Many say that banking is years ahead of insurance when it comes to innovation, technology and working together with fintechs. We must say we tend to agree. That’s why we’re pleased that Markus Pertlwieser, Chief Digital Officer at Deutsche Bank, is willing to share his experience with us.
Roger: Markus, what does your role as Chief Digital Officer at Deutsche Bank involve?
Markus: “For about three years now I’ve had the pleasure of managing our digital agenda. This includes transforming our core business as well as building new businesses. I’m responsible for our Digital Factory, where we have four hundred people. It’s a really interesting portfolio, largely involving all sorts of cooperations with fintechs, but also with some insurtechs.”
Roger: You mention the Digital Factory. Could you share what it entails.
Markus: “The Digital Factory is basically where we develop things; where we produce our digital innovations – and we’re into serial production nowadays. The Digital Factory works closely with our Innovation Labs in San Francisco, New York, London and Berlin. The labs conduct basic research into topics like blockchain, artificial intelligence and API. So you could say that our Digital Factory and Innovation Labs are our Digital Research & Development department. And it plays an absolutely crucial role; anyone who aims to be a leading bank in future must also be at the forefront of digital change. I see a clear trend here, comparable to the one in the media or music industry, where Google and Spotify took those markets by storm. That’s unlikely to happen in the banking sector, though; it’s too fragmented and tightly regulated.”
Roger: Looking at the where the Digital Factory is now, what would be the most important achievement so far?
Markus: “For me the most important innovation of the last eighteen months was not the creation of a new service but the creation of the Digital Factory itself. We now have four hundred people working on innovations on a huge scale. Among those who work at the Digital Factory are colleagues from Deutsche Bank, from the business areas as well as IT; we have externals - fintech people - and we have people from Risk and Compliance. As a bank, we really need these people; you can’t be truly agile if the legal guy only steps in on the last day. If that was how we did things, we’d actually be the opposite of agile. All these people work together just as they would in a startup. They often tell us that the Digital Factory not only looks and feels like a fintech; the way they work there is the same as being in a fintech.”
Roger: Do each of the different Innovation Labs have a specific area of focus?
Markus: “Yes, they do. The Berlin Lab focuses on the more traditional retail banking area; we’re doing a lot of API stuff there. London is our hub for blockchain initiatives. The guys in San Francisco focus on artificial intelligence because they’re close to Silicon Valley, and in New York we have lots of expertise, in particular on cybersecurity. We’re not doing it all on our own. For example, in San Francisco IBM is our partner. HCL is our partner in London. And we have Microsoft in Berlin. We’ve chosen partners at each of our locations to support us with whatever research we’re doing there.”
Roger: So you’re actually building a whole ecosystem of suppliers to accelerate innovation.
Markus: “Yes, absolutely. One of our core beliefs is: if you want to succeed in digital, you will never be able to do that on your own; you need really strong partners. This is a major shift in thinking. When I joined Deutsche Bank in 2008 the focus was on how to effectively manage internal resources. When you’re in a platform economy this is still important, but you need an extensive network of external partners to make the most of all the opportunities the platform economy has to offer.”
Roger: You’re not only working together with the likes of IBM, HCL and Microsoft, but also with much smaller fintechs.
Markus: “That’s right. I’m a great fan of fintech. We now have twelve active collaborations. These fintechs are partners in different areas, for instance robo advice, identity management, deposit market place, and so on. So many fintechs started out as B-to-C and developed into B-to-B-to-C enterprises. They had to learn that it is exceptionally difficult to gain clients’ trust in banking. This is where banks have a key advantage. We’ve created plenty of win-win situations with fintechs. Like the word says, it’s a combination of financial services and technology. Consequently, fintechs are very valuable partners in terms of technology. I think it’s also absolutely fair to say that much of our innovation would never have been developed that fast if we’d done it entirely on our own. Likewise, though, if you talk to CEOs at the fintechs, they will say the same: it would have been a lot harder for them without us as a partner.”
Roger: Looking at all these different parties that you work with, you must be able to create totally new concepts, totally new platforms.
Markus: “Yes. Everybody’s talking about platforms. We’ve also given some thought to what ‘platform thinking’ could mean for our business model. Despite the importance of technology I don’t see digitalization as just an upgrade of IT systems; digitalization revolutionizes our business models. So the key question is: what could the platform economy mean for a bank? The easiest way to explain this is: if Uber has no cars and Airbnb no beds, digital banks will have no balance sheets. If you start discussions like that in a bank, there’s always somebody who’ll cut in with “right, this guy is totally crazy; that’s just not possible”. But I really think it is. We’ve done a lot of customer research and the results highlight the future relevance of platform banking. With all the excitement about new kinds of services, people are just not interested in having five, ten or twenty different apps for their finances. So the main priority is multi-bank aggregation – having all your bank accounts in one place. This is the starting point for creating a platform. We believe that a digital offering isn’t about having the best product but about being able to give our clients access to the best products. That’s why, for example, Deutsche Bank clients are now also able to buy deposit products from selected third-party banks. It’s a kind of curated market place. Our goal is to have a kind of app store for banking services – one that is built by third parties, not the bank.”
Roger: These are all services that play an important role in the context of financial services rather than in the current core business itself.
Markus: “Exactly. Having a great banking experience is not enough for us. Clients don’t distinguish between banking experiences and non-banking experiences. They just want to have a great experience. Here at Deutsche Bank we always say it’s crucial that we offer relevant services but besides current accounts and payments, our other services aren’t as relevant on a day-to-day basis. So it’s important for us to develop new services that go beyond banking. This will help us maintain our ongoing and future relationships with our clients. Fintechs that go after our customers are our competitors. But as long as we have a relationship with our clients, we understand them much better than a product provider does. One consequence of the platform economy, I think, is the need to decide whether you’re a platform provider, or whether you’re a provider of the infrastructure.”
