Retail Banking and Economic Growth Local Banking in a Global Context

Retail Banking and Economic Growth

– Local Banking in a Global Context

A report from The Second Workshop of The Göran Collert Research Foundation

September 22-23, 2004

Index Preface.............................................................................................. 3 1. Introduction ................................................................................... 6 2. The dynamics of globalization....................................................... 7 3. Local banking in the globalizing context – the EU perspective... 13 4. Retail banking and economic growth – local banking in the globalizing context....................................................................... 20 5. Results from ’The Future of Retail Banking’, a research project funded by the Göran Collert Foundation for Research and Education .................................................................................... 22 6. The research program: The future of retail banking – summary and conclusion ............................................................................ 44 7. Parallel workshops – Day 1 ........................................................ 46

7.1 A service management perspective on retail banking......................................................................................... 47 7.2 Banking for high growth emerging economies: Lessons from Estonia................................................ 51 7.3 Banks as Learning Organizations ............................. 53 7.4 Banks as network organizers: providing virtual space for financial flows and economic growth ................... 55 7.5 Retail Banking and Local Growth.............................. 58

8. Centre for Banking and Finance at The Royal Institute of Technology: Visions priorities and strategies ............................. 60 9. The emerging financial environment in Europe .......................... 62 10. Parallel workshops – Day 2 ...................................................... 66

10.1 The Future Financial System From an EU Perspective............................................................. 67 10.2 Risk analysis ........................................................... 70 10.3 Building Customer Relations................................... 72 10.4 Banks as networking catalysts ................................ 78 10.5 Urban Development and Local Banking.................. 80

11. Guidelines for future research................................................... 82 Appendix 1 - Material distributed ahead of The Second Workshop of The Göran Collert Research Foundation Appendix 2 - Seminar papers presented at The Second Workshop of The Göran Collert Research Foundation

Preface Background The Göran Collert foundation for promotion of development within the banking sector in the Nordic countries and the Baltic Sea Region (‘The Foundation’) was created in 1997. The aim of the Foundation is to promote the development of business and an interactive exchange of business within the banking sector and the rest of the ‘retail market’, mainly in the Nordic countries and the Baltic sea Region. The Foundation chose to invest its capital in creating a research network based in the Nordic and Baltic countries. The network consists of the Norwegian School of Economics and Business Administration, BI, in Norway, the Swedish School of Economics and Business Administration (Hanken) in Finland, Tallinn University of Technology, University of Tartu, and The Royal Institute of Technology (KTH), where the Center for Banking and Finance (‘CeFin’) was given the responsibility to co-ordinate the research program ‘The Future of Retail Banking’. This responsibility also involved arranging a major workshop in 2001, and one in 2004, where researchers and practitioners could meet in order to discuss the research results achieved so far, as well as their usefulness. The research program The research program ‘The Future of Retail Banking’ has been going on since 1997, and it is the pre-dominant project at the CeFin. The project’s aim is to study the interface between customers and suppliers in the financial system. In doing so, the project is expected to contribute towards a better understanding of retail banking in a global environment, which is an essential component for the development of business models for retail banking in the future. The research program, which is co-ordinated by CeFin, continuously arranges work meetings for researchers in the program and the board of the Foundation. The members of the board give their view on the design of the program and its projects. At its meetings, the board of the Foundation also decides on new proposals for research projects and other activities that it decides to support.

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Results The board of the Foundation has decided to support 28 researchers and their projects during the period 1998-2004. 3 of these are pursued in Sweden, 6 in Finland, 2 in Norway, and 17 in Estonia. The project has produced 10 books, 15 journal publications, 8 book chapters, 3 working papers , and 25 conference presentations. In terms of career progression of the researchers involved, this means that 2 researchers have become tenured professors, 6 PhDs, and 1 Licentiate. One more PhD is scheduled for the 30-05-2006. The workshop The aim of the workshop ‘Retail Banking and Economic Growth – Local Banking in a Global Context’ is to create a forum for the discussion of how retail banking can be done at a local level, while still being connected to the global context. The forum involves both academics and practitioners in order to increase the understanding of how business models work and can be developed. The workshop took its starting point in the conditions of the surrounding world and the development in the Nordic and Baltic countries and the rest of the world as concerns retail banking. The first day focused on the state of knowledge that we currently have of these issues, and the second day focused on what we need to know in the future. The first day started by presentations and a following panel discussion between practitioners and researchers who discussed globalization and local banking. Then, the research leaders in Sweden, Norway, Finland and Estonia gave their general view of this area of research. This was followed by group work in five parallel workshops, where the results of the research in the project ‘The Future of Retail Banking was discussed’. The second day contained presentations and a plenary discussion on future research areas as concerns retail banking and local growth. This was followed by group work that identified several research issues to be investigated by researchers and practitioners. Conclusion A central issue for the research program is the question of how co-operation with practitioners can be done so that the research as well as the direction and methods of practice can continuously be adapted to a changing reality. Another fundamental task is to identify relevant questions

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and research results and find methods for answering these questions, as well as an efficient implementation of the results. The aim is thus two-fold:

• to create a forum where researchers and practitioners can meet in a constructive exchange of knowledge in order to improve the process and results of research.

• to find new and better business models for society and its citizens

which promote economic growth and stimulates an growth in welfare for the individual.

Stockholm, 2005-01-08

Göran Collert Chairman of the Board The Göran Collert Foundation

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1. Introduction Göran Collert, chairman of the board, The Göran Collert Foundation Göran Collert introduced the workshop and wished the participants welcome to two days of lectures, seminars and discussions with the purpose of sharing concepts, ideas and visions for the future of retail banking.

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2. The dynamics of globalization Urban Bäckström, CEO, Skandia Liv, Sweden What is (Economic) ”Globalisation”?

• Greater integration, as both natural and manmade barriers to international economic exchange continue to fall

• Both technological breakthroughs, resulting in lower costs for transport, communications and information dissemination, and political liberalisation

• Increased flow of goods, services, labour and capital across borders • Here I will focus on the globalisation of capital

Globalisation of capital Opportunities

• Political deregulations o Movement from a government led to a market led financial

system • Technology advances

o Driving the marginal cost of information dissemination to zero o Driving the marginal cost of trade execution to zero

• Increased opportunities to invest savings anywhere around the globe Capital markets became more integrated in the 20th century than ever before Is the system working better this time?

• Pre-1913 period did a much better job transferring resources between countries

• Today, high capital mobility reflects enormous short-term positions • Today, high-income countries, collectively, are net importers of

capital

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Foreign assets over world GDP (per cent)

7

19 18

85 6

18

57

0

10

20

30

40

50

60

1870 1900 1914 1930 1945 1960 1980 1995

Second periodFirst period

Source: Nicolas, Crafts, Globalization and Growth in the Twentieth Century, IMF Working Paper WP/00/44, Washington

Some consequences of the globalisation of capital

• The financial system has become more “elastic”. Hence, the risk of financial cycles has increased. Instability and volatility. o The word “elasticity” seeks to capture the new financial

system’s inherent potential to allow financial imbalances to build up over time

o Excessive optimism, credit expansions, rising asset prices, temporarily lower cost of capital, more investments and a booming economy. Eventually, the investments are found not to be sustainable – not generating profits. The cycle collapses, moving from boom to bust

• Financial cycles are not a new phenomenon. The old discussion in the 1920s and 1930s between Hayek and Keynes o Keynes focused on the demand side and how to get out of the

bust, whereas Hayek focused on the supply side and how we got into it in the first place.

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Any investor with an Internet connection now has 24-hour-a-day access to:

• news, security prices, economic data, financial reporting data, analysts forecasts, investment advice and the opinions of other investors

What is disintermediation of financial services?

• An overall financial trend in the industrial world during the last 50 years o An increasing proportion of savings and financing flow

directly to financial markets instead of being routed via banks’ traditional lending and deposits

• I will concentrate here on the “saving side” of the disintermediation process o Bank deposits are ”risk free” – other assets are more risky o Participation in the market led financial system o Defined-benefit pension systems have been replaced by

defined-contribution plans

What is disintermediation of financial services? • 70 per cent of households total financial assets was held in bank

accounts in 1960 - 2003 less than 20 percent (Sweden) • Households are now expected to

o make complex and important financial decisions o manage increased risk levels

Households Financial Assets (Sweden)

0%

10%

20%

30%

40%

50%

60%

70%

80%

1950 1960 1970 1980 1990 2000 2003

Currency & Bank deposits

Shares, Mutual funds and Bonds

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Globalization and Disintermediation - Some Results:

• As trading costs fall and the disintermediation process continues, more and more new investors are coming into financial markets o The growing abundance of information available to

unsophisticated investors creates, in their minds, an illusion of knowledge.

o Hence the marginal investor is becoming less experienced, less sophisticated and less able to derive fundamental security values from raw information.

• Studies have shown that o Internet accounts are driving increased retail trading. o Less informed retail investors tend to concentrate on

speculative stocks and engage in herd behavior o Heavier trading and herd behavior are detrimental to

performance. Globalization and Disintermediation - More results

• Selecting mutual funds (from Morningstar) o The yearly return on the overall Swedish stock market has been

11,9 per cent on average between 1994 to 2003. o The unweighted average return per year for mutual funds

active in the Swedish stock market was 9,6 per cent during the last ten years

o The average return that people actually received by investing in mutual funds during the same period was 2,3 per cent per year.

Globalization and Disintermediation - More results Investing within the Swedish public pension system, PPM (from the Swedish State Audit Institution)

o “The private investors have in most categories failed to select mutual funds with good returns. In addition, they have chosen the worst performing mutual funds in categories that showed the least satisfactory result.”

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Globalization will certainly continue. How about the disintermediation trend?

• Deep and wide-ranging disintermediation has left households with the responsibility for making important and technically complex micro financial and risk decisions o They are not trained to make them in the present o They are not likely to execute them efficiently in the future,

even with attempts at education • I believe that the disintermediation trend will reverse at some stage

in the future o Shift towards more integrated financial products and services o Products will be easier to understand, tailored towards

individual profiles, and allowing more effective risk selection and control

When the disintermediation trend reverses

• The integrated financial services will, unlike today, focus on the customer instead of the product as the prime unit of attention o Helping the customer design a financial plan to determine his

optimal life-cycle needs. Advanced models are needed. o Finding the products necessary to implement that integrated

plan in a cost-efficient fashion • Not only an advisory role

o Demand for financial instruments that eliminate the “basis” risk. One important category for such intermediation is hedging “targeted” expenditures

• Making the products more user-friendly and simpler for customers will create considerably more complexity for producers

Interesting questions about the future structure of the financial industry

• The existing trend in Europe: o Large universal banks are trying to become even larger through

mergers or acquisitions. Expansions of the size and the range of operations.

o Element of herd behavior among bank CEOs. • However, large banks are in general not more profitable than small

banks. o Not the general trend in other parts of the business community.

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o Strong competition is often met by specialization, sub-contractors, out-sourcing etc.

Future structure of the financial industry • A possible new trend in the financial industry:

o Separation of the production of financial services from their distribution and marketing.

