’s leaders have said their main objective is to reduce costs, but he believes its agenda is more strategic, and that its decision to bring 5,000 roles, currently undertaken by IT services suppliers, back in-house is part of this.

“Most financial services IT executives we speak to believe that differentiated products and service offerings are becoming more important, and are a key reason why many banks are now beefing up their in-house IT teams,” said Schumacher.

“Developing cloud models and implementing the latest digital technologies requires a deeper understanding of the business. Insourcing establishes a closer relationship between IT and the business, and this interaction facilitates learning, cross-pollination of ideas, and many other benefits.

“But this won’t be the old in-house IT – the full benefit can only be realised if this new model is supported by new ways of working, new capabilities and, most importantly, a new mindset.”

History repeating itself

But German fintech pioneer Matthias Kroner, who set up digital bank Fidor in 2009, said history is repeating itself. In the late 1990s and early 2000s, Deutsche Bank launched an online retail bank known as Bank 24, and the moneyshelf.de online account aggregation and financial planning service. Both were withdrawn a few years later.

Deutsche Bank’s challenges go beyond cost-cutting and investing in digital technology, said Kroner.

To succeed in fintech, there has to be a change in corporate culture, he said. “Fintechs start trying to solve the problem customers have, whereas Deutsche Bank will start with its own problems.”

Kroner pointed out that fintechs offer end-to-end digital journeys accessible to an ecosystem of suppliers that can make money. “This is not what Deutsche Bank will be,” he said. “This reminds me of when the German banks launched Paydirekt to rival PayPal over 15 years after it was launched.”

Kroner said he believes 80% of the traditional European banks are in a similarly tricky position as Deutsche Bank.

Like other traditional banks, Deutsche Bank has an existing IT operation that new technologies have to be integrated with. “We face the challenge to embrace and incorporate new, disruptive technologies in conjunction with existing technological architecture,” said Sewing.

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