1. Be a driver, not a passenger
Implications of Web 2.0 for financial institutions
Think Tank of Deutsche Bank Group
Dr. Stefan Heng, September 2008

2. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 2

3. 1 Joe Six-pack live on stage
Web 2.0 has many drivers and facets
Technology
- Broadband, convergence
Society
- Need to communicate, individuality
Business
- Globalisation, project work
S. Heng ,·September 2008 · p. 3

4. 1 Joe Six-pack live on stage
“Web 2.0 is an attitude, not a technology”
Dissatisfying attempts to define the
phenomenon via …
– Consultant-speak, e.g.:
– Citizen journalism, crowdsourcing,
long tail, swarm intelligence, viral
marketing
– Technology, e.g.:
– Atom, AJAX, API, RSS, SVG, XML,
XUL etc.
S. Heng ,·September 2008 · p. 4

5. 1 Joe Six-pack live on stage
Lively exchanges via web platforms
Number of German articles on Wikipedia, '000 Wikipedia
– New articles per day: roughly 8,000
750 – Number of edits per article: about 20
LEO
600
– Responses to forum questions:
within about 10 minutes
450
Volumes on P2P lending platforms
300 – Prosper (US): roughly EUR 100 m
since start in Feb 2006
150 – Smava (DE): roughly EUR 3 m
since start in March 2007
0 Consumer assessments on rating
01 02 03 04 05 06 07 08 sites (ciao, dooyoo etc.)
Source: Wikipedia, 2008
– DB: roughly 1,000; DreBa, CoBa:
roughly 300
S. Heng ,·September 2008 · p. 5

6. 1 Joe Six-pack live on stage
Participatory network: Users trust users
Source that German web surfers
trust, % Opinion-based knowledge becoming
more important than fact-based
Newspaper
article knowledge
– Quality of report can often only be
Customer
assessment
estimated on the criterion of topicality
Quality is critical in terms of
Private blog
– Accuracy
– Completeness
Commercial
Corporate
e-mail
Management
information
0 5 10 15 20 25 30 35
Multiple responses possible
Source: Ipsos, 2006
S. Heng ,·September 2008 · p. 6

7. 1 Joe Six-pack live on stage
Market transparency drives down prices
Clients who shop around for financial Average price development, 2005 vs. 2006,
products, % Euro area, % yoy
55
Cash
utilisation
45
Monetary
transactions
35
Account
management
25 Exceptions
handling
15 -20 -10 0 10 20
2002 2003 2004 2005 Source: Cap Gemini, 2006
Source: Forrester Research Inc., 2005
More and more customers comparing offers on the web
Prices of standardised products coming under pressure
S. Heng ,·September 2008 · p. 7

8. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 8

9. 2 Communication form is a challenge to entrepreneurs
Promising outlook at the intra-company level
Corporate investments in Web 2.0 worldwide, Global investments about
USD bn
EUR 400 m in 2007;
2.0
Social networks
CAGR2007, 2013 : + 47% p.a.
– North America expanding its lead
RSS/ widgets/ podcasts/
1.6
mashups – Social networking leads by far
Blogs/ wikis
1.2 Especially internal Web 2.0
applications are gaining ground
0.8 – Blogs may reveal insider knowledge
CAGR2007,2013 :
+47% p.a.
– Wikis serve as internal stores of
0.4 knowledge
Objective for internal applications:
0.0
2007 2008 2009 2010 2011 2012 2013
Have employees identify with their
Source: Forrester Research Inc., 2008
product and company
S. Heng ,·September 2008 · p. 9

10. 2 Communication form is a challenge to entrepreneurs
Companies have big plans for customer contacts
Web users who post information them- Intensify customer contacts
selves, Germany, % of age cohort, 2008
– Create emotional ties to product/
50 company
Expand customer contacts
40
– Establish contact also with groups that
30
have not yet been reached
Manage reputational risk
20 – “It’s better if consumers speak with us
than they speak about us.”
10
Forecast business development in
0
the physical world
14 - 29 30 - 44 45 - 59
age
Source: Bitkom/ Forsa, 2008
S. Heng ,·September 2008 · p. 10

11. 2 Communication form is a challenge to entrepreneurs
Heed critical factors in web applications
Content and functionality that US customers General demands on int./ ext. appl.
want on bank sites, %
– Ensure long-term maintenance
Customer – Content, response time for inquiries
ratings
– Style and content must be authentic
Price – For customers, information ranks far
comparisons
ahead of pure entertainment
Discussion
forum
Demands on internal applications
– Create incentives for employee
Quizzes/
games
participation
– Leapfrog hierarchies in exchanges of
Product
videos
information
0 10 20 30 40
Demands on external applications
Source: Forrester Research Inc., 2008
– Establish guidelines for employees’
communications
– Ensure compliance with regulations
S. Heng ,·September 2008 · p. 11

12. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 12

13. 3 Web promotes product diversity
New payment systems developing in tandem with
e-commerce
B2C e-commerce: gaps between
goods delivery and payment in terms
of time and location
Payment systems must factor in
particular circumstances of
impersonal virtual world
– Buyers and sellers who do not know
each other are particularly wary of the
payment procedure
S. Heng ,·September 2008 · p. 13

