is 604: contemporary issues in es banking enterprise...
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Chair of Information Systems IV (ERIS)
Institute for Enterprise Systems (InES)
IS 604: Contemporary Issues in ES
Banking Enterprise Systems
Prof. Dr. Alexander Mädche
Chair of Information Systems IV
Institute for Enterprise Systems
Lecture
supported by:
Goals of this lecture 2
Provide some basic contextual
background on Enterprise Systems
Describe the motivational
background for studying and
teaching Banking Enterprise
Systems
Introduce fundamental concepts
needed to understand retail banking
business
IS 604 Banking Enterprise Systems
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Agenda – Session I
Agenda
1 Enterprise System Fundamentals
2 Motivation: Enterprise Systems in the Financial Services Industry
3 The Financial Services Industry – Banks in the Market Environment
4 Products and Services of Retail Banks
5 Reference Processes in Banking
6 The Bank as Enterprise System
7 Business Scenario: the Global Retail Bank - GRB
IS 604 Banking Enterprise Systems
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3
Comparison: Traditional IS vs. Enterprise System
Traditional IS Enterprise System
Strategy Lower organizational
scope
Organization-wide
resources required
Flexibility High Low
Scope Integrates selected
functions within or across
business processes
Integrates broad spectrum
of business processes
Business Logic Developed to suit existing
processes
Best practices adopted or
customized
Development In-house or specialized
vendors
Vendors with industry best
practices
Complexity / Risk Low High
Industry Commonality Specialized Across industries
Deployment Many different systems Small set of systems
Devadoss and Pan (2007)
IS 604 Banking Enterprise Systems
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Product Software vs. Tailor-Made Software
Product (Packaged) Software Tailor-Mode Software
Standard software Custom software
Generally purchased from vendor
Service contract
Made to order or in-house
purchase of things
Characteristics
Shared development costs
Best-practices established
Dev and maintenance by supplier
Preview possible
Documentation and education
material available
Reference implementation
available
Characteristics
Tailored solution, focus on
required functionalities only
Competitive advantage
Company-specific changes
possible
Independency of software
supplier
Terminology of company used,
less education effort
5 5 IS 540 – Management of Enterprise Systems
Definition: Enterprise Systems (ES)
“Enterprise Systems (ES) represent a specific category of information systems. They
build on pre-packaged industry best practices embedded in standardized product
software and target large‐scale integration of data and business processes across all
company’s functional areas and beyond company borderlines. Enterprise Systems
strongly interplay with work practices of individual employees as well as organizational
structures shaping and being shaped by individuals' behavior.”
IS ES
Web Page Chair of Information Systems IV
IS 604 Banking Enterprise Systems
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Key ES Constituents: A Simplified Semantic Model
Individual Individual
Context
Mental Model
Organisation
Organizational
Structure
Functional
Structure
Procedural
Structure
Orga.
Context
Process Resources
Technology
Information
Technology
Tech.
Platform Product
SW Module
Tailor-made
SW Module
Other
Technology
is-a
has
builds
performs
is-a
builds
on
is-a
is-a defines
contains
Task
Repre-
sented
by
Action
Application
Application Layer
Interface
has
Policies
Rules defines
IS 604 Banking Enterprise Systems 7
Platform
Platform
Information Technology
Layered Concept:
Platform
Application Software
Module
Application Software Module
Application Software Module
Example:
•Oracle Database
•Windows Operating System
•SAP ABAP Application Server
•SAP ERP with SAPGUI (Product)
•Custom Developed Add-On(Tailor-Made)
…
Based on Ferstl and Sinz (2008)
Interface
Interface
Interface
Application
Layer
IS 604 Banking Enterprise Systems
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3 Major Types of Product Software
Process-Centric
Software Products
Information-Centric
Software Products
People-Centric
Software Products
Enterprise Resource
Planning (ERP)
Customer Relationship
Management (CRM)
Supply Chain Management
(SCM)
Product Lifecycle
Management (PLM)
Business Process
Management (BPM)
Master Data Management
(MDM)
Business Intelligence (BI)
Enterprise Content
Management (ECM)
Information Access (IA)
Enterprise Portals (EP)
Collaboration Technology
(CSCW)
Social Web Sites (SWS)
IS 604 Banking Enterprise Systems
Horizontal vs. Vertical Integration – Product SW
People-Centric Software Products
Process-Centric Software Products
CRM SCM
Information-Centric
Software Products
LogisticsSales &
Marketing…
ERP
BI
EP BPM
MDM
SWS
PLM
CSCW ECM
IS 604 Banking Enterprise Systems
Industry-Specific Product Software
Specifically in the context
of process-centric software
products only a small set of
the implemented reference
business processes is
shared across all
industries.