• In the future banks will perhaps function as brokers (as banking is local), with a range of associated external highly competent suppliers that specialize in the production of the new and more complex but user friendly products.

• The intrinsic value of the bank will lie mainly in a familiar and reputable name – its brand name – and the network of customers.

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3. Local banking in the globalizing context – the EU perspective Gunnar Lund, Minister for International Economic Affairs and Financial Markets, The Swedish Parliament, Sweden This issue is important and essential. It‘s concerned with the links between the financial sector on one hand and the overall performance of the economy on the other, basically the links between the financial sector – in this case retail banking – and economic growth. It’s an issue that I have reason to deal with on a daily basis since I’m responsible for international economic issues and financial markets in the Swedish government. We give a great deal of thought to what we can do in order to foster an efficient financial sector, which in turn will help us achieve greater growth and welfare in the Swedish economy. I believe that the financial sector and financial stability issues are important also at a global level, becoming more important every day as we are moving rapidly into a global economy. Again and again we have seen financial crisis can lead to and how we become so much more vulnerable in the world economy. And we have seen how a financial crisis can have enormous negative effects on economic growth and development. I am dealing with these issues in a Swedish and a global context, but indeed also at the European level. Today I intend make some observations of what I see happening in the European Union. There is a conviction, at least among policy makers and governments in the European union, that there are great benefits to be gained from a high level of financial integration in Europe. This has been brought up by a great deal of research in a number of studies. To me the benefits are clear: financial integration will bring greater competition and through that lower prices, a broader range of services, improved access to risk capital and better chances for high returns on savings and insurance capital. Some studies have tried to quantify this and one of them estimates that full-fledged financial integration in the European union would bring an increase in

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Appendix 1

Material distributed ahead of The Second Workshop of

The Göran Collert Research Foundation




previously available at the homepage www.infra.kth.se/cefin

1. Background and Purpose ............................................................. 5 2. How Banks Can Create Local SME Growth Communities ........... 6 3. The Program of The Second Workshop of The Göran Collert Research Foundation.................................... 10 4. Participant List............................................................................. 15 5. Addresses ................................................................................... 20

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1. Background and Purpose The first symposium of the Göran Collert Foundation, in 2001, reported on and discussed the research program “The Future of Retail Banking.” The program is now coming to an end and will be summarized at this second symposium. At this symposium, “Retail Banking and Economic Growth – Local Banking in a Global Context”, we will also inform and discuss the future research priorities for the newly established Centre for Banking and Finance (CeFin) at The Royal Institute of Technology in Stockholm, Sweden. The research program that started five years ago has involved universities in Sweden, Norway, Finland and Estonia, connecting to relevant research worldwide. The theme for this symposium emphasizes the importance of retail banking to local business-development and economic growth. The symposium aims to develop a common knowledge and insight for researchers and practitioners on how the local financial institutions more efficiently can contribute to economic growth and community development, for example through supporting and developing their partners and customers’ business opportunities and assisting with analysis and solutions of financial problems. One of the points of departure will be the EU-program ”Round Table of Bankers and SMEs”. The first day of the symposium will summarize the recently finalised research program ”The Future of Retail Banking”. Results and methodologies will be analysed. The second day will lay out the foundation for the recently launched research programme at the new ”Centre for Banking and Finance” (CeFin) at The Royal Institute of Technology in Stockholm, Sweden.

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2. How Banks Can Create Local SME Growth Communities By Kent Eriksson, Oystein Fjeldstad, and Lars Silver1

The Norrtälje experience Norrtälje is a small town at 16 000 inhabitants. Located approximately one hours drive north of Stockholm it could almost be regarded as a suburban district. Business life in such a small town is predictably rather uneventful. Tradition holds that there are few large employers in town, most businesses are small and rarely inventive. The workforce is described as loyal though not very well educated. Most of the neighboring high-tech companies shun places like Norrtälje in favor of university cities like Stockholm and Uppsala. Small businesses are started mainly in order to serve the local market and rarely grow beyond a couple of employees. Among the more expansive firms a significant number have relocated to Norrtälje from other venues. Most of the small business owners are well recognized in the small community and the two Rotary clubs connect most of the major actors. In this small town there are three banks operating at the moment. One bank is local and describes itself as the only bank with its headquarters located in Norrtälje. The other two are branches of two of the largest banks in Sweden, Nordea and Handelsbanken. Although the Norrtälje banks and SMEs used to get along fine, the SMEs considered that banks did not add much value to their business, and banks were not involved much in SME businesses. In 2000, an initiative was made by a group of researchers and local bankers to form a local group of SME businesses, banks, accountants, and local municipal council members. This group quickly became the primary vehicle for discussing and solving issues at the interface between the participants. The formation of an interface between SMEs, the local authorities and the local service providers to SMEs is now known as the Norrtälje-model. The Norrtälje model has the potential to create a local growth community, based on the entrepreneurial drive of SMEs. The

1 The authors appear in alphabetic order and have contributed equally to this paper

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model makes it possible to remedy the poor relationship between banks and SMEs, to the benefit of both.

The Norrtälje model in perspective Ever since Henry Fords methods of mass-producing standardized products were replaced by more differentiated product ranges, firms have increasingly tried to customize their offering to the customer. The benefits can be huge, as has been shown by that Dell's build-to-order system both makes production more efficient and the product more customized. However, as the economist points out, mass market customization typically fail because of differences in how to manage and organize production so that the customer meets one firm interface (the economist special report on mass customization 2001-07-14). For instance, only one third of customer relationship management processes are successful. The reasons for these problems are very evident in the Banking industry. Banks have a long history of conservatism in their business practices, where a large range of more or less standardized services have been offered through branches. However, for the past decade, changes in technology, regulation and general economic conditions have transformed the industry. Today, banks attempt to be their clients’ partner in solving their financial needs. Even though customers still need to save, loan, and make transactions, they do it through multiple channels, and with many different combinations of products. The major determinant for the future of banking are the customers. Their preferences, and in particular their acceptance of the new technology, and new actors will greatly influence the outcome. Research on customer behavior have shown that there is considerable inertia to how fast and how much customers are willing and able to learn, yet little is known about how this learning works. The Future of Retail banking program takes the perspective that banks service not only their individual customers but fundamentally the financial relationships that customers engage in, with their banks and with each other. In effect, the program takes the perspective of the Norrtälje model.

The strategy for value creation in local growth communities In order to offer value for each other, the bank and the SME should be aware of each other's unique resources. The bank's resources are their service offer and their ability to meet individual customer needs through

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customized services. In meeting these needs, the bank engages their employees, which apply problem solving expertise from a vast array of sources inside and outside the firm. Understanding the bank's service offer thus often involve understanding their organization, and sometimes also their suppliers and partners. Adding value to the bank could thus be made by using more of the expertise in the organization, thereby helping them to combine their vast array of sources into one service offering. The SME's resources can thus be understood in terms of his customer relationships and supplier relationships. The strategy for value creation recognizes that banks work as intermediaries between customers in three ways: Firstly, banks process financial transactions, they perform standard services for a broad range of customers; secondly, banks are professional advisors that solve complicated customer problems; and thirdly, banks are enablers of networks of interconnected flows of knowledge and financial assets linking their customers to other customers, financial markets, competitors etc. Each of three ways of working create value in the bank - customer relationship. A specific research area concerns how Internet based technologies change the banks role as transaction processor, problem solver, and network enabler. Banks are financial intermediaries. They mediate financial exchanges in the economy. Financial transactions arise in the support of real economy transactions including retail exchange of goods and services, investments made by firms, governments and individuals as well as financial investments in securities. Consumption and investments require mediation of payments transactions, but also quite frequently creates the need for liquidity. The motivation for insurance against risks is closely linked to ownership, changes in ownership or performance of hazardous activities. In other words, the customer context consists of network relations to businesses, governments, and individuals. Current research has identified that relationship development is strongly dependent on the network, but much work is still needed to better understand their influence on each other. Only recently have we begun to understand how networks add value in relationships. And there are also limits to our understanding of how networks can be managed to facilitate more value in relationships. How is the relationship between the bank and the customer affected by changes in customer networks? What services, contact points and technologies will

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customers need in the network economy? What implications do the changes have for banks and the provisioning of financial services? Network management is poorly understood, but holds a great potential for future studies. One way for the bank to achieve a better usage of their network is to focus on being a problem-solver in the interface with the customer, and then build co-operative relationships and alliances to support this. If the bank is burdened by using internal resources, then they could outsource those. However, network management has only recently emerged as a new research field, and there is much to do. Customers have to be the central focus of attention because their way of living their lives determine the needs banks will match. As a consequence, future research areas focus new ways of exchanging with customers, such as exchange in communities. More concrete research areas focus processes for how relationships evolve, and how these relationships evolve together with other relationships. The managerial perspective focuses how banks can develop work-practices that take the customer's perspective in defining financial services. Development of such work-practices requires new ways of interacting between academics and practitioners. The researcher can develop more relevant theories in close cooperation with practice, and practitioners can develop a more coherent logic for their business with customers. The banking industry can thus become more driven by moral values at the customer interface. It is therefore essential that practice and theory evolve in tandem. The Norrtälje-model in effect suggests, based on research results, that there are no major hindrances for banks to take a more active part in the development of local networks supporting small firm development. In fact, all other actors, including auditors, local government, external board members and in particular the small firms themselves encourage banks to take greater initiative locally. It is seen as important that banks emerge from their shells and take part in emerging networks. Banks have always been great observers on the local scene, but rarely tend to use that position for the benefit of their customers. Together with other important actors banks can create a supporting network that promotes local growth in a community.

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3. The Program of The Second Workshop of The Göran Collert Research Foundation

Wednesday, September 22 8.00 a.m. Registration/coffee 9.00 a.m. Welcome & Introduction

Göran Collert, Chairman of The Collert Foundation and of The Centre for Banking and Finance, Sweden

9.10 a.m. The dynamics of globalization

Urban Bäckström, CEO, Skandia Liv, Sweden Moderator: Olle Rossander, Author and journalist, Olle Rossander AB, Sweden

9.50 a.m. Local banking in the globalizing context – the EU

perspective Gunnar Lund, Minister for International Economic Affairs and Financial Markets, The Swedish Parliament, Sweden Moderator: Olle Rossander

10.40 a.m. Coffee break 11.00 a.m. Panel discussion

Panel: Peter Stenkula, Senior Economic Advisor, Central Bank of Sweden Indrek Neivelt, CEO, Hansa Bank, Estonia Urban Bäckström, CEO, Skandia Liv, Sweden Moderator: Olle Rossander

12.00 Lunch

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1.15 p.m. The research program: The future of retail banking – summary and conclusion Chair: Barry Howcroft, Professor, CEO, Banking Centre, Loughborough University, England Reporting panel: Research leadersChristian Grönroos, Professor and Director, CERS, Swedish School of Economics, Finland Vello Vensel, Professor, Tallin Technical University, Estonia Mart Sõrg, Professor, University of Tartu, Estonia Kent Eriksson, Professor, CeFin, The Royal Institute of Technology, Sweden Øystein Fjeldstad, Assoc. Professor, BI, Norwegian School of Management, Norway Lars Silver, Ph.D. Business Administration, CeFin, The Royal Institute of Technology, Sweden Concluding remarks: Kent Eriksson, Professor, CeFin, The Royal Institute of Technology, Sweden

3.00 p.m. Coffee break 3.30 p.m. Parallel workshops – Discussions of the research results and

their implications for retail banking

Group 1. A service management perspective on retail banking Chair: Annika Wijkström, Executive Vice President, Swedbank, Sweden Group 2. Banking for high growth emerging economies: Lessons from Estonia Chair: Indrek Neivelt, CEO, Hansa Bank, Estonia

Group 3. Banks as learning organisations Chair: Maria Granö-Isaksson, Branch Manager, SEB, Sweden

Group 4. Banks as network organisers: Providing virtual space for financial flows and economic growth Chair: Siv Svensson, Head of Regional Banks, Executive Vice President, Nordea, Sweden

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Group 5. Retail banking and local growth Chair: Carl Eric Stålberg, Chairman of the Board, Swedbank, Sweden

4.45 p.m. Plenary session: What did we learn?

