Despite improved labor productivity in retail banking from 1994 to 2000, France and Germany are still behind the U.S. (Exhibit 3). Among other solutions, higher consolidation in Germany and an improved payment mix in France will help the nations boost their productivity and get more out of IT investments.
While a range of improvements are necessary to revitalize German and French retail banks, four areas represent the highest priorities:
Information Technology Adoption
IT has already made significant inroads into banking in France and Germany, accounting for more than 10 percent of nationwide IT spending. IT-based innovations accounted for 1.9 percent of annual productivity growth, as back-office automation and the introduction of remote channels (e.g. call centers) improved efficiency. But there is significant room for further improvement. IT systems are not taking advantage of economies of scale triggered by consolidation, and insufficient levels of standardization mean that systems are complex and inefficient.
Mixing Up the Payments
In France, where the government mandates free checks, there is little incentive for the consumer to move away from paper for transactions. But processing paper checks is labor intensive and, therefore, less productive than an automated, paperless system. A relaxation of regulations won't be enough though. French banks will have to come together to convince customers to use modern payment methods instead of checks.
Demanding Customers
For a variety of reasons, including higher affluence, the stock market hype, and the increasing requirements for personal retirement plans in France and Germany, customers are more active in managing their accounts. That resulting bank activity accounted for more than two percent of annual productivity growth in both France and Germany from 1994 to 2000. However, despite this growth in activity, French and German customers are still well behind their U.S. counterparts, who not only have more banking products to choose from, but also take advantage of them. French and German banks need to expand their product offerings.
Consolidation Proliferation
Competition from direct banking and a drop in deposits led to a drastic erosion of profits for French and German banks from the beginning of the 1990s. Lower margins can be addressed in part by consolidation where the benefits of scale are substantial. Germany particularly, with a large proportion of small banks, can reap significant rewards through consolidation. The catch is that the consolidation process can be slow. Launch this chapter (PDF - 602 KB)
