Towering ambitions

FST. Growth in Central and Eastern Europe is key to Commerzbank’s ongoing development. Does this expansion present any particular technical challenges?
PL. We have recently purchased the majority of Bank Forum in the Ukraine, so indeed this is a very important topic for us. As for the challenges the key technical hurdle is centred around the platform issue. We have a very developed, sophisticated platform for our domestic market, so the question for these Eastern European markets, is what do we use? Do we use our existing domestic platform? Do we use the systems of the banks that we have acquired? For example, those of BRE Bank in Poland and Bank Forum in Ukraine. Another vital question is whether you then have one platform for all the Eastern European markets or several different systems. That’s the key technical challenge in the sense that in some of these markets, the margins are very different from our home market. Growth is much stronger, but the margins are smaller. Therefore the cost to serve is a very critical design parameter for the platform. At the moment, our key challenge is to determine what degree of consolidation and harmonization we want for those markets.

FST. What effect is the implementation of SEPA having on the work you do as CIO? Do you think that the market as a whole will be ready for the full switchover in 2011?
PL. With the effect of SEPA on IT, we are taking two steps. The step we have already completed is basically the step of regulatory compliance, which was one of our key projects in 2007. Of course, as the CIO, that was one of the top 10 projects in 2007 that I paid attention to last year. It was essential that we managed it well. For 2008, rather than one big project on compliance, we now have a bundle of customer-oriented initiatives by our business units. These are aimed at delivering the potential benefits of SEPA our customers, in particular to our corporate customers. That is a key activity right now.

As for whether everyone will be ready for the switchover, that is a very difficult question. It’s not necessarily the technical side of things which is the constraining factor. The difficult point, particularly for the German banks, is making the business case. If you are familiar with the domestic payment system within Germany, you’ll know that we have one of the highest degrees of straight through processing in payments. We have a very efficient and low-cost system. With the complete switchover we want to avoid any increase in the cost per transaction for customers. That from our point of view is not acceptable.

That to me is the key thing that needs to be solved regarding the switchover. We need to get business case so that the cost of this new international system, which by necessity is more complex than just the domestic system that we have now, does not exceed the cost per transaction that we have today.

FST. Can you tell us a little bit about Commerzbank’s approach to technology? Does the bank prefer to buy in or build on its own infrastructure?
PL. Our approach is very much business-driven here. We identify those areas where technology and infrastructure do make a difference to the business. If there’s a competitive advantage to building things ourselves, then that’s what we do. For example, we are a market leader in Germany in equities derivatives, and we have a leading position there in the European markets. In that business, you have these hundreds of thousands of certificates out in the market. You need to quote prices for all of these certificates at any given point in time, depending on thousands of different market parameters. That, of course, is a very technology-sensitive business. You have issues around latency and so forth, and for that business, we have proven in the past that we can make a difference. We have a very recent example just looking back to the beginning of 2008 when we had these big peaks and turbulences in the market. Many other banks had to actually go out of the market and no longer quote prices continuously for their certificates. Our infrastructure allowed us to stay active, which was a clear advantage for us.

But of course, if there are infrastructure solutions available on the market that are satisfactory, we choose them. So we don’t have a natural preference to build. If the market offers us a good solution, we buy. The only areas where we invest or customize are where it really makes a difference to our business.

FST. Does IT outsourcing play any part in the group’s operations?
PL. We have a select resourcing strategy. Our point of view is that technology is so core to the banking business that you have to be very, very careful in defining which areas of IT for banking can be seen as commodities. Our feeling so far is that those are very few, but in those areas, we do outsource. For example, we have outsourced our 40,000 desktops to Hewlett Packard. So in these commodity areas where you are dealing with technology that is not specific to the banking industry and specific to what Commerzbank is doing, we are outsourcing. Other areas where we think we can make a difference to the business or where we don’t find, cost efficient and satisfactory offers in the market, we currently prefer to keep things in-house.