Moderator: Charlotte Ostergaard, Associate Professor, Department of Financial Economics, BI, Norwegian School of Management, Norway Reporting panel: Group chairs

7.30 p.m. Dinner Thursday, September 23 8.30 a.m. Centre for Banking and Finance at The Royal Institute of

Technology: Visions, priorities and strategies Chair: Stellan Lundström, Professor and Director, CeFin, The Royal Institute of Technology, Sweden Anders Flodström, President of KTH, The Royal Institute of Technology, Sweden Ulrika Boëthius, Second Vice President, Financial Sector Union of Sweden, Sweden Lars G. Nordström, CEO, Nordea, Sweden

9.30 a.m. The emerging financial environment in Europe

Chair and introduction: Leo Verhoef, Professor, Eindhofen University of Technology, The Netherlands

The emerging financial environment in Europe Barry Howcraft, Banking Centre, Louhgborough University, England The new roles of banks in the glocal economy Leo Verhoef, Professor, Eindhofen University of Technology, The Netherlands Banking and regional development Kristina Persson, Deputy Governor, Sveriges Riksbank, Sweden

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Banking and local growth Lars Silver, Ph.D., Business Administration, CeFin, The Royal Institute of Technology, Sweden

10.30 a.m. Coffee break 10.45 a.m. Plenary discussions

Moderator: Øystein Fjeldstad, Assoc. Professor, BI, Norwegian School of Management, Norway

11.30 a.m. Lunch 12.30 p.m. Areas and priorities for new research: What do we need to

know? Introduction to afternoon workshops: Stellan Lundström, Professor and Director, CeFin, The Royal Institute of Technology, Sweden

12.45 p.m. Parallel workshops

Group 1. The future financial system from an EU perspective Lars Otterbeck, Assoc. Professor, The Royal Institute of Technology, Sweden and Cecilia Hermansson, Economist, Swedbank, Sweden Group 2. Risk-analysis Boualem Djehich, Professor, The Royal Institute of Technology, Sweden and Tomas Franzén, Head of Asset Allocation, Second Swedish National Pension Fund – AP2, Sweden Group 3. Building customer relations Christian Grönroos, Professor, Swedish School of Economics, Finland and Jan Lidén, CEO, Swedbank,Sweden Group 4. Banks as networking catalysts Oystein Fjeldstad, Assoc. Professor, Norway and Lars-Erik Kvist, Executivce Vice President, Swedbank, Sweden

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Group 5. Urban development and local banking Stellan Lundström, Professor and Director, CeFin, Sweden and Hans Eliasson, CEO, Svenska Hus, Sweden

2.45 p.m. Coffee break 3.00 p.m. Concluding discussion: Guidelines for Future Research

Chair: Folke Snickars, Dean, The Royal Institute of Technology, Sweden Short presentation of each group by the panellists, discussion Reporting panel: Group chairs

4.30 p.m. Closing of The Second Workshop of The Collert Foundation

Göran Collert, Chairman of The Collert Foundation and of The Centre for Banking and Finance, Sweden

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4. Participant List Bergendhal, Göran

Professor Business School University of Gothenburg (Sweden)

Berggren, Björn

Ph.D. Student CeFin (Sweden)

Berndtson, Mikael

Ph.D. Student Swedish School of Economics and Business Administration/ CERS (Finland)

Boëthius, Ulrika

Second Vice President, Financial Sector Union

Finansförbundet (Sweden)

Bäckström, Urban

CEO Skandia Liv (Sweden)

Collert, Göran Chairman The Collert Foundation & CeFin (Sweden)

Dahlblom, Christina

Research Director, Ph.D.

TNS Gallup Oy (Finland)

Dembrower, Maria


De Ridder, Adri

Associate Professor The Royal Institute of Technology

Djehiche, Boualem

Professor The Royal Institute of Technology (Sweden)

Doverholt, Urban

EVP and Managing Director

EDB Business Partner AB (Sweden)

Edsbäcker, Göran

Ph.D. - Business Administration

CeFin (Sweden)

Ehnbom, Johan

Sales Manager, Activebank

EDB Bank & Finans (Sweden)

Eklund, Lars Executive Vice President

Swedbank (Sweden)

Ekman, Bo CEO and Chairman Nextwork AB (Sweden) Eliasson, Hans CEO Svenska Hus (Sweden) Eriksson, Kent

Professor CeFin (Sweden)

Fjeldstad, Oystein

Ass. Professor Norwegian School of Management/BI (Norge)

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Flodström, Anders

Dean The Royal Institute of Technology (Sweden)

Franzén, Tomas

Head of Asset Alloc. Andra AP Fonden (Sweden)

Graffner, Joakim

Headmaster Finek (Center for Financial Education) (Sweden)

Granö-Isaksson, Maria

Branch Manager SEB (Sweden)

Grönroos, Christian

Professor -Business Administration

Swedish School of Economics and Business Administration/ CERS (Finland)

Hermansson, Cecilia

Ph.D. Student Swedbank (Sweden)

Holm, Christian

CEO Roslagens Sparbank (Sweden)

Howcroft, Barry

Professor - Banking Louhgborough University Banking Centre (United Kingdom)

Hõbe, Ly Ph.D. Student University of Tartu (Estonia) Jonsson, Sara Ph.D. Student CeFin (Sweden) Julander, Claes-Robert

Professor Stockholm School of Economics (Sweden)

Kerem, Katri Ph.D. Tallin Technical University (Estonia) Kirikal, Ly Ph.D. Student Tallin Technical University (Estonia) Kolga, Henrik Head of

Communications Swedbank (Sweden)

Kotnik, Victor VP, CEO, Responsible Nordic Banks

EDB Bank & Finance (Sweden)

Kull, Katrin Doctorate Student Department of Economics at Tallinn University of Technology (Estonia)

Kvist, Lars-Erik

Executive Vice President

Swedbank (Sweden)

Lidén, Jan CEO Swedbank (Sweden) Liikane, Karin Project Manager Estonian Banking Association

(Estonia) Ljung, Birger Professor The Royal Institute of Technology

(Sweden)

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Lund, Gunnar Minister for International Economic Affairs and Financial Markets

The Swedish Government (Sweden)

Lundahl, Nicolaus


Lundström, Stellan

Professor - Acting Head

CeFin (Sweden)

Lustsik, Olga University of Tartu (Estonia) Lyford, Einar J.

Senior Vice President Nordea Bank Norge ASA (Norway)

McDowell, Malcolm

Adviser, Economic Affairs

European Savings Banks Group - World Savings Banks Institute (Belgium)

Mankert, Charlotta


Marthin, Tor Head of Asset Management

AMF Pension (Sweden)

Mäkijärvi, Taina

Head of Private Banking

Nordea (Finland)

Neby, Tore Managing Director Doorstep AS (Norway) Neivelt, Indrek

CEO Hansa Bank (Estonia)

Niku, Kaija Director of Market Research

Nordea Bank (Finland)

Nilsson, Daniel

Ph.D. Student Stockholm School of Economics (Sweden)

Nordström, Lars G.

President and Group CEO

Nordea (Finland/Sweden/Danmark)

Nyman, Henrich

Ph.D. Student Swedish School of Economics and Business Administration, CERS (Finland)

Ohlsson, Lennart

Assoc. Professor CeFin, (Sweden)

Ostergaard, Charlotte

Assoc. Professor Dept. of Financial Economics, BI-Norwegian School of Management (Norway)

Otterbeck, Lars

CEO Associate Professor, The Royal Institute of Technology (Sweden)

Persson, Kristina

Vice President The Riksbank (Sweden)

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Rader Olsson, Amy


Ramström, Dick

Professor - Business Administration

CeFin (Sweden)

Rodriguez, Enrique

Senior Vice President Swedbank (Sweden)

Rossander, Olle

Author & Journalist Olle Rossander AB (Sweden)

Sasson, Amir Ph.D. Student Norwegian School of Management/BI (Norway)

Sharma, Deo Professor Stockholm School of Business (Sweden)

Silver, Lars Ph.D., Department of Business Studies

Uppsala University (Sweden)

Snickars, Folke

Dean The Royal Institute of Technology (Sweden)

Solhäll, Catharina

Ph.D. Student Swedish School of Economics and Business Administration/CERS (Finland)

Stenkula, Peter Senior Advisor to the Governor

Central Bank of Sweden (Sweden)

Ståhlberg, Carl Eric

Chairman of the Board

Swedbank, (Sweden)

Sults, Marge Ph.D. Student Tallin Technical University (Estonia) Sundborg, Håkan

Program Coordinator Finek (Center for Financial Education) (Sweden)

Svensson, Siv Head of International Products

Head of Regional Banks, Executive Vice President, Nordea (Sweden)

Sõrg, Mart Professor – Money and Banking

University of Tartu (Estonia)

Tamm, Mari Economist Bank of Estonia (Estonia) Tapper Hoel, Jenni

Ph.D. Student CeFin, (Sweden)

Uiboupin, Janek

Ph.D. Student University of Tartu (Estonia)

Vegholm, Fatima


Verhoef, Leo H.J.