14. 3 Web promotes product diversity
New payment systems struggling for market share
Worlwide eBay payments initiated by PayPal, Roughly 40 innovative payment
USD bn systems in Germany
45
– Continuing dominance of pre-payment,
40 invoice, cash on delivery, direct debit
CAGR2003, 2007: and credit card
35
+ 39% p.a.
30 The most promising models …
25 – embrace the particular features of e-
20 commerce,
15 – are supported by established
companies in the value chain,
10
– convey their unique value added
5
2003 2004 2005 2006 2007*
* Q1 annualised
Source: eBay, 2007
S. Heng ,·September 2008 · p. 14

15. 3 Web promotes product diversity
International web of online lending platforms
S. Heng ,·September 2008 · p. 15

16. 3 Web promotes product diversity
Lending platforms changing the face of the business
Web brings together lenders and
Bank takes risk
borrowers
Bank – Procedure: e.g. reverse auction,
internal matching
Personal relation
– But: private persons not allowed to
P2P lending
lend commercially
– Additional information from knowing
why customer needs loan
– However: private creditors find it hard
Peer pressure
to assess risks rationally
P2P lending online
Diversification
P2P lending online
Source: DB Research, 2007
S. Heng ,·September 2008 · p. 16

17. 3 Web promotes product diversity
P2P lending has particular default risk
Default ratios for Prosper loans* by credit Smaller default risk thanks to …
quality, % of total loans
Personalised credit relationship
40
Formation of borrower groups aiming
30 Borrower is not a group member
to improve conditions for members
Borrower is a group member via group reputation
– Group membership a signal for lenders
20
about the creditworthy
– Group membership brings social
10 pressure helps ensure punctual
repayment
0
AA A B C D E HR NC
* From term of 6 months
Source: Prosper, 2007, DB Research
S. Heng ,·September 2008 · p. 17

18. 3 Web promotes product diversity
High-risk category suffering from market breakdown
Share of funded loans and average lending Interest rate and share of funded loans
rate, by credit rating, Prosper, %
hinge mainly on risk class of borrower
35
Platforms mainly arrange micro-loans
30
Share of funded loans But: nearly 90% of loans requested are
25 not funded
– Probability of loan approval for
20
AA credit rating: 30%,
15 HR credit rating: 3%
10
Lending rate
5
0
AA A B C D E HR NC
HR = high risk; NC = no credit score
Source: LendingStats, 2008
S. Heng ,·September 2008 · p. 18

19. 3 Web promotes product diversity
Virtual world builds bridge to new customer groups
The virtual world lays the groundwork
for business in physical world
Objective for virtual engagements:
generate emotional ties to product/
company in the physical world
– Instrument: entertainingly and informative
presence
S. Heng ,·September 2008 · p. 19

20. Implications of Web 2.0 for financial institutions
1 Joe Six-pack live on stage
2 Communication form is a challenge to entrepreneurs
3 Web promotes product diversity
4 Conclusion: Be a driver, not a passenger
S. Heng ,·September 2008 · p. 20

21. 4 Conclusion: Be a driver, not a passenger
Web 2.0 brings pressure to bear in many areas
Opportunities
– Realise trends at an early stage
– Improve emotional ties to product/
company
– Emergence of new business areas (e.g.
payment systems, lending platforms)
Challenges
– Market transparency squeezes margins
on standard products
– Ensure maintenance (esp. of content,
response times on inquiries)
– Style must fit (corporate culture, image,
regulatory regime)
– Manage reputational risk
S. Heng ,·September 2008 · p. 21

22. 4 Conclusion: Be a driver, not a passenger
“Do today what others only think of
doing tomorrow, for only change is
constant.”
Heraclitus of Ephesus, philosopher,
540 - 475 B.C.
© S. Heng, 2008
S. Heng ,·September 2008 · p. 22

23. Dr. Stefan Heng
Senior Economist
Deutsche Bank Research
Theodor-Heuss-Allee 70
D-60486 Frankfurt a.M.
Tel: +49 69 910-31774
Fax: +49 69 910-31743
stefan.heng@db.com
http://www.dbresearch.com/eresearch
S. Heng ,·September 2008 · p. 23

24. Disclaimer
© Copyright 2008. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite
“Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the
author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without
notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above
information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or
representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanz-
dienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of
the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is
distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche
Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In
Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report
and consider the PDS before making any decision about whether to acquire the product.
S. Heng ,·September 2008 · p. 24

25. For more on the digital economy and structural change
• Telecom regulation in the EU facing change of tack (2008)
• Be a driver, not a passenger – implications of Web 2.0 for financial institutions (2007)
• E-commerce settles for established payment systems (2007)
• Media industry facing biggest upheaval since Gutenberg (2006)
• RFID chips: Future technology on everyone’s lips (2006)
• Rising stars in information and communication technology (2004)
http://www.dbresearch.com/digitaleconomy
Think Tank of Deutsche Bank Group
Dr. Stefan Heng, September 2008