FST. With the ongoing turmoil in the European and global financial markets, what role do you think technology can play in rebuilding confidence? Do you believe that regulatory frameworks are strong enough to safeguard against future problems?
PL. I think the key contribution that technology can make is actually with regards to transparency. Transparency around data, around transactions and so on. Technology can play a key role creating transparency. The second contribution that technology can make is, of course, in the design of systems. By carefully building these systems, you can guide the user, enable controls and ensure that controls take place. However, I believe we need to be realistic here. The best framework and the best technology in the world can never completely prevent criminal actions. If you really have a lot of criminal energy and creativity, there is no foolproof system in the world. That’s why I think we need to be careful right now not to overreact. Banks are already paying huge costs related to compliance. I would guess that roughly a quarter of my IT budget is spent on compliance.

I think you have to be really careful to do the trade-off and say where it makes sense to build tighter systems and controls and frameworks. You also have to be realistic and accept that you will never be completely secure. In the end, it’s a business decision where you need good judgment on how far you need to go. You’ve got to be aware of the point when compliance costs increase so much that the benefit no longer justifies the expenditure. 

FST. How do you see your role as CIO? Is it a technical position or a more managerial one? And in your experience, is the boardroom alive to the advantages that technology can bring to the modern financial services industry?
PL. To me, the CIO role is clearly a managerial one. It’s about managing technology to create business benefits. One thing that one needs to be aware of is that actually IT is a people business, because it’s people who deliver the project. It’s your human know-how, specialists and expertise that are essential for critical technical reasons. It’s the creativity of your people that deliver innovations. So it’s really a people business, and that’s why you as a CIO need to be very strong in things that are typically considered soft factors. Strong communication, motivation, talent management and so on are absolutely vital.

Also, from my point of view, the CIO needs to understand the needs of both internal and external customers. Internally, I’m talking about the business units within the bank and what they need to make money. Externally, it’s the bank’s customers and making sure that we meet their demands in order to stay successful. In the end, we want to use technology to create business opportunities for our business units and benefits to our end users.

Regarding the second part of the question, I think we have more and more technology-savvy top managers in the banks. That’s certainly the case with our board. For example our new CEO, Klaus-Peter Mueller, is a very technology-savvy guy who is aware of its benefits. We also have a board member, Frank Annuscheit, in charge of IT transaction banking and back office operations. We really have the voice of technology, at the table in boardroom discussions.

FST. In your experience, how has the role of financial CIO changed over recent years?
PL. I think first aspect is what we were just talking about. The role has shifted in focus from a purely technical role to something more managerial. Also, CIOs have evolved from resource managers to business enablers. There was even a short period during the ‘new economy’ hype when some CIOs even thought they were businessmen. Most of them had a tough awakening in that regard. But I think the right definition is really being an enabler. That goes hand-in-hand with the fact that as a CIO, you are now in much closer contact with the other executives in the business. Finally, as a CIO, you need to understand the business processes very well, and then make the correct sourcing decisions. You need to know exactly which resources you need, both internally and externally, onshore and offshore, to support these processes.

Commerzbank: A History

1870. Commerz- und Disconto-Bank is formed in Hamburg
1920. Merger with Mitteldeutsche Privat-Bank increases number of outlets to 284. Renamed Commerz- und Privat-Bank
1927. Opens representative office in New York and issues 10 year, $20million bond
1940. Assumes current name Commerzbank Aktiengesellschaft
1952-53. Opens first post-war representative offices in Amsterdam, Madrid and Rio de Janeiro
1962. Listed on London Stock Exchange, the bank’s first listing abroad
1965. Has over a million customers
1970. Process of centralising HQ in Frankfurt am Main begins
1973. Branch opened in London
1975. First bearer bonds issued
1989. Has over three million customers with more than six million accounts
1994. Acquires 51% of Hypothekenbank in Essen AG
1997. Official opening of new headquarters building in Frankfurt
2005. Takeover of Eurohypo AG makes Commerzbank second-largest German credit institution with more than eight million customers