Master Thesis

Electronic Commerce
for Financial Institutions in Germany and the
United States of America
with respect to XXL Internet AG

For

XXL Internet AG, Germany
Southeastern Louisiana University, Hammond, USA
Fachhochschule Reutlingen, Reutlingen, Germany

By

Klaus M. Schmidt

May 7, 2001

Table of Content

Table of Content 2
Table of Tables 3
Table of Graphics 4
Acknowledge 5

1. Executive Summary 6

2. Company Overview 8

3. Problem Definition 9

4. History of Retail Banking 10

5. Technical Standards for Online Financial Services 14
5.1. Impact for Online Financial Institutions 28

6. Competition 29
6.1. Implication for Financial Institutions 32

7. Opportunities 33
7.1. Market Trends 33
7.1.2. Implication for Financial Institutions 41
7.2. Clients 41
7.2.1. Implication for Financial Institutions 43
7.3. Price 43
7.3.1. Implication for Financial Institutions 45
7.4. Products 46
7.4.1. Implication for Financial Institutions 46
7.5. Distribution 48
7.5.1. Implication for Financial Institutions 48

8. Threats 49
8.1. Implication for Financial Institutions 52

9. Strategic Alliances 53
9.1. Implication for Financial Institutions 55

10. Innovations and Visions 55
10.1. Implication for Financial Institutions 59

11. The US Market 59

12. Implication for XXL Internet AG 69

13. Abbreviation 81

14. Bibliography 82

15. Sources 87

Table of Tables

Table of Graphics

Acknowledge

Mr. X and Mr. Y, both employed by the XXL Internet AG, have always given me a helping hand at any time during my research in Germany, and the USA. I enjoyed the discussions with both people and their profound interest for my master thesis. Both supported me and gave me meaningful advice. The interaction enlightened me and gave me a better understanding of the business environment in this particular sector.

In addition, Dr. Teri Shaffer (Director MBA Program) was also very helpful to me in supporting my ideas concerning the master thesis. She helped me balance the requirements of XXL Internet AG, Southeastern Louisiana University as well as the Fachhochschule Reutlingen, Germany.

I also thank reviewers of this paper at early versions of the research for many valuable comments and suggestions.

1. Executive Summary

Online banks dig for continued quantitative growth in account number, transaction, and value of transaction since these factors are essential for valuation of the company at the stock exchange.

The market for online financial services, or "eFinance", is growing in Europe and the US. The German market is the biggest but not the fastest growing market within Europe. Financial institutions have to consider trends in the market in order to survive and prosper in this very dynamic and competitive environment. Simple products like current account, saving accounts and brokerage, incl. mutual funds, as well as personal loans will be sold more on the Internet. However, customers are using the Internet as an information tool but close the contact often at physical branches. In order to avoid this miss match, online financial institutions will be forced to obtain core competence in:

• Customer relationship management
  The ability to capture, manipulate, and utilise customer data will be one of the principal keys in the competition for market share.
• Multi-channel banking
  Customers increasingly demand being served any time, any place, anywhere. Meanwhile, employees and suppliers alike are more likely to be connected to the financial institution′s architecture. This additional complexity will require innovative solutions by financial institutions, and most likely, a real-time online platform.
• Customer satisfaction
  Technology problems such as poor system performances or poor execution of orders are a source of much frustration for customers. A dissatisfied customer with a greater number of options in the Internet is less likely to remain loyal for long.
• Competitive differentiation
  Technology supports new product and feature development, as well as customisation, which allows online financial institutions to differentiate their offer from their competitors. Branding requires a sophisticated differentiation strategy.

The online financial institution faces a number of challenges: a heavy transaction load, fast moving shifts in channel usage and a requirement to sew all the channels together. There are many requirements for the success of this business environment: security, data management, degree of customisation, and range of products and features.

The web presentation should include dynamic tools. The speed of data transfer increases and makes further development in Customer Relationship and Content Management advisable. Product adaptation will be necessary by the financial institutions to satisfy the Internet users needs, which are often the most profitable customers. These are ingredients of success. Personalization, and traditional channels of contact through the call center or to the common physical branch, enhance the acceptance of online financial service. Since XXL Internet AG consults financial institutions, it is important to be aware of these future requirements.

Financial institutions do not have the necessary manpower to manage and develop the online presentation by themselves. Their personnel often do not accept the challenge from the Internet and change management requires high investment. XXL Internet AG has the opportunity to enter alliances with these financial institutions and implement the Internet presentation, and further develop new ideas for sales and service.

Standards and security play an important role and change quickly. Mobile phones, Personal Digital Assistants (PDA) are starting to become connected to the Internet via Wireless Application Protocol (WAP), which opens tremendous new ways to reach new customers. iTV is the latest media to reach customers, but it was not successful in the US and has not fulfilled the prognoses. For iTV a separate receiver is necessary and customers in the US rejected spending extra money for the service. The future will tell whether German customers will accept iTV.