Professor EUTECHpark BV (The Netherlands)

Wijkström, Annika

Executive Vice President

Swedbank (Sweden)

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Yilidiz Dag, Sussi


Åkerlund, Helena

Ph.D. Student Swedish School of Economics and Business Administration/CERS (Finland)

Staff: Ekman, Sara Project Assistant Nextwork (Sweden) Nordström, Cecilia

Project Assistant Nextwork (Sweden)

Strömberg, Charlotte

Executive Assistant Nextwork (Sweden)

Söderberg, Inga-Lill

Ph.D. Student Project Assistant

CeFin Intellecta Publicisterna (Sweden)

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Appendix 2

Seminar papers presented at

The Second Workshop of the Göran Collert Research Foundation




1. The Effect of Network Organizers on Relationship Commitment 5 2. Knowledge of inter-customer relations as a source of value creation and commitment in intermediation ....................... 8 3. Value of Affiliation: Composition and Redundancy of Financial Networks................................................................. 14 4. Understanding Customer Loyalty and Disloyalty – The Effect of Loyalty-Supporting and -Repressing Factors ....... 18 5. Opening-Up the Mediating Technology: The Effects of Organizational Affiliation on Firm Survival.......... 20 6. Fading Customer Relationships................................................. 23 7. The Internalization of Estonian Banks: Inward versus Outward Penetration........................................... 25 8. Implications of foreign bank entry on central and east European banking market ............................... 26 9. Household Debt and Credit Constraints in Estonia ................... 35 10. Estonian Banking Sector Performance Analysis Using Malmquist Indexes and DuPont 11. Malmquist Indexes of Productivity Change in Estonian Banking .................................................................. 39 12. Stabilization Period and Malmquist Index of Productivity Change: an empirical study of Estonian banks......................... 40

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1. The Effect of Network Organizers on Relationship Commitment Kent Eriksson, Center for Banking and Finance, The Royal Institute of Technology - KTH Øystein. D. Fjeldstad, Department of Strategy, The Norwegian School of Management, BI

Synopsis Most firms are engaged in multiple relationships that together form a network, in which, the properties of the network impact properties of the individual relationships. The network form of organization is displacing the hierarchical form in many industries and has been heralded as the organizational form of the future. Networks have been analyzed in strategic management, purchasing, in sociology, and in marketing. Numerous studies have identified networks as structures that govern firms’ market behavior. The network can govern company behavior by being: a system for innovation; a source of new knowledge; a structure where opportunities can be detected and exploited; a safeguard against opportunism; and a structure that determines co-ordination. The focus in network studies has been on the nodes of a network and the relationships that connect them. Networks are frequently seen as evolving organic structures with no assumption of coordinating actors. Recent analyses have raised the issue of networks as managed structures, but there is a lack of knowledge concerning whether and how an actor can organize networks. Although knowledge of network organizing should be of general interest, such knowledge is of particular interest with respect to firms that create value by employing a mediating technology to organize transactions, since many of the transactions organized are embedded in networks. Extant studies of relationships between mediating firms and their customers focus the dyadic relationship between supplier and customers and do not consider properties of the mediating technology. Furthermore when studying mediator network relationships the focus has been on how firms can use their networks in their relationship with the mediator. For instance, prior research has found that more embedded relations between a firm and a bank leads the firm to have distinctive trade-credit financing capabilities

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vis-à-vis its surrounding network. The present study extend those findings by taking into account that banks are mediating firms, and we investigate their effect on their customers’ relationships in a network context. In this paper we address the issue of whether and how network organizers can impact the mutual commitment of parties in a relationship. We study the effect of network organizers on mutual commitment in dyadic relationships for two reasons. First, networks can be considered to consist of relatively long-lasting dyadic business relationships that are connected to each other. These business relationships frequently evolve over time and contain relationship specific assets, resulting from mutual adaptations in a process of mutual commitments. Second, relationship commitment represents a behavioral intention to expand the business in the relationship, and is considered central in both Transaction-Cost and Social Exchange research. Commitment therefore captures many of the other relationship factors, and as such, it is a key mediating construct in management of business relationships. Relationship commitment leads to relationship profitability, and this depends on how the firm is embedded in the surrounding network of relationships. Business networks can be defined as several business relationships that are connected to each other in the sense that exchange in one relationship is contingent on exchange in another. Network organization is difficult because it implies the structuring of exchange between many interconnected business relationships, each one of which is multidimensional and complex. We define network organizers as actors who have an effect on the connectedness of business relationships in a business network. Although several types of firms may organize networks, e.g. Toyota manages a network of suppliers, network organization is the primary value creation of firms employing a mediating technology to link customers who are, or wish to be, interdependent. Despite the important role of the latter type of firms in the economy, there has been, to our knowledge, no systematic study of how network organizers achieve effects on relationship behavior in the network. Specifically there has been no empirical study so far investigating the effect of network organizers on relationship commitment. The established working hypothesis on the role of transaction organizations is that network organizers alleviate network members of coordination tasks and their associated investments. In addition, we hypothesize that they can indirectly increase relationship commitment by improving exchanges in the surrounding business network. Hence we study two intermediate effects: the effect of the business

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network on relationship commitment and the effect of the network organizer on the business network. In particular we examine how network organizers can better connect one of their customer’s relationships to the network that surrounds this relationship. We find, in addition to the transaction efficiency effect that a more connected network has a positive effect on the customers’ relationships because it makes them and their own customers commit more, and that the bank as a network organizer can impact the connectedness of network members. The paper thus presents networks as a manageable phenomenon, and not as an exogenous structure. The findings have particular implications for the strategies of firms such as banks and telecommunication firms. The findings open up for a theory of value creation through mediation in networks and extend the tie between strategy and institutional economics beyond transaction cost analysis. The findings challenge the role of strategies for product marketing and the classical notion of segments as consisting of similar customers. It provides a partial alternative to segments research, and it addresses the need for a new theory of value creation through intermediation. Most network organizers act as mediators and tie actors together as they facilitate exchange in relationships between their customers. For instance, telecom firms add value to the consumer by being large and providing access to content and services of relevance to their customers. The present research highlights the need for development and validation of a theory of value creation through mediation in markets where customers are related. The study highlights the importance of institutions for strategy. Institutions are important for world trade and the growth of markets. However, institutional economics has not taken sufficient account of network research, and commonly refers to relationship factors as anomalies. The present research establishes a new linkage between institutional economics and strategy. Further research is needed into how other business actors than banks can organize the network. It may be expected that regulators, lawyers, and industry organizations will want to achieve network organization. There is also a need to better understand which dimensions of relationship exchange that network organizers influence.

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2. Knowledge of inter-customer relations as a source of value creation and commitment in intermediation Kent Eriksson, Centre for Banking and Finance, KTH, The Royal Institute of Technology, Øystein D. Fjeldstad1 and Amir Sasson, Department of Strategy, The Norwegian School of Management, BI The 1982 annual report of a major Swedish bank contained a picture of a bank branch manager demonstrating new services to a family in their carpet store. By displaying this picture, the bank wanted to promote their services for the small and medium sized business customer segment. Mattbolaget, the depicted carpet retailer, became a customer of the bank at the time of its founding in 1971. Since then Mattbolaget paid off their debt and grew to become the largest local carpet retailer in their community of approximately 200,000 inhabitants. Mattbolaget accumulated capital by increasing its stock of expensive oriental rugs. Mattbolaget had outstanding, interest free, supplier debt for 3 to 6 months each year. In the period 1982-1998, average outstanding supplier debt was 16% of turnover, and the company had no bank debt. Mattbolaget thought of the outstanding supplier debt as a discount given by their suppliers, but could instead have borrowed capital from the bank and negotiated a substantial reduction in price. During the 1980’s, Mattbolaget developed its relationship with one of its main suppliers, Regor AB. Together they developed designs and fabrics for Mattbolaget’s local market in a successful co-operative business relationship. They jointly developed their model for cooperation into a formalized purchasing organization encompassing approximately 30 stores. A credit firm with whom Regor had business relations offered a tailor-made credit package for all carpet retailers in the purchasing organization. This was of great benefit to Mattbolaget because the firm had previously resolved credit

1 Corresponding author. The authors have contributed equally to the research reported

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problems by making individual installment plans for customers. Customer credit management took precious management time and it was perceived as emotionally difficult to occasionally have to repossess goods. The owners of Mattbolaget never brought up the issues of supplier or customer credit with their bank because they did not see the bank as relevant for solving these kinds of business problems. The ways in which the bank failed to provide solutions for a customer’s important financial problems are illustrated in the figure below.

First, the bank failed in assisting a valued customer in solving important trade related financial problems due to lack of contextual knowledge. Second, the customer was not aware of the bank’s ability to improve its relationships with suppliers and customers. The bank failed to provide the customer with added value despite both the fact that the bank considered the relationship with this particular customer as very good and the fact that the customer had a long-term relationship with the bank. From a theoretical point of view, the bank–carpet trader case illustrates several important issues about banks, as a type of firm using the mediating technology to create value, that have only partially been examined in the organizational

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and financial literature. First, it exemplifies how creating value with the mediating technology, i.e. linking customers who are or wish to be interdependent, implies that the relationships serviced constitute the relevant context for adding value. Second, the case shows how lack of situated knowledge about inter-customer relationships can cause a mediator to fail in providing value adding financial services. Finally, since Mattbolaget did not consider the bank able to offer consumer credit service, the case also illustrates that complex bank services are experience goods for which the customers’ perception of value depends on experience of value. To answer why the banks failed in these aspects, we develop a knowledge perspective on value creation in organizations that employ the mediating technology to facilitate inter-customer relations. Mediators, individually and collectively, build networks of customers between whom linking can take place, and they provide services that facilitate inter-customer exchanges. Earlier research has shown the importance of size and standardization in mediation. A different stream of research has shown that contextual knowledge is important for problem solving and innovation in organizations. Combining theory of the mediating technology and theory of situated problem solving we posit that inter-customer relations constitute the fundamental context for value creation of firms using the mediating technology. We use data from questionnaires answered by 253 Small and Medium sized firms to test relationship-level, cross-sectional hypotheses that link knowledge of inter-customer relationships, added value, and customer commitment in bank services to small firms. This study shows how banks can use knowledge of inter-customer relationships to add value and increase commitment in the bank-customer relationship. We found that increased bank knowledge of inter-customer relationships assists the bank in adding value to their customers. The results also provide support for the notion that the greater the added value for a customer, the greater is the customer’s commitment to the bank. Customers who have experienced knowledge based value added in their banking relationships are more inclined to respond with increased commitment to their bank offering value added services. Finally, we find support that knowledge based added value mediates the relationships between bank knowledge of inter-customer relationships and customers’ commitment to the bank. Banks, in their role of supporting inter-customer trade, have a greater potential to avail value-creating knowledge if they understand the customer’s important relationships Understanding the customer’s

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relationships with buyers and suppliers means that the bank can relate its own financial knowledge resources not only to the customer alone, but also to the relationships to which it actually provides service. Our findings provide support that situated knowledge is important for value creation and that inter-customer relationships constitute an important context of situated knowledge in banking. Previous studies have found the positive effect of situated knowledge in products and software, but there are no studies that have examined situated knowledge related to the inter-customer relations that constitute the fundamental context of the mediating technology. Such knowledge is valuable and not easily imitable or substitutable because it requires investment in learning about specific customer relationships to which access is limited. Some researchers argue that an important question for organizational theorists is how inter-organizational commitments develop, mature and end. We contribute to the understanding of inter-organizational commitment by finding that, in the context of mediators operating under conditions of uncertainty, relationship-specific investment in relationship specific resources, i.e. developing and acquiring knowledge of inter-customer relationship, is reciprocated by increased commitment. Our findings are consistent with a theoretical perspective of banks as mediators, i.e. facilitators of customer networks. Banks mediate multiple types of financial transactions related to payment, liquidity, risk and information between businesses and other organizations, consumers and governments. Financial transactions arise in support of real economy transactions including trade exchange of goods and services and, investments made by firms, governments and individuals. Consumption and investment require mediation of payment transactions and frequently create the need for liquidity. Furthermore, the motivation for insurance against risks is closely linked to changes in ownership. A large number of these real economy transactions take place in embedded networks. The rationale for bank services is ultimately found in their contribution to the exchanges taking place in the networks that they service. Banks that have good knowledge of the relationships between several interdependent actors, should thus be better positioned to avail financial knowledge that can be used in solving problems related to inter-actor trade and give the customer a means to profitably pursue business opportunities. Bank knowledge of inter-customer relationships is a potential source of superior value creation and hence competitive advantage of banks. First, it is a source of knowledge-based added value in the bank customer relations