Many business processes
are industry specific. Thus,
industry-specific software
implements industry best
practices.
IS 604 Banking Enterprise Systems
SAP:
Examples from Practice
Oracle:
Banking Enterprise Systems
People-Centric
Process-Centric
Front-to-Back
Integration
(STP)
CRM and
Multi-Channel-
Integration
at POS
Information-Centric
Group-
ware
Portals
…
Front
Office
Back
Office
Transactional
Banking
Analytical
Banking
Mid
Office
IS 604 Banking Enterprise Systems
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Technological Components of an Banking Enterprise System
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Agenda – Session I
Agenda
1 Enterprise System Fundamentals
2 Motivation: Enterprise Systems in the Financial Services Industry
3 The Financial Services Industry – Banks in the Market Environment
4 Products and Services of Retail Banks
5 Reference Processes in Banking
6 The Bank as Enterprise System
7 Business Scenario: the Global Retail Bank - GRB
IS 604 Banking Enterprise Systems
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Motivation - Challenges in the Banking Industry
IS 604 Banking Enterprise Systems
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Change of Economic Conditions
• “Glocalization” (markets without time and space
restrictions, but importance of local actions)
• Mature markets
• Low market entry-barriers for non-banks, new
competition
• High price pressure, low revenues
• …
Change of the Society
• Ageing Society vs. young and
well informed customers
• Importance of customer centricity and customer
trust
• Decreasing customer loyalty
• ….
• Financial crisis enforces stronger
regulation
• New regulatory requirements like
Basel II & III, SEPA, Dodd Frank,
MiFID I&II
• Regulatory Projects cut budgets for
innovation
• …
• Omnipresence of technology within
people’s lives and increased
technological interconnectedness
• High cost pressure and need for
standardization
• …
Banking
Change of Technological Conditions
Change of Regulatory Conditions
14
Motivation – 1 Billion in SAP!
IS 604 Banking Enterprise Systems
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Enterprise Systems – Industry Example I
16
Deutsche Bank (2012)
IS 540 – Management of Enterprise Systems
Enterprise Systems – Industry Example I (contd.)
17
Deutsche Bank (2012)
IS 540 – Management of Enterprise Systems
Agenda – Session I
Agenda
1 Enterprise System Fundamentals
2 Motivation: Enterprise Systems in the Financial Services Industry
3 The Financial Services Industry – Banks in the Market Environment
4 Products and Services of Retail Banks
5 Reference Processes in Banking
6 The Bank as Enterprise System
7 Business Scenario: the Global Retail Bank - GRB
IS 604 Banking Enterprise Systems
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Financial Intermediation
IS 604 Banking Enterprise Systems
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Financial
Markets
Savers/
Depositors Borrowers
Financial
Intermediaries
Savers/
Depositors Borrowers
DIRECT FINANCE
INTERMEDIATION
Casu et al. (2006)
“A bank is a financial intermediary whose core activity is to provice loans
to borrowers and collect deposits from savers. In other words they act as
intermediaries between borrowers and savers.” (Casu et al. (2006), p.4)
Banks‘ Role in Modern Financial Intermediation
Banking System (Central Bank and Regulation)
IS 604 Banking Enterprise Systems
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Financial
Markets
Savers/
Depositors
Financial
Intermediaries
Borrowers
Private Persons or
Business Institutions Private Persons or
Business Institutions
Asset
Securitization
Analysts and Observers
Based on Casu et al. (2006)
Is responsible for the …
Ensurance of the price stability
Support of the general economic policies (as far as possible)
Is managed by the decision-making bodies of the ECB
The European Banking System
IS 604 Banking Enterprise Systems
