20000320Internet driving German bank consolidation

FRANKFURT: The Internet has emerged as a key driving force in German banking consolidation and will continue to force banks to seek link-ups to cut costs and face new competitors on all fronts.

The huge expense of going online is an added reason to join forces. "Especially in institutional banking it's very expensive to remain at the state-of-the-art level and to be competitive", said Dieter Hein, analyst at Credit Lyonnais.

Deutsche Bank AG and Dresdner Bank AG have said their merger will enable them to save 500 million euros ($481.2 million) in the next two years in their investment on electronic commerce.

"Because of the Internet competition within the banking sector as well as between banks and companies is getting fiercer," said Nobert Linn, a partner of management consultancy firm Andersen Consulting.

The traditional chain of production has been broken up, he said.

The Internet has completely shaken up financial services.

DISTINCTIONS BLURRED

The core businesses of established banks have been circumvented by new competitors such as software companies, industrial firms and insurers offering a variety of financial services hitherto the domain of banks.

New online brokers such as E Trade and Consors AG have already radically cut fees in equity trading.

In their fight for customers, even rivals are forced to work together. Banks have left their traditional role and are increasingly interweaving with companies.

One example is the alliance between Deutsche Bank and Europe's largest business software producer SAP.

Through online ventures banks hope to protect themselves from the potential threat software and online companies pose to their territory.

ONLINE STRATEGY SEEN AS DEFENSIVE MOVE

However, in the recent aggressive Internet launch of Germany's large banks, many analysts see a defensive move rather than a real strategy.

"Banks are forced to focus on e-commerce just to maintain their status quo", said Britta Graf, analyst at BNP. It won't improve their yields, she said.

Software groups such as SAP stand to benefit more from technological cooperation with banks and are a better investment in their own right anyway, she said.

None of the alliances is exclusive. Many analysts therefore remain sceptical that banks will able to bind customers via the Web in the long-term.

"The question of who will win the customer is still open", said Linn.

Additionally, any technological lead by one bank is likely to be short-lived as others are bound to catch up quickly, analysts say.

"Even if banks are ahead in e-commerce, they will only have a short term advantage", said Hein.

Still, "partnering" has become one of the most important concepts in the banking and software sector.

In future, even mergers could increasingly take place via the Internet, analysts believe.

"The Internet offers the chance to merge without being exposed to the troubles and risks traditional mergers cause", said Manfred Piontke, analyst at Deutsche Bank.

ONLINE VENTURES AS PRELUDE TO REAL MERGERS

IT costs often are the most expensive part of ventures. Virtual cooperation could well be a prelude to real mergers.

HypoVereinsbank(HBV) joined forces with SAP in November to launch banking software that could even help facilitate a future bank-sector merger.

After Deutsche Bank's agreement to participate in SAP's virtual platform "My SAP.com" HypoVereinsbank is now in negotiations with Deutsche Bank to work together, said Eberhard Rauch, a member of the board of managing directors at HBV.

Though banks are aware the World Wide Web will eviscerate traditional banking, they hope it will open huge opportunities.

The Internet, they hope, will be the ultimate solution to expand abroad and capture customers. -Reuters