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that enables banks to build more effective networks of committed customers. Second, there are potential network effects in this process. To the extent that customers’ relations form semi-closed networks, bank investments in knowledge creation about members in the network should, all else being equal, benefit other network members. The above findings are preliminary in nature and call for further research. Although based on a relatively small sample that is banking industry and geographically specific, we argue that the theory developed and the constructs applied to some extent should be generalizable to other firms using the mediating technology. We have tested the impact of a mediator having knowledge of a portion of the customer’s network on value creation and commitment. Our findings suggest potential network externalities by which actual bank membership could matter if bank learning is a function of customer affiliation. Future research should develop theories of banking that could explain how network knowledge is acquired, whether there are actual network externality effects in this process, how such network externalities may arise, and how embeddedness within the customers’ ego-networks impact bank knowledge acquisition and value creation. Furthermore, combinations and mutual adaptations of multiple financial services may be required in solving customer financial flow related problems. Potential demand side economies of scope associated with providing multiple financial services through the same branch infrastructure should therefore be investigated because banks may seek complementarity effects with respect to the benefits that customers could receive from bundled services. The dyadic focus of the economics of banking literature should be supplemented with a true network perspective. Incorporating global and local structural embeddedness may provide insights into the unresolved issues in the banking literature of the scale and scope decisions and ultimately bank performance. Future research should investigate whether network firms make their scale and scope decisions partially based on the impact of the structural composition of their customer sets, in order to increase knowledge of their customers’ relationships. Network firms, after all, assist their customers in their inter-firm relationships. With the above limitations in mind, the findings have significant implications also for managerial practice. The dominant segmentation practices in banking group customer firms according to size, geography

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and industry. It is likely that other network industry firms follow similar practices. Our findings call for a revisit of both the theory and practice of segmentation and positioning applied to network-industry firms, because our findings indicate that network industry firms increase their ability to create value in their dyadic-customer relationships by being embedded in the broader networks of their customers. From this follows significant organizational implications with respect to customer relationship management and service management. Product segments frequently are the basis for organization and market activities. Organizations group related activities to minimize coordination costs, and local network effects, manifest in the value of knowledge about specific inter-customer relationships, imply that grouping of activities related to similar customers will require extensive inter-segment coordination when inter-customer relationships cross traditional segment boundaries. Furthermore, the product segment organization in banking and other mediation industries is frequently broken down into customer relationship managers. The impact of inter-customer relationship knowledge on knowledge-based value added suggests a particular need for inter relationship-manager knowledge transfer in mediation industries. More generally the service of inter-customer relations calls for segmentation practices and corresponding organizational structures and practices that can provide service to inter-customer relations rather than to atomistic independent customers.

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3. Value of Affiliation: Composition and Redundancy of Financial Networks Øystein D. Fjeldstad and Amir Sasson, The Norwegian School of Management, BI

Synopsis In this paper, we argue that the composition of a mediator’s (in this case a bank) customer base impacts the value that the customers derive from affiliation with the mediator because knowledge pertinent to the service of a particular customer is available through the network of firms affiliated with the mediator. We apply our argument to bank service for small and medium sized firms and use hierarchical linear modeling to test hypotheses that link properties of the affiliation network defined by a bank’s customer base and the properties of the customer’s bank network to customer credit terms. We use an original dataset of bank-customer relationships for which we also have information about inter-customer relationships and bank affiliation for the two firms in the triad. The results support that both complementarity of relationships in the bank’s customer base and degree of concentration of the customer’s relationships with banks impact customer value. The bank having direct links to a given customer’s respective suppliers or customers moderates the impact of the customer’s bank network configuration. Mediators (e.g. banks) create value by organizing collectives of customers. We argue that customer value is in part a function of properties of the collective. The affiliation of customers with mediators defines network subsets. These network subsets have structural properties that are determined both by the existing and by the latent relations among actors in the population from which their customers are recruited. Examples of such organizations are: banks that link depositors and borrowers, telephone companies that link those who would call and those who wish to be called, and insurance companies that pool customers for the purpose of risk sharing.

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Despite the special role of mediators in the economy and the accentuated need to understand their actions as a result of the extensive deregulation of the implied sectors, the mediating technology has received little attention. An exception is a line of research which develops the argument that firms using the mediating technology have distinct value creation logic and activity configuration with customer base scale and composition, as the main drivers of customer value. In this paper, we develop and test the argument that individual customers are affected by structural properties of the collective with whom they share a mediator. Specifically, we argue that the mediator can obtain information pertinent to specific customers from other customers’ affiliated with its services. We apply this argument to the study of organizational financial performance by examining the determinants of customers’ cost of debt capital. The study of the determinants of the cost of debt capital has its roots in financial economics as well as in management and sociology. Focusing only on dyadic relationships, the financial literature argues that relationships between independent firms and their lenders “can reduce frictions in the flow of capital from potential lenders to borrowers”. Sociological accounts of capital pricing adhere to the same underlying atomistic assumption although they allow firms to interact with various lenders. By examining how individual customers are affected by structural properties of the collectives with whom they are affiliated, we relinquish this assumption. Financial intermediaries are especially suitable for testing this argument because they belong to a special class of mediators where information asymmetry impacts the operation of the mediating technology by giving rise to the acute problems of adverse selection and moral hazard. In banking, the uncertainty about the value of projects and the creditworthiness of borrowers lead to the erroneous selection of new projects and, as a result, the misplacement of funds. Specifically, we ask the question: how and to what extent does the structure of a customer set affiliated with a bank determine a specific customer’s cost of debt capital? We argue that when the composition of the bank’s customer set enables a bank to improve its knowledge about customers and their respective task environments, customers will obtain better financial terms. Further, we argue that the informational advantage resulting from a favorably composed customer set may be so strong that it reduces the effect of other information providing relations.

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We test our arguments utilizing an original data set collected both in Norway and in Italy. The data set contains information about bank affiliation of small and medium size businesses as well as their respective suppliers and customers. The rich data set allows us to directly estimate the impact of bank network properties on customer level outcomes. We make three contributions. First, we contribute to the organization literature by extending the understanding of how properties of the set of affiliated customers impact customer value. The relationship between customer set composition and the value of affiliation extends our understanding of how firms using the mediating technology create value and has implications both for customer choice of mediator relationship and for mediator choice of customers. Second, we contribute to sociological research of collectivity by extending the understanding of benefits that members obtain from affiliation with collectives. Third, we identify the concept of relation type redundancy, which calls into question previous findings that have been derived from the analysis of single type of relation which was not explicitly argued for. In doing so, we directly address the problematic issue of relational choice in research design. Our empirical results from testing the hypotheses using hierarchical linear modeling provide strong support for those arguments. Specifically, we find that the cost of debt capital declines as the density of the collective increases and as firms increase the concentration of their relationship with a single bank. The relationship between the concentration of the firm-banks network and interest rate margins is, however, contingent on the density of the collective. Firms that are affiliated with low-density banks and maintain multiple banking relationships pay the highest premium, while firms that maintain exclusive banking relationships are not affected by the bank density level. We also found that the effects of the density of the collective and firm-banks network concentration exist only in situations where the bank is not locally positioned in a specific firm’s business network. In the case where a bank is locally positioned in a specific firm’s business network, the network of firm-bank relationships is fully redundant. To control for single country bias we also tested similar hypotheses in a smaller compatible dataset from a country with a radically different banking system. The results derived from the Italian dataset corroborate our findings from the primary Norwegian dataset. We identify two alternative explanations of decreased capital pricing. First, in line with the classic institutional argument for the role of banks to help

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actors overcome barriers to trade, the bank that embeds itself in its customers’ networks could by virtue of increased situated knowledge of the relationships serviced, be in a better position to offer advice and help solve problems that reduce customer risk and increase growth. Through such actions, the bank increases the customer’s probability of success and hence lowers the risk premium similar to how venture capital firms both select possible winners and increase their chance of success. Second, a bank that embeds itself strongly in its customers’ network may be vulnerable to bargaining as a result of high relationship specific investments or from network closure that limits its opportunities. We identify the following limitations of our research. First, the cross sectional nature of the data limits statements about causality, and future longitudinal research should attempt to confirm our findings and the proposed causality. Second, the effects of other network properties, especially at the local bank positioning level, should be further examined. Future research should investigate whether it is merely positioning that matters or whether multiple structures of inter-firm relationships and mediator affiliations modify our findings. Third, we test our hypotheses in Norway and Italy, arguing that the mechanism underlying the effects of local positioning is applicable in both banking systems. Future studies should examine the application of this mechanism in bank-dominated financial systems, e.g. the German system, and in market-dominated systems like the American system. There are significant actionable implications for both mediator management and management of the corresponding affiliated organizations. First, mediator management should consider the specific actual and latent links that they will service. This provides a major challenge to existing segmentation practices and the whole concept of relationship management. Second, the managers of organizations that use mediators to improve their linking should consider the potential benefits and limitations that come from assisting mediators in the composition of their portfolios and weigh these against benefits and disadvantages of maintaining affiliations with multiple mediators.

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4. Understanding Customer Loyalty and Disloyalty – The Effect of Loyalty-Supporting and -Repressing Factors

Christina Nordman is associated with CERS, Center for Relationship Marketing and Service Management at the Swedish School of Economics and Business Administration. The doctoral thesis is part of the Göran Collert Research Project in Customer Relationships and Retail Banking and has been funded by The Göran Collert Foundation.

Abstract Customer loyalty has been a central topic of both marketing theory and practice for several decades. Customer disloyalty, or relationship ending, has received much less attention. Despite the close relation between customer loyalty and disloyalty, they have rarely been addressed in the same study. The thesis bridges this gap by focusing on both loyal and disloyal customers and the factors characterizing them. Based on a qualitative study of loyal and disloyal bank customers in the Finnish retail banking market, both factors that are common to the groups and factors that differentiate between them are identified. A conceptual framework of factors that affect customer loyalty or disloyalty is developed and used to analyze the empirical data. According to the framework, customers’ loyalty status (behavioral and attitudinal loyalty) is influenced by positive, loyalty-supporting, and negative, loyalty-repressing factors. Loyalty-supporting factors either promote customer dedication, making the customer want to remain loyal, or act as constraints, hindering the customer from switching. Among the loyalty-repressing factors it is especially important to identify those that act as triggers of disloyal behavior, making customers switch service providers. The framework further suggests that by identifying the sources of loyalty-supporting and -repressing factors (the environment, the provider, the customer, the provider-customer interaction, or the core service) one can determine which factors are within the control of the service provider.