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Grill and Perczynski (2004)
http://www.ecb.int/ecb/orga/escb/html/index.de.html
European Central Bank (ECB)
Decision-making bodies:
Governing Council Determine consistent financial policies
National Central Bank (NCB)
of the 17 euro area countries
Responsible for the operative
implementation of monetary policies
Executive Board
General Council
21
The European Banking System (cont‘d)
IS 604 Banking Enterprise Systems
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Monetary Policy Instruments of the Eurosystem are used to
achieve the goals of the Eurosystem
Instruments:
Influence the money supply (open market operations)
Change interest rates (prime rate)
Reserve requirements
Approved business partners
Need to fulfill operational and regulatory requirements
Requirements: minimum reserve system involvement, supervision by
national authorities of a standard comparable to harmonized
EU/EEA, and financial solidity
Grill and Perczynski (2004) 22
The German Banking System
IS 604 Banking Enterprise Systems
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German Central Bank as NCB of Germany
Independent of instructions from the German Federal Government
Is allowed to conduct certain business transactions with credit
institutions and further market participants
Universal banks conduct all banking services defined by the
German Banking Act, whereas special banks focus on limited
banking services
German
Banking System
Central Banking German Central Bank (Bundesbank)
Commercial Banking Credit Institutions
(German Banking Act =
KWG § 1 ,1)
Universal Banks
Special Banks e.g. Building Association,
Investment Bank
Grill and Perczynski (2004) 23
National Regulation in Europe
IS 604 Banking Enterprise Systems
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National Institutes ensure the proper functioning, stability and
integrity of the national financial system.
Ensure solvency of financial institutions and protect funds of
clients and investors
Banking
Supervision
e.g. Actions
against
illegal businesses
Insurance
Supervision
e.g. Check and
approval of
business
plans of private
insurance
companies
Securities
Supervision
e.g. Insider
monitoring
and report
to responsible
prosecution
authority
e.g. BaFin in Germany
(Bundesanstalt für Finanzdienstleistungsaufsicht)
Grill and Perczynski (2004) 24
Agenda – Session I
Agenda
1 Enterprise System Fundamentals
2 Motivation: Enterprise Systems in the Financial Services Industry
3 The Financial Services Industry – Banks in the Market Environment
4 Products and Services of Retail Banks
5 Reference Processes in Banking
6 The Bank as Enterprise System
7 Business Scenario: the Global Retail Bank - GRB
IS 604 Banking Enterprise Systems
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Banks as Service Companies 26
IS 604 Banking Enterprise Systems
Grill and Perczynski (2004) 26
Payment
Services
e.g. execution of
money transfers
Size Transformation
Deposit
Services
Offering of
investment
vehicles
(savings
products)
Lending
Services
e. g. Handing
out
of loans
Other
Services
e. g.
intermediation
for third party
products
Maturity Transformation
Risk Transformation
Information Transformation
Services of Banks
Financial Intermediation
IS 604 Banking Enterprise Systems
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Credit institutions (Kreditinstitute) are companies that
conduct professional banking business
Financial service providers are non-banks, conducting
professional financial business
The Business of Banks
Types of banking businesses
Loan
Lending
Bill-Broking
Financial Commission
Deposit Investment Guarantee
Giro Issuing E-Money
Types of financial businesses
Investment Intermediation Acquisition Brokerage
Foreign Currency
Proprietary Trading Finance Portfolio Management
Credit Card Money Transmission
Grill and Perczynski (2004) 27
What do Banks do?