Roger: An important strategic decision indeed. When I look at payments, for instance, I see that more and more payments are becoming invisible. Think of machine-to-machine payments or what Amazon is doing with Cash. It’s easy to see the same thing happening in insurance. Insurance might also become invisible; you purchase a product and there is already an insurance embedded in that.
Markus: “I think the disruptive trend behind this is that many of today’s products are becoming services thanks to the cloud and to artificial intelligence. Payments will become instant, changing completely. And the new Payment Services Directive PSD2 will allow aggregated account information to be combined with payments. From a strategic point of view, the e-commerce of ten, fifteen years back is becoming today’s mobile commerce. I believe we will see a time when identity management and payment systems will be combined and when that happens the question of who will provide the infrastructure for digital identity services will be a decisive one. That’s why we teamed up with several other big companies, such as Allianz, Axel Springer, Daimler, Telekom and Lufthansa, to start a digital identity and payment platform called verimi. I think it’s a great example of a pan-industrial platform – one that is not owned solely by a bank but is, in fact, a service-providing ecosystem.”
(ed) Also at DIA Munich 2017, Vikas Chhariya, global head of digital partnerships AXA Group, mentioned Aadhaar, India’s national biometrics identity program, as an interesting platform. Banks need to comply, so that fingerprints will give hundreds of millions Indians access to financial services, including insurance.
Roger: You mention PSD2, the new payment services directive by the EU, which makes it obligatory for banks to open up customer data to third parties. Although this has hardly crossed the radar of insurance carriers, we believe this will revamp the bancassurance model. Moving from bank partnerships for just distribution and using bank data in the marketing and underwriting processes to really being much closer to customers.
Markus: “PSD2 offers everyone the opportunity to become closer to customers. The original intention was to increase the competition between banks to improve payment products, also making these better and more secure for clients. But PSD2 effectively creates opportunities to all sorts of third parties to provide new opt-in services to these customers. Now, everyone can offer account information or payment initiation services, presuming clients are willing and agree to their account information being shared. For insurers the right PSD2 applications offer great opportunities to link insurance to certain payments. This brings you one step closer to the customer. It might not be as close as you would like to be because when you see the transaction, it’s already done. But it’s a great opportunity to make insurance much more individual and much more real time.”
Roger: So it’s really about integrating insurance services into the customer experience that people already have, for instance with their banks? Might that also be part of the future of bancassurance?
Markus: “I see great potential for a revival of bancassurance. Our customer research shows that customers are really interested in having all their financials at a glance in one place. And by the way, customers typically do not differentiate between banking products and insurance products. The reason why bancassurance failed to work well ten to fifteen years ago is that bank advisors are not really interested in selling insurance products. Just like there are relatively few insurance agents that truly want to sell bank products.
With PSD2, if you have the data, it’s relatively easy for banks and insurance companies to build a kind of property insurance broker that is closely linked to payment data. That’s a big opportunity.”
Roger: When we look at what’s currently taking place in banking - particularly in private banking - another area that insurers can definitely learn from is robo advice. Deutsche Bank recently launched Robin.
Markus: “I think the story about robo-advice is fantastic. It shows just how powerful digital can be. In the past, customers had to invest at least half a million euros or a million euros for discretionary portfolio management. It’s extremely costly in terms of production because you need people to provide the service. Now, the same investment product can be had by all. Robin offers discretionary portfolio management for a minimum investment sum of five thousand euros as well as access to the bank’s extensive expertise. So, how much of this investment is actually done by a robot? For one thing, the allocation - how much you invest in equity bonds, America, Europe, and so on - is not done by a machine. This is something our capital market experts take care of. Robin manages risks and rebalances the portfolio.”
Roger: We believe that in order to relate to their customers, financial institutions need to secure the feelings side of the relationship. In our book Reinventing Customer Engagement. The next level of digital transformation for banks and insurers we included a whole chapter on creating the ‘best of both worlds’ by combining new digital technologies with human skills, i.e. deploying technology in hybrid models to empower people.
Markus: “Absolutely, that’s also been our experience. Not for traditional banking services and payments, mind you, but if you’re buying a mortgage or you want to invest a large amount, people want to be served by another person. This doesn’t just have to be at the branch. It can take place remotely, perhaps via chat. So yes, I think hybrid is the solution for many of our clients’ needs.”
Roger: Many of the things that you talked about started out in the Digital Factory. They’ll need to move to the next level at some point. How do you scale the philosophy behind the Digital Factory?
Markus: “One thing I learned over the past ten years is that people who work at a bank or at an insurance company are just as smart as the people working in Silicon Valley. The main difference is the way these people interact. What kind of processes do they have to follow? That was why we came up with the Digital Factory. The set-up there is completely different. It allows people to take risks and, if something fails, it’s not a problem because mistakes are made when you’re coming up with new ideas. The next step is to gradually introduce these new ways of working and collaborating across the whole bank. I work extremely well with my colleagues from HR, from Compliance and from Legal – they’re integral and essential parts of the whole Digital Factory concept.”
Roger: This asks for totally new competences.
Markus: “That’s right. We have to think about how things change in the digital world. The emphasis is on how we collaborate, also with external partners. For me the biggest mind shift is that for the last ten years our industry went through a prolonged phase of driving efficiency. When you’re in that kind of mode, all that matters is that you do things right. In the digital era, it’s about doing the right things. It’s such a big difference and people really need to understand this. We’re far from being done, but I think we’ve made really excellent progress and have a solid foundation on which we can build.”
Roger: Moving from doing the things right to moving to doing the right things ... Thanks Markus!