Sir,
I write in response to Patrick Jenkins' article 'Stay open for lunch, please' (October 11) on German retail banking.
Research conducted by PA Consulting Group in 2002, analysing the gap between German bank performance and foreign best practice, found that the revenue gap was four times greater than the cost gap. Since then, German banks have made good progress in reducing their costs, which highlights still further the continued revenue underperformance.
German private sector banks conspicuously lack a customer acquisition strategy. They have low market share historically and their chosen focus on network cost reduction as the route back to profitability means this will shrink still further.
Received wisdom says that German customers are unique in a number of areas: price sensitivity - making it challenging for banks to introduce high margin products or raise fee income; lack of a service orientation - making it hard to segment, differentiate and price based on service; low propensity to borrow - so German banks cannot make the high margins which UK or US banks enjoy on credit cards, for example, nor can they substitute high margin bond issuance for low margin vanilla lending in the corporate sector.
Yet segmentation, service and product differentiation are at the heart of retail and commercial banking. Failure by the supply side to innovate is a more compelling explanation for the under-development of German banking than a unique make-up of German customers. As your article shows, foreign bankers are finding the segments which want to borrow and devising the products they want to buy.
Foreign entrants come from countries with a higher tempo of product innovation and customer turnover, and they are well placed both to stimulate the growth in credit demand and to service it. The German private sector banks should heed the wake-up call, otherwise we may evolve towards a situation where indigenous retail banking is almost wholly represented by the non-commercial Sparkassen (savings banks) and cooperative banks, with the private sector competition offered by foreign entrants.
John Rushton
Member of Management Group
PA Consulting Group
London SW1W 9SR