IS 604 Banking Enterprise Systems
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LIABILITIES ASSETS
Customer Deposits Cash
Equity Liquid Assets
Loans
Other Investments
Fixed Assets
TOTAL TOTAL
• A banks main funding comes from customer deposits (reported on the
liabilities side of the balance sheet)
• This funding is then invested in loans, other investments and fixed assets
Based on Casu et al. (2006)
Including
retained profits
+Interest income
-Interest expense
+Net interest income (spread)
How do Retail Banks earn Money? 29
IS 604 Banking Enterprise Systems
Lending and Deposit Business Service Business
Lending / Loans e.g. consumer loan, mortgage loan, current
account
Deposit / Savings e.g. savings account, onvernight money, time
deposit
Other Banking Services e.g. account management, advisory, foreign
trade,
Payment Transactions e.g. bank transfer, standing orders, direct debit
Securities e.g. purchase and sale of securities
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+Fee and commission receivable
-Fee and commission payable
+Net fee and commission income
Operations
Operating profit
-Operating expenses
Production Factors
IS 604 Banking Enterprise Systems
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In contrast to industrial companies, banks rely on two major
production factors
Technical-Organizational Liquidity-Financial
Object-oriented Work
Executive work - instructed by supervisors
Monetary Factors
Cash and cash equivalents & financial guarantees
Dispositive Work
Managerial work - decision about other production factors and their combination
Operating Resources
e.g. Facilities, Equipment, IT Systems, …
Grill and Perczynski (2004) 30
Distribution of Banking Services
IS 604 Banking Enterprise Systems
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A bank needs a consequent market-oriented business
strategy in order to protect or enhance its market share
Marketing Management
Protect or enhance the segment- and product-related market shares by
focusing on customers needs
Marketing Instruments
Usage of aligned, sales-political instruments (“Marketing Mix”) to protect
and enhance the demand
Grill and Perczynski (2004) 31
IS 604 Banking Enterprise Systems
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Target is to achieve the best fit and focus based on market
research
Communication
Distribution
Price & Condition
Product & Range
Design of the distribution channels
and marketing approach.
Measures to positively
influence the marketing situation
e.g. advertising, promotion, PR.
Arrangement of prices & conditions
for banking services e.g. interests
& commissions.
Marketing
Mix
Design of banking services,
management of the product range
and development of products i.e.
product policy, product mix policy
and product innovation.
Distribution of Banking Services (cont’d)
Grill and Perczynski (2004) 32
How Banks reach their Customers
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A distribution channel is used to reach customers and match
their needs by offering appropriate banking services
Banks that use all of these channels pursue a multichannel
marketing strategy
Customer
Stationary
(Branch)
Medial
(Internet, Telephone, Mobile Banking)
Mobile
(Sales Force)
Grill and Perczynski (2004) 33
Types of Distribution Channels
IS 604 Banking Enterprise Systems
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Stationary channels: Traditional sale of banking services at
permanent locations
Direct banks
No personnel-intensive sale via branches
Competence
centers
Offer tailored services to specific customer
segments at selected locations e.g. investment-,
real estate-, and business-center
Standard
branches
offer basic services to standard private customer
segments with middle and low income
Self-service
branches
offering technology to pursue routine businesses
Grill and Perczynski (2004) 34
Types of Distribution Channels (cont‘d)
IS 604 Banking Enterprise Systems
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Medial channels: Sale of banking services using
electronic media. Also called home banking as
customer can use services at home
Online banking (PIN/TAN or HBCI approach for security
purposes)
Telephone banking (in combination with call centers)
Internet Banking
Mobile Banking
Mobile channels:
Sales representative, independent brokers,
and mobile branches
Grill and Perczynski (2004) 35
Retail Banking Customers
IS 604 Banking Enterprise Systems
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Banking Customers can be categorized into two main
business areas:
Retail Business Private and Commercial
Business
Standard private customers
e.g. salary earner, pensioner
Wealthy (private)
customers
e.g. entrepreneur,
freelancer,
manager
Business/Corporate
customers
e.g. (small)
companies,
municipalities,
associations
Focus on deposits Focus on
deposit/investment
Focus on
lending/financing
• Practically not manageable
customer base
• Need for an easy to understand
and standardized offerings