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Attitudinal loyalty is approached through a customer’s “feeling of loyalty”, as described by customers both orally and graphically. By combining the graphs with behavioral loyalty, seven customer groups are identified: Stable Loyals, Rescued Loyals, Loyals at Risk, Positive Disloyals, Healing Disloyals, Fading Disloyals, and Abrupt Disloyals. The framework and models of the thesis can be used to analyze factors that affect customer loyalty and disloyalty in different service contexts. Since the empirical study was carried out in a retail bank setting, the thesis has managerial relevance especially for banks.

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5. Opening-Up the Mediating Technology: The Effects of Organizational Affiliation on Firm Survival Amir Sasson, Norwegian School of Management, BI

Synopsis I examine the properties of the network of organizations affiliated with mediators (banks) and evaluate their impact on affiliated organization and mediator performance. Organizational failure has been attracting academic attention for a long time because it constitutes the ultimate measure of performance as well as provides an opportunity to learn and develop our analytical models of entrepreneurial value creation. Various theoretical perspectives have been utilized to study organizational failure. The age dependence research in organization ecology examines the relationship between firm age, carrying capacity and failure rates. The resource-based view contents that failure of young firms is caused due to the lack of management competences and of older firms due to the lack of adjustments to changes in the competitive environment. Economists have been focusing on failure prediction based upon financial ratios and sociological accounts break grounds with the focus on intra-firm explanations and investigate how the properties of supplier-customer networks impact firm failure. Organizational failure is commonly defined by the lack of capital to cover organizational financial obligations. Financial intermediaries are the largest external capital providers for small and medium size firms. As provider of capital, financial intermediaries play a central role in influencing an organization ability to meet its financial obligations. Financial intermediaries are a special class of mediators operating in the presence of information asymmetry, which makes the provisioning of financial services to informationally opaque firms difficult. Uncertainty about the value of projects and the creditworthiness of borrowers can cause erroneous selections of new projects causing either the misplacement of

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funds or the failure to successfully select viable projects. Such errors may have dramatic consequences to performance and ultimately to firm survival of both affiliated organizations and financial intermediaries. Financial intermediaries are particularly vulnerable to bankruptcies and extreme high customer bankruptcy rates threaten not only a financial intermediary short-term performance but also its viability and solvency. Financial intermediaries financing decisions in turn directly impact entrepreneurs’ activities and organizational success and failure. The identification of factors that assist investors to better predict the likelihood of a firm defaulting is thus vital for bankers as well as other investors. In the context of small and medium size firms operating in the Norwegian economy between the years 1999 and 2002, I show that the underlying properties of the customer set served by each bank substantially impact each bank’s ability to evaluate a firm’s probability of success or failure as well as to avoid firm defaults. I utilized multiple archival sources to construct a unique data set of Norwegian limited liability firms operating between 1999 and 2002 and their respective banking relationships. I randomly selected two groups of 235 firms. The first group was randomly selected from the list of bankrupt firms and the other from the list of active firms. I provide support for the following arguments. First, the more central in the network of inter-organizational exchanges, bank customers are, the less the bank loses per failing customers. Common factors, such as bank size or bank growth rate do not explain the differences between banks in terms of loses. Secondly, the centrality of the customer set also impacts the probability of a firm affiliated with a bank in such a manner that the more central the customer set is, the less likely a firm belonging to that customer set is to fail. An alternative method is specialization. A firm affiliated with a bank, which has specialized in a specific industry, is less likely to fail than a firm affiliated with a bank, which has not developed specific capabilities and competencies in that firm’s specific industry. The findings have important implications for both theory and bank management. From a theoretical perspective, the findings providing support for the argument that customer set composition in an essential value driver in the context of financial mediators and hence advances our understanding of the operation of the mediating technology as well as calls for a shift in scholars’ attention on the mediating technology, which has

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not been particularly central in the research agenda. That is startling when considering the central role of transaction organizations or mediating organizations in economic life. Although there is much to be studied concerning the knowledge intensive firms and the rapidly disappearing manufacturing firms, there is a large vacuum in organizational studies of mediating organizations in particular and of mediators in general. The paper provides some evidence concerning the impact of mediating firms and their networks on the ultimate performance measure namely firm survival and invites scholars to fill in the theoretical and empirical voids. The findings suggest important managerial implications. From the affiliated organizations perspective, it suggests that the choice of a financial institution is not trivial but of vital importance to organizations. Firms who are affiliated with banks who already service related industry customers and who are central in the economy are more attractive to firms than non-specialized and peripheral banks. Taking a bank perspective, a specialized and central bank is more likely to attract good projects or alternatively select such projects successfully. Banks face the strategic challenge of organizing activities and structures in order to foster the development and utilization of internal informational markets, which decrease their losses.

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6. Fading Customer Relationships

Helena Åkerlund, is associated with CERS, the Centre for Relationship Marketing and Service Management at Hanken, Swedish School of Economics and Business Administration, Helsinki.

Abstract This dissertation is based on the assumption that fading customer relationships are important phenomena to understand in order for companies to prevent a future relationship termination, manage a desired relationship termination, or manage the situation where the relationship strength temporarily or permanently has weakened but where the customer still stays with the same service provider. It is assumed that fading could take different forms and develop through a range of different processes. The purpose of the thesis is therefore to define and describe fading, reveal different types of fading relationship processes, and discuss the dynamics of these processes. In services literature there is a lack of research focusing on the weakening of customer relationships. Fading therefore represents a new approach to understanding issues related to the ending of customer relationships. A fading relationship process could precede a relationship ending, but could also represent a temporal weakening of the relationship without leading to termination. It thus distinguishes the concept from other concepts within ending research which focus solely on relationships that have been terminated. It therefore takes a larger aspect of the relationship into account (as a relationship could build on constant changes) compared to only studying the processes that leads to an ending. Fading is here defined as “the weakening of relationship strength, where the outcome of the process is not yet known”. The strength of the relationship does not only incorporate behavioral components, but also cognitive, affective as well as co-native components filtered by a general (relative) impression of the relationship.

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A pilot study created an understanding of difficulties related to understanding and detecting fading customer relationship, which led to a follow-up study incorporating qualitative interviews in relationship dyads characterized as fading with both private banking customers and their respective financial advisor. The focus remained on the understanding of the fading process. Different aspects of the fading process resulted in a model for analyzing fading relationships, and four types of fading processes were revealed with the help of ideal type analysis; the crash landing process, the altitude drop process, the fizzle out process and the try out process. The dissertation contributes to a broadened understanding of different types of fading processes within the research area of ending relationships emphasizing the dynamic aspects of the phenomenon. Managerial implications include the management of different types of fading processes and also the understanding of the financial advisor’s role in influencing the development of these processes.

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7. The Internalization of Estonian Banks: Inward versus Outward Penetration Mart Sõrg, Janek Uiboupin, Urmas Varblane, University of Tartu Vello Vensel, Tallinn Technical University

Introduction The banking sector in Estonia has been among frontrunners in understanding the opportunities and risks of internationalization process. The internationalization of banks in Estonia has been twofold. At one side foreign banks have intensively entered into Estonian banking market and currently more than 86% of the aggregated share capital of Estonian banks is owned by foreign residents. At the same time some of Estonian banks have tried to enlarge their activities on neighboring foreign markets. The aim of this paper is to analyze foreign entry strategies of Estonian banks going abroad and foreign banks entering into the Estonian banking market. We discuss also main entry motives and possible effects of foreign bank entry in Estonia and other CEE (Central and Eastern European) transition countries. The paper is structured as follows. In first section we discuss main theoretical and empirical literature explaining the internationalization of banks. Then we give an overview of main potential effects of foreign banks entry on transition countries. In the second section we analyze empirically strategies used by Estonian banks going abroad. Then regression analysis is used to point out differences of foreign banks compared with domestic banks in Estonia and 10 other CEE countries. In section 2.2 we analyze motives and impact of foreign entry into Estonian banking market, some comparisons are made with other CEE countries.

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8. Implications of foreign bank entry on central and east European banking market Janek Uiboupin, University of Tartu Published in Kroon & Economy, 1/2004 Financial institutions in former centrally planned economies were not real banks in essence. This is why the early days of transition to market economy delivered a large number of small banks but they could provide just a few modern banking services, and in a limited extent anyway. Therefore many small banks closed their doors or merged. Opening of the market brought along first foreign banks in transition economies. The article introduces a study on the implications of foreign bank entry to the market.

Introduction International banking has been thriving on expansion of international trade and increasing foreign direct investment flows since the 1960s. In transition economies, in particular in Central and East European (CEE) countries, international banks have increased their presence since the second half of the 1990s, primarily due to opening of financial markets in these countries. The share of foreign capital in the banks’ total share capital exceeds 50% on the average, in Estonia even 86%. We can argue that the banking market in the CEE countries is to a large extent under the control of foreign capital. The growing foreign participation in banking raises a question of how this is going to influence the target banking market. Current studies have primarily focused on foreign entry’s impact on the profitability and level of cost of domestic banks (implications on net interest margin, asset productivity, overheads, non-interest income and loan losses). As in several CEE countries, including Estonia, the share of foreign capital is close to 90%, this study analyzed short-term impact of foreign entry on the

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entire banking market. Claessens et al2 concludes that an increase in the foreign participation reduces domestic banks’ net interest margin and level of overheads, i.e. market efficiency goes up. However, Lensink and Hermes3 argue that the impact of foreign participation on domestic banks is linked to the level of economy, characterized by GDP per capita. In less developed countries a larger participation in banking enhances growth in costs and margins of domestic banks; in developed countries no distinct correlation has appeared. The article derives from a study, which attempted to define the correlation between the foreign bank entry to the market and the development level of the banking market. While in previous studies primarily groups of different countries were compared, e.g. developing countries, developed countries, or transition economies, the current study focused on the development of banking market in the CEE transition economies. The objective was to provide an empirical evaluation of foreign entry’s short-term impact on domestic and foreign bank efficiency on the basis of the example of the CEE transition economies.

Theoretical Background Studies of foreign bank entry’s impact go back to the work of McKinnon and Shaw3 on liberalization of the financial environment. They discovered that abolition of barriers and opening of the banking market allows international banks to meet unsatisfied demand forbanking services, which domestic banks could not provide. Most of the studies (Bonin et al; Dages et al; Doukas et al)4 establish that foreign bank entry to less developed markets entails positive associations:

1 Claessens, S., Demirguc-Kunt, A., and Huizinga, H. (2001), ’How Does Foreign Entry Affect Domestic Banking Markets?’ Journal of Banking and Finance, 25 (5), pp 891–911. 2 Lensink, R. and Hermes, N. (2004), ‘The Short-term Effects of Foreign Bank Entry on Domestic Bank Behaviour: Does Economic Development Matter?’ Journal of Banking and Finance, 28 (3), pp 553–568. 3 McKinnon, R. I. (1973), ‘Money and Capital in Economic Development’, Washington DC, The Brookings Institution; Shaw, E. (1973), ‘Financial Deepening in Economic Development’, New York, Oxford University Press. 4 Bonin, J., Miszei, K., Szekely, I., and Wachtel, P. (1998), ‘Banking in Transition Economies: Developing Market Oriented Banking Sectors in Eastern Europe’; Edward Elgar, Brookfi eld, Vermont; Dages, B. G., Goldberg, L., and Kinney, D. (2000), ‘Foreign and Domestic Bank Participation in Emerging Markets:

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• development of new financial services and financial innovation; • possibilities to create economies of scale and economies of profile; • development of the financial system infrastructure (increased

transparency and implementation of good banking practice, development of financial regulation, transfer of management information);

• enhanced cooperation in the target market; • better investment climate and increased FDI in non-financial sector.

A few authors, e.g. Weller, argue that foreign bank entry to the market of transition economies could soar loan losses of domestic banks, as weaker domestic banks cannot compete with foreign banks and pay less attention to loan quality in order to keep their market share. According to previous research, foreign bank entry would tighten competition in the banking sector of the target country but also reduce profitability. Table 1 displays the anticipated impact of foreign entry.

The study analyzed also to what extent implications of foreign entry would depend on the development of the banking market. Countries, which have markets at different level of development, may have a different foreign entry impact on profitability indicators of domestic banks. Transmission effects could be more significant in countries with less-developed financial

Lessons from Mexico and Argentina’, Federal Reserve Bank of New York Economic Policy Review, 6 (3), pp 17–35. Doukas, J., Murinde, V., and Wihlborg, C. (1998), ’Main Issues in Financial Sector Reform and Privatisation in Transition Economies’, Financial Sector Reform and Privatisation in Transition Economies, Elsevier Science B.V., Amsterdam, pp 1–18.

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markets (King and Levine)6 where development potential is higher. In longer term, with larger foreign bank participation, the banking market is going to be more efficient; although in short term foreign entry could rather push costs up in less developed markets. This is due to various investments, which are necessary to increase the competitiveness of local banks. We can conclude that the response of a domestic bank to a changing foreign participation in the market depends also on the domestic bank market share by asset volumes. The larger the bank, the slower it can respond to changes.

Overview of Data Used This study defines a foreign bank as a bank with non-residents owning more than 50% of the equity. Two indicators were used to indicate the share of foreign banks in the market: the share of foreign banks’ assets to banks’ total assets in the country and the numerical share of foreign banks to the total number of banks in the country. Data from ten transition economies was used (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia). Data on 1995–2001 was grouped as follows: data on individual banks, foreign participation in the banking market of the country, characteristics of banking market developments in the country, and data about macroeconomic development in the country. BankScope database was used for bank-specific data: balance sheet and income statement indicators of 319 banks in the CEE countries in 1995–2001. The ratio of retail loans to GDP was used to characterize

6 King, R. G. and Levine, R. (1993), ‘Finance and Growth: Schumpeter Might Be Right’, Quarterly Journal of Economics, 108, pp 717–737.

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development of the banking market. The relevant data is available in IMF Statistics Yearbook7. The following macroeconomic indicators were used: real growth of GDP, GDP per capita, and inflation according to CPI. The data was available in an EBRD publication8. Figure 1 displays the median foreign bank participation in the surveyed countries in 1994–2001. The participation in total assets was on the average about 70% whereas the share of foreign banks in the total number of banks remained within 50%. However, the market share of foreign banks in transition economies is quite large and is going up.

Figure 2 displays the share of foreign banks in the total number of banks by countries in 1994–2002. Slovakia has the largest number of foreign banks (84% of the total number) and Slovenia the smallest (below 30%). The number of foreign banks may not indicate their actual participation in the market. Thus, in 2002, in Estonia foreign banks accounted for 57% of the total number of banks but for about 99% of the banks’ total assets9. .As seen also in Figure 1, the share of foreign banks in total assets of the banking market is larger than in the total number of banks. In some countries, like in Hungary and Croatia, the share of foreign banks in the number of total banks has slightly shrunk, primarily due to

7 International Financial Statistics Yearbook 2003. International Monetary Fund. 8 Transition Report 2003: Integration and regional cooperation. European Bank for Reconstruction and Development 9 The Estonian branch of Nordea Bank Finland Plc is treated as a bank, although official statistics treat it as a branch. This is why indicators here differ from official statistics

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bank mergers and takeovers, the actual foreign participation has not significantly decreased. As privatization of banks has been completed in most of the transition economies, new foreign bank entries are rare. The number of foreign banks has remained stable also in Estonia in recent years. Various indicators can be used to describe the development of the banking market. This study considered ratio of domestic credit by banks to GDP (DCGDP) as a banking development indicator. This is an internationally comparable financial sector development indicator with just one drawback: private sector loan burden in any given year depends on various macroeconomic indicators, and therefore the DCGDP value could considerably decrease in certain periods whereas the banking sector development level may not always decline. For example, in the Czech Republic the ratio of domestic credit to GDP has continuously declined over the last 5–6 years (see Figure 3), although according to EBRD, the banking sector development level against other CEE countries is quite high in the Czech Republic (see Figure 4). Also Lensink and Hermes10 have used DCGDP as a banking sector development indicator.

In Figure 3, Bulgaria stands out among all the countries analyzed, as its level of domestic borrowing shrank significantly. In 1996–1997 Bulgaria suffered from a major banking crisis and 17 banks were closed down,

10 Lensink, R. and Hermes, N. (2004), ‘The Short-term Effects of Foreign Bank Entry on Domestic Bank Behavior: Does Economic Development Matter?’ Journal of Banking and Finance, 28 (3), pp 553–568.

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which represented a third of the market. In post-crisis years the domestic credit level is slightly recovering but is still below 20%. Comparing Figures 2 and 3, we can see that banking markets with a larger foreign participation have developed more rapidly. However, Slovenia is an interesting exception: it has a very small share of foreign banks, about 30%, but the EBRD development index (which includes various market development indicators, such as the level of domestic borrowing, legislation, banking market stability, etc.) is equal to Poland and Slovakia (see Figure 4).

We can conclude that a large foreign participation in banking has a positive impact on the development of banking in the transition economies but in certain cases also a market with a very small foreign participation can develop equally well. According to the EBRD, Hungary has developed best out of the CEE countries. Estonia, Czech Republic, Croatia, and Latvia follow, being on a more-or-less equal level. In 2003, Lithuanian banking sector had the lowest development index. In Lithuania the level of domestic borrowing was the lowest in the CEE countries under review. We can say that DCGDP can describe the banking market quite well.

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Empirical Evaluation: Outcome The econometric model derives from an empirical model compiled by Claessens11, which studies the impact of foreign participation in the market on domestic banks’ profitability indicators. The model comprises several country-specific indicators (GDP, inflation, level of interest rates, etc.) as well as bank-specific indicators (share of deposits, equity, etc.). The equation also considered banking market development indicator (DCGDP) and bank’s market share by balance sheet volume (MSHARE). Multiplying the variables with foreign participation variable we get interactive variables, which reflect the dependence of foreign entry impact on changes both in the banking market development and in the market share of the bank. The study confirmed that foreign entry to CEE markets has reduced banks’ non-interest-rate income and profitability but increased overheads. The level of the banking market development has had the following implications: the higher the value of the market development indicator DCGDP, the less the banks’ profitability and non-interest rate income have shrank, and the less the banks’ overheads have grown. The findings are in line with a hypothesis that in a more developed market foreign bank entry involves less change. The outcome also displayed that with the foreign entry, the average interest rate level declines. This indicates tighter competition. With foreign participation going up, banks’ loan losses go down whereas loan losses of large banks shed less.

Summary The article analyses short-term impact of foreign entry on banks’ efficiency indicator in the CEE countries. According to the study, foreign entry reduces banks’ profitability, loan losses, non-interest income, and interest income. In short-term, foreign entry may also soar banks’ overheads. Summa summarum, foreign entry enhances competition in the domestic market.

11 Claessens, S., Demirguc-Kunt, A., and Huizinga, H. (2001), ’How Does Foreign Entry Affect Domestic Banking Markets?’ Journal of Banking and Finance, 25 (5), pp 891–911.

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The study shows that the impact of foreign entry on domestic bank behavior depends also on the development of the banking sector in the given country and the size of the bank. A more advanced banking market does not undergo such an overhead growth as a less advanced one does. Partially, also the hypothesis of technology difference was confirmed: the more advanced the market, the lower the transmission effects. We conclude that the larger the bank’s market share, the less its loan provisions would shrink upon foreign entry, i.e. the impact of foreign entry on larger domestic banks is not that great.

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9. Household Debt and Credit Constraints in Estonia

Marge Sults, Doctoral candidate, Tallinn Technical University

Abstract Rapid changes in banking and financial sectors in Estonia in 1990’s have had great influence on household behavior. One of the striking features of the changes has been significant growth in household sector’s debt burden. The main reasons are rise in income, low interest rates and lowering of credit constraints by banks and other financial institutions. It is still unclear what proportion of the households consider themselves as credit constrained and how many of them would demand more credits if credit constraints would be eased further. Here it would be useful to segment households to study their ability to borrow and their willingness to borrow. The survey of households was provided in January, 2003 to ascertain households’ attitude toward credit. The data came from two sources: via regular mail, and electronic questionnaire that was placed on the one of the main commercial bank’s Internet site. Via regular mail 874 questionnaires (29%) were returned. In the Internet site 929 questionnaires were filled. After listwise deletion of questionnaires with incomplete answers, total 1706 questionnaires remain in the sample. On the basis of responses to questions whether respondent has been rejected the loan or whether respondent has not applied for the loan because they expected to be rejected the loan, households were divided in two groups: credit constrained and unconstrained. The total number of credit constrained is 566 households, 33.2% of the sample. Among them, the number of those actually rejected is 358 (21% of total sample), the number of those who expected to be rejected (discouraged borrowers) is 371 (22 %). Comparison of credit constrained and unconstrained shows clearly that female are heavily represented among credit constrained. They make up of

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2/3 of credit constrained. The youngest respondents (aged 18-25) are the largest unconstrained age group that can in some extent reflect favourable terms of study loans by banks. Age group 26-35 faces more problems with getting loans than any other age group - nearly 40% of them see themselves as credit constrained. Education gives certainly some advantages in receiving loan as well as living place in a big town. The fact that the inhabitants of small towns are more credit constrained than inhabitants of big towns may be caused by the insufficient competition of the commercial banks for the customers in these areas. Two of the main commercial banks have branches in almost every small town but the rest of the commercial banks concentrate their activities mostly in the capital city and in other big towns. The biggest credit constrained group by occupation, the professionals, is quite heterogeneous and includes representatives of various professions with very different income levels. It is still obvious that among specialists demand for credits is higher than among other groups. The interesting feature of this structure is that, again, the youngest group (students and pupils) is relatively satisfied with the borrowing possibilities. The last characteristic, number of family members shows that single person get loan more easily than household that consists of multiple members. In general, 33% of credit constrained is higher than in similar empirical studies. It indicates that the demand for the bank loans is high in Estonia and it may even be considered a loan boom. One of the reasons for high demand for loans is the real estate price rally that started in 2002 and was partly boosted by the accession process to the European Union. The other important reasons are financial deepening, commercial banks’ heavy competition for the customers, low interest rates and households’ optimism towards the future.

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10. Estonian Banking Sector Performance Analysis Using Malmquist Indexes and DuPont Financial Ratio Analysis Ly Kirikal, Tallinn Technical University Mart Sõrg, Tartu University Vello Vensel, Tallinn Technical University 2004. Estonian Banking sector Performance Analysis Using Malmquist Indexes and DuPoint Financial Ratio analysis. In: Paper of Applied Business Research Conference, San Juan, Puerto Rico. * This article has been accepted for publication in the International Business and Economics Research Journal.

Abstract Banks and other financial institutions are a unique set of business firms whose assets and liabilities, regulatory restrictions, economic functions and operating make them an important subject of research. Banks’ performance monitoring, analysis and control needs special analysis in respect to their operation, productivity and performance results from the viewpoint of different audiences, like investors/owners, regulators, customers/clients, and management themselves. In this paper, productivity change in Estonian banking is estimated using the Malmquist productivity index. The data used in this study covers the period from 1999 to 2002. One purpose of this research is to introduce the Malmquist productivity index, which is first used for productivity analysis of Estonian banks. The present study shows that Estonian banks experienced average a 25,6 percent annual productivity growth rate during 1999-2002, what was the result of technological progress. Generally, all Estonian banks have increased productivity as a result of technological progress on this period. Some historical notes on the

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development of the Estonian banking system and the capital structure of banks are presented in this article. Different versions of financial ratio analysis are used for the bank performance analysis using financial statement items as initial data sources. The usage of a modified version of DuPont financial ratio analysis is discussed also in the article. Empirical results of the Estonian commercial banking system performance analysis are presented in the article (1994-2002).

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11. Malmquist Indexes of Productivity Change in Estonian Banking Ly Kirikal Department of Economics at Tallinn Technical University, PhD student, Estonia

• Kirikal, L. 2004. Malmquist Indexes of Productivity Change in Estonian Banking. In: Papers of the 4th International Conference for Master and Doctoral Student: Society and Consumption: Economic-Managerial and Social-Cultural Factors, Kaunas, Lithuania.

• Kirikal, L. 2004. Malmquist Indexes of Productivity Change in Estonian Banking. In: Papers of the 12th Conference on Science and Training: Economic policy perspectives of Estonia in the European Union, Värska, Estonia.

• Kirikal, L. 2004. Malmquist Indexes of Productivity Change in Estonian Banking. In collection of papers: Integration of Financial sectors of Baltic States into the European Union: Challenge and Experience, FEBA at Tallinn University of Technology and FEBA University of Tartu, Estonia, 253-265.

Abstract In the current study I estimate productivity change in Estonian banking using the Malmquist productivity index, which is first used for productivity analysis of Estonian banks. The present study shows that Estonian banks experienced an average of a 25,6 percent annual productivity growth rate during 1999-2002 due to technological progress. In comparison of 6 Estonian domestic banks over the period of 1999-2000, it was surprising that newest bank in Estonia - Preatoni Pank (Preatoni Bank) has the highest productivity growth.

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12. Stabilization Period and Malmquist Index of Productivity Change: an empirical study of Estonian banks Ly Kirikal Tallinn Technical University, PhD student, Estonia

• Kirikal, L. 2004. Stabilisation period and Malmquist Index of Productivity Change: An Empirical study of Estonian Banks. In: Papers of the Conference “New Europe 2020 – Visions and Strategies for Wide Europe”, Turku, Finland.

• Kirikal, L. 2004. Stabilisation period and Malmquist Index of Productivity Change: An Empirical study of Estonian Banks. In: Papers of the 4th International Symposium of DEA: Data Envelopment Analysis and Performance Management, Birmingham, UK, 353-360.

Abstract The problem of banking and financial system soundness has become more important in all countries over the last years. In the transition countries, the weakness of the banking system is the major factor of delaying expected economic growth. Rapid financial sector reforms and drastic restructuring has been characteristic for all Central and Eastern European transition countries. In the current study I estimate productivity change in Estonian banking using the Malmquist productivity index and compare received results with standard measures of performance used by banks. The data used in this study covers the period from 1999 to 2003, during which there was the steady development of financial institutions and stabilization in Estonian banking market. The present study shows that Estonian banks experienced an average of more than 25 percent annual productivity growth rate

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(production approach) during 1999-2003 due to technical progress. The comparison of correlation between Malmquist indexes and standard measures of performance (Return on Shareholders’ Equity, Net Interest Margin, Cost to Income ratio) gives the result, which proves that there is a weak correlation between these values.

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GNP of about one percent over a period of ten years, and employment would increase with 4.5 percent. These are big numbers if they can be linked directly to financial integration. And this is only for the 15 old member states. The dimension of enlargement of the union should be added and I think that will lead to stronger financial integration. The member states have big financial needs and they need improved financial systems. This is what preoccupies many policy makers, the potential benefits of continuing financial integration. It has propelled the work that we’ve undertaken over the past five years, which I hope is fairly familiar to you working in the financial sector, but all to unfamiliar to a wider audience. About five years ago we formulated two action plans – one for risk capital and one for financial services – and decided to use them as an agenda for the first few years of this decade. They form part of the so-called Lisbon agenda, an ambitious agenda for structural reform in the European economy. There has been a lot of debate over this agenda over the past few years. People feel that we’re not achieving our objective, that we aren’t making progress fast enough in a number of areas. I’m inclined to agree with a lot of the criticism but sometimes it goes to far. One area, and in fact the only area where we have been extremely faithful to, and achieved, the objectives that we set for ourselves, is the financial area. Essentially, the job has been done. We have taken all the necessary political decisions, put in place all the necessary legislation to pave the way for considerably increased financial integration in Europe as a whole. It’s a host of directives, as the legislative instruments are called in the European union, and it’s a boring material to go through but extremely important and very interesting and I’m sure it will help achieve this integration. The action plans are aimed at three areas. One is to build better functioning capital markets for issuers and investors; the target is the wholesale market. The second task is to move barriers for consumers and enable them to take advantage of the broad range of financial products, including cross-border services. And for banks and financial institutions to be able to provide those services. Thirdly, there is a lot to be done in the area of supervisory activity and legislation directed towards supervising authorities in the European Union. We are well on our way in achieving this. As far as

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legislation is concerned, the two action plans have been concluded. The question now is, will that be enough. Once implemented, will we see the desired effects? Will it enhance cross-border activities and commercial opportunities and to what extent has this framework removed obstacles of organizing business on a pan-European level? It’s not easy to answer these questions. Maybe you have answers yourself, but I think it’s too early to judge. A number of observations can be made, though. We do see signs of increasing structural integration of the European banking sector. We see the establishment of financial institutions and acquisitions of financial institutions abroad. And we see a gradual increase in the formation of financial multinationals. But what is most striking to date is perhaps that the consolidation in the banking sector still takes place primarily at a national level. National champions remain the dominant model. The degree of foreign ownership in the banking sector in the European Union is still strikingly low, with a few exceptions such as Luxembourg. At least if you look at the 15 old member states. It’s between ten and twenty percent on average. Not surprisingly, the average is considerably higher in the new member states. So, consolidation still takes place mainly at the national level and we remain boxed into these national contexts when it comes to the banking sector. I’m concerned about this because I don’t think it’s entirely healthy from a competition point of view. In Sweden, two of the major banks made an attempt to merger not long ago, but the European Commission stopped them. I think cultural factors play a part in the resistance against consolidation across boarders, and we have to overcome that. The banking sector in the United States, who we often compare ourselves with, is fragmented too I some respect, but if you look at the US market you see that the ten largest banks control about 60 percent of the assets and 40 percents of the capital in the country. I’m convinced that we’re moving in that direction in Europe as well, but so far progress in that direction is slow. One of the major differences between the European Union and the US, in this context as in many others, is that Europe is multinational, multilingual and multicultural. We have a number of cultural differences and I believe that constitutes an important obstacle in this type of relationships. I’ve been told that, for cultural reasons, it’s still inconceivable today for French banks on the one hand and German banks on the other to see a merger between a French and

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a German bank. So it will probably take the threat of a US mega bank moving in and doing the job for them. That would probably work as an incentive. From this point of view it is interesting to look at the region in which you find yourselves now, the Baltic Sea region. Because what you see here is a financial integration that has gone much further than in most other parts of the European Union and I welcome that. In fact Swedish banks, with their rather strategic geographical position in this area, have been at the forefront when it comes to creating new markets and driving the financial integration around the Baltic Sea. Again I will turn to the cultural issue; I believe that an important factor in our favor is that we have longstanding cooperation between the Nordic countries and great similarities and historic bonds. That makes integration easier to achieve than in other parts of Europe. With great satisfaction I see how the Baltic states are joining this family around the Baltic Sea and again I don’t see any major cultural differences. The younger generation in the Baltic states impress me all the time with their enormous openness and adaptability, which is helpful indeed. This integration and cross-border activity have led to a quite new situation for the Swedish banking industry. Today about half of the assets of our four leading banks are foreign and half of their lending to the public goes outside of Sweden. Of course this has affected not only the banks but also indeed the supervisory authorities in the area where I have a responsibility and we are trying our best to keep pace with this development. That is very important. If we look at the stock market we see other tendencies of financial integration, or positive trends in that direction, that go further in the northern area than we see elsewhere. We’ve seen integration between the Swedish stock market and the Finish exchange and now we see this go further into the Baltic states and so on. This should be encouraged and I’m trying to encourage it from the government side. Because, in the coming few years, the countries in the northern part of Europe need to build sufficient strength and financial muscle, whether it is in the banking sector, insurance sector or the stock market, in order to withstand the inevitable and powerful magnetism from the major financial sectors on the continent, such as Paris or London. We need to protect our turf and we can only do that only by building strength and being competitive.

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The only mistake Sweden made is not taking on board the euro. I believe that would have been a very positive interaction between what’s happening in the exchange rate field, what’s happening with the euro on the one hand and integration on the other. Anybody who decides to opt out of that definitely creates a handicap. But I still believe that Sweden can provide a leadership in the financial integration in the northern part of the European Union and I continue to keep the vision of ‘Finansplats Stockholm’ alive. This vision, from ten years ago, has tended to go into oblivion but I think it should be awakened. Let me return to the European work. I said we had done our job in terms of the necessary legislation. What shall we do next? What are the big tasks in the European Union in terms of legislative work and other political decisions? I think the next couple of years will be dominated by the task of implementation, implementation, implementation. So far, all we have are blueprints. In front of us is the task of incorporating the directives in national legislation and having all financial actors abide by them. That’s not an easy task and it will require a