Many scientific and non-scientific sources mentioning different trends and challenges in the financial services industry from different points of view exist. However, these sources hardly consider the different challenges the industry is facing holistically. In order to provide an overview and retrieve the most important issues, a literature analysis on the publications used for the creation of this thesis was conducted. All mentioned trends for the financial services industry have been collected and a set of core trends was deduced. 

It is important to mention that the selected literature may not provide a comprehensive overview of all trends in the financial services industry. Additionally, most of the sources have been published before the financial crisis appeared in 2008, which leads to the assumption that declining earnings are now an even bigger issue. Recent information shows that financial institutions such as Deutsche Bank and UBS face a strong decline in earnings [DEB09].  

 

The core trend categories are:  

A trend to cooperation in terms of sales in the financial sector is observable. Companies used to serve distinct markets now bundle their products in order to enhance market coverage. These co-operations can change quickly based on volatile customer needs and market conditions. A product concept called ‘bankassurance’ is one of the results. Thereby, insurance products are sold by a bank over the counter. Some banks already have integrated insurance companies and hence sell their own products while others collaborate with insurance companies in order to make additional use of their sales channels [AHL07]. Another example would be a credit card company co-operating with a frequent-flyer program [HAC07]. 

Especially in retail banking self-service terminals have loosened the relationship between customers and their banks. Although personnel costs could be reduced by providing self-service terminals, the resulting lower customer loyalty led to more price sensitive customers [WIL04], [HAC07]. Offering high quality services is one of the key strategies for strengthening customer retention [HAC07]. Hence, fast time to market is required which means that banks have to develop innovative products, react quickly to market changes, and be able to provide the newly created products across all channels in order to stay competitive [WIN07]. Especially the importance of the internet as a distribution channel is increasing as all other channels such as phone, fax, field staff, PDAs, and even multifunctional self-service terminals in the branches are getting more and more integrated into the internet channel [WIL04]. 

Regulatory changes create specific requirements for banking processes and therefore affect IT systems [WIN07]. The demanded higher degree of transparency results in new reporting obligations and processes like risk analysis have to follow newly specified rules. The list of new regulations that banks already have to comply with or will have to comply with in the future includes Basel II, the Sarbanes-Oxley Act (SOX), the Single European Payment Act (SEPA), the Markets in Financial Instruments Directive (MiFiD), as well as various EU directives [HAC07]. Hence, changes which are necessary to ensure compliance with the regulatory requirements constitute a considerable cost factor for the financial services industry [REI06]. Additionally, the regulatory requirements also restrict some potential cost saving options such as offshoring of personal data or certain hold-back times. 

Financial service institutions have been facing a strong market consolidation for many years. The number of financial institutions in Germany was reduced by more than 50% from 1990 to 2004 [HAC07]. Recent megadeals include Commerzbank’s acquisition of Dresdner Bank and Deutsche Bank buying a major stake in Postbank. Austrian financial institutions also very actively execute mergers and acquisitions (M&A) [PWC06] because of their expansion strategies in Eastern Europe which would not be possible solely with organic growth (e.g. Raiffeisen International, Vienna Insurance Group, Erste Bank). Figure 19 shows the market consolidation through M&A deals with European bidder banks involved between 1996 and 2006. It further shows the origin of the targeted financial institutions, the deal volume, and the number of deals per target region. Liquidity and low stock prices of some financial institutions due to the financial crisis are expected to bring further M&A deals in the financial services industry. The integration of acquisitions is still known to be a complex and expensive process. 

Newer business models such as direct banks are winning over costumers from traditional banks. The low customer loyalty and the increasing price sensitivity of customers led to price erosion [KRU05]. Deregulation and globalization further increase the pressure on prices [CAP07]. In general lower prices result in lower revenue if the quantity of sold goods is not increased. Given that most financial institutions have to maximize profits on behalf of their shareholders and profit is defined as revenue minus costs, the price pressure leads to pressure on the cost. 

It is well known that the financial crisis which started in 2008 heavily affects the financial services industry. Major financial institutions which have been continuously reporting higher profits in the last years now have to deal with declining earnings [ALT08]. Deutsche Bank AG for instance reports a net loss of EUR 3.9 billion for the year 2008 compared to a net income of EUR 6.5 billion in 2007 [DEB09]. In general the market environment is embossed by cost reduction programs and major investments which are not of utmost importance are delayed. 

The industrialization of the financial services sector means a decomposition of its value chain. Financial institutions need to identify which parts of their value chain are profitable and particularly valued by their customers [AHL07]. Subsequently, each financial institution pays attention to optimizing these core competencies, whereas non-core competencies can be outsourced to professional service providers [REI06]. When considering different sourcing options it has to be taken into account that only an anticipated cost reduction rate of at least 20% is expected to make sourcing projects worthwhile [MCK04]. Core competencies can also be provided to other financial institutions with other core competencies and together with many participating institutions value nets can be created. In this case financial institutions with a local presence through a wide branch network could act as distribution institutes. Other institutions with highly efficient processes and a strong infrastructure could focus on processing transactions, whereas new and innovative products could be invented by institutions specializing solely on product development [MOR05b]. With this trend economies of scale are obviously realized through specialization.