• Individually addressable customer base
• Need for tailored offerings
Grill and Perczynski (2004) 36
The Account in a Business Relation
IS 604 Banking Enterprise Systems
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Deals between banks and customers are usually processed
using bank accounts
Bank accounts are used to record claims and liabilities
Account Book as archive for deals
Consistent and economic processing
Deals are based on contracts (e.g. giro, lending)
Benefits of using Bank Accounts
Customer Bank
Protection against theft by reduced cash
holdings (cashless payments)
Settlement of customer claims
and liabilities
Usage of further banking services possible
(e.g. credit card)
Procurement of deposits and processing of
loans
Interest earnings or expenses depending on
the type of contract
Cross selling strategy
Interest and commission earnings Grill and Perczynski (2004)
37
Account Types
IS 604 Banking Enterprise Systems
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Accounts can be categorized by the purpose and the
customer relation
Account
Purpose
Payment
Transactions
Deposit
Business
Lending
Business
Securities
and
Safekeeping
Customer
Relation
Banks as
customers
Non-Banks
as customers
• Current Account • Savings/Deposit Account
• Time Deposit Account
• Depot Account
• Bank Current Account
(Loro/Nostro)
• Current Account
• Loan Account
• Giro account for private
customers
• Accounts for commercial
customers Grill and Perczynski (2004)
38
Debit vs. Credit Account
IS 604 Banking Enterprise Systems
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Current accounts (C/A) are used to settle and book mutual transactions
between the creditor and the debtor
C/A are managed as Credit and Debit Account i. e. with calculation of
credit- and debit-interest
Account statements report movements (transactions) and account balances
Liabilities
Credits
Credit Balance
Liabilities
Credits
Debit Balance
Debit Credit Account Assets Debit Debit Account Assets
Grill and Perczynski (2004) 39
Exemplary Comparison of Account Types
IS 604 Banking Enterprise Systems
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Type Purpose Account
Mgmt
Earnings for
the bank
Current
account
• Booking of transactions and
current loans
• Processing of payment
transactions and further
bank businesses
Debit or
credit
• Direct
• Debit interest
• Commission
• Fees
• Indirect
• Interest margin
• Earnings from follow-up
businesses
Giro
account
• Specific current account
• Booking of transactions and
current loans
• Salary account
• Processing of payment
transactions and further
bank businesses
Rather credit • Direct
• Commission
• Fees
• Indirect
• Interest margin
• Earnings from follow-up
businesses
Deposit
account
• Booking of savings deposits
• Accumulation of capital
gains and investments
Credit • Indirect
• Interest margin
• Earnings from follow-up
businesses
Grill and Perczynski (2004) 40
Exemplary Comparison of Account Types (cont’d)
IS 604 Banking Enterprise Systems
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Type Purpose Account
Mgmt
Earnings for the Bank
Time deposit
account
• Booking of time deposits
• Interest-bearing investment
Credit • Indirect
• Interest margin
• Earnings from follow-up
businesses
Securities
account
• Processing of securities
inventory
• Safekeepting and
management of securities
- • Direct
• Deposit fee
• Indirect
• Commission from securities
businesses
Lending
account
• Booking of loan claims
• Processing, payout, refund,
and interest payment
Debit • Direct
• Loan interests
• Commission
• Fees
Grill and Perczynski (2004) 41
The Account Opening
IS 604 Banking Enterprise Systems
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An account opening is based on a contract between the bank
and the customer
The banks business operations needs to follow several
internal steps -> Reference Processes, in several areas of
the bank -> Functional Areas that are supported by
information technology -> Banking Enterprise Systems in
order to create and manage the contract/account relationship
with the customer.
Customer
First declaration of intent:
Application for acocunt opening
Second declaration of intent: Acceptance of the application
Bank
42
Questions, Comments, Observations
43 IS 604 Banking Enterprise Systems
Suggested Literature
44 IS 604 Banking Enterprise Systems
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Essvale (2011); Business Knowledge for IT in Global
Retail Banking; Available in the Uni Mannheim e-library:
http://site.ebrary.com/lib/unimannheim/docDetail.action?d
ocID=10466331
Casu B., Giardone C., Molyneux P. (2006); Introduction to
Banking, Prentice Hall
Grill and Perczynski (2004), “Wirtschaftslehre des
Kreditwesens”, 38. Edition (only German)
IS 604 Banking Enterprise Systems
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Grill and Perczynski (2004), “Wirtschaftslehre des Kreditwesens”, 38.
Edition
http://www.ecb.int/ecb/orga/escb/html/index.de.html
References
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