However, the banks saw that earnings expectations were uncertain due to the threat of other digital solution providers, in which they sold NETS to Advent International, ATP and Bain Capital in 2014 (Christensen, 2015; E24, 2014). The reason for the sale was that NETS's management model was not optimal and that the company needed clearer management and decision making in the implementation of necessary IT and technology investments. Thus, NETS does not only compete with banks, but also to TPPs in the digital competition.This may indicate that the banks had very different strategies to how NETS would develop, and it was therefore difficult to find a satisfactory solution for all 186 banks. Instead, the banks earned 19 billion from the sale and could continue their own digital development individually (Christensen, 2015; E24, 2014).
Furthermore, this can also be seen in the context of that several banks asserts that they want to
“go for the competition”, in which they have various opinion in how to do so. Additionally, it means that they must have the right systems and experts to do so. Thus, not only to be a part of, but also to be a leader in the digital competition, they must have the best resources. It goes without saying that this will be expensive if they do not already possess such resources. As investments in IT systems have increased over the years, this indicates that they are working on gaining a competitive platform.
Today’s Investment Equals Tomorrow’s Income
Moreover, some banks states that they seek to increase their investments today to reduce costs in the long run. For example, Collector Bank stated that they have pressure from their
shareholders to meet the expectations of a growth rate of 30% each year (Jordal, 2018). It is therefore more convenient for them to rather focus on doing good investments which promotes growth opportunities, than constantly look for places to cut costs. In comparison, large banks may display more obvious areas to cut costs, such as redundant employees or unprofitable business areas. In this matter, some banks see the possibilities that lie in cutting costs and consider this a better strategy for them. Increased focus on cost reduction, as well as more digitalization, also indicates that companies need fewer resources in terms of
employees. For example, Nordea has been one of the major banks that has portrayed a great focus on cost reduction and are in the ongoing process of terminate 6,000 employees (Stene,
2018). This way they release resources that enable them to invest in projects such as the reconstruction of their entire platform.
The main objective for many of the companies that cut costs is to manage innovation in the most cost-effective way. Too many steps correspond to increased costs in form of employees, systems and, not least, time. Moreover, cost-effective and fast processes make the length of time to market shorter. Thus, the process from the point where the idea of a product is conceived until it is out on the market is adequate. In this matter, the product will still be relevant and attractive when customers are going to use it.
However, cutting costs also provides disadvantages and new challenges. If the bank is forced to cut costs to become cost-efficient, this may be at the expense of other operations in the bank. Cutting costs may force the bank to be more risk-averse, because it does not have resources to diversify its investments. This may cause the bank to miss important
opportunities that could lead to huge returns in the long turn. Furthermore, it may force the bank to terminate employees who still are valuable to the company and this may create distrust among the workforce. Nevertheless, a risk of cutting costs is the uncertainty to how the shareholders will respond. Cutting costs usually insulates that there are bad times and that the company has to take action. This can be perceived as negative in the market and the stock price may therefore fall, which will reduce the value of the bank.
Resource Allocation
Moreover, data of this thesis show that the traditional banks come from a project-based allocation. This means that the allocation of resources within the company will be undertaken at the beginning of the year. Hence, banks are working to predict early which areas that will require most money and resources in the future. The financial research of the thesis identified that the value of intangible assets in the banks has increased over the last years, which implies that the banks have predicted this area as increasingly important and valuable. Furthermore, the financial analysis reveals that within the intangible assets, the banks has allocated
resources to investments in IT-development at the expense of goodwill. This suggests that the banks have determined that this should be the focus-area from the very beginning of the operating year.
However, allocating resources this early on may indicate that resources are largely locked. As a result, for larger projects that appear along the way throughout the year, it may be difficult to obtain enough resources as these resources are disposed for other purposes. This can again make it difficult for banks to work agile in the extent as they wish. Another aspect is that if they were to take resources out of other areas to build another project, this could have a negative impact on the areas that are being taken from. On a large basis, this could have an even greater negative impact than what it would have had to not possess resources for a project.
On the other hand, if the banks are good at allocating their resources correctly, they will be both more transparent and save time searching for sufficient resources. As the financial data of this thesis shows, banks have started with increased investment in IT development already in 2015, 3 years before the introduction of PSD2. In addition, research of this thesis show that the banks have set up individual investment groups where they invest large amounts of capital in order to invest in TPPs. This indicates that banks have captured the shift in the market and have a good insight into what they invest in.
Changed Competition
The banks in the interview study were secretive when it came to revealing too much of their cost structure. Nevertheless, the response from Deloitte gave a better perspective on how some banks can follow a strategy if they are not sufficient themselves. For example, new TPPs place themselves in between consumers and banks, and it is these players who stand for innovation. Thus, they offer solutions within both payment, loan and insurance. For example, internationally, players like Amazon and Chinese Alibaba have taken up the competition with the banks on loans (Aftenposten, 2018). For a smaller bank, which may not be as specialized within the business area of loans, they may face a huge challenge. Nevertheless, instead of offering the loan themselves, they may choose to cut out their entire loan service. Instead, they can make a price comparison service, where they can guarantee customers the lowest loan on the market (Duong, 2018).
Another change that is observed in the market is that retail companies offer customers their own apps and payment solutions. For example, the grocery chain Coop’s own Coop Bank offers their members a combined membership and payment card with Visa. The customer automatically receives a 1% purchase return when using the card. Savings and membership discounts from partners are automatically credited to the customer’s member account and through an app the user will always be in control over his/hers spending. In addition, customers who have a Coop member and debit card can subscribe to a payment insurance (EnterCard, 2018). The fact that such companies offer their own payment solutions to customers is a challenge for the banks. Such apps are very accessible and adapted to customers, as everyone is shopping in grocery stores approximately every day. In addition, the banks face competition in that retail companies can acquire information and data that they can use to detect trends and preferences among customers. That is, the banks will face a big challenge when it comes to tailoring solutions for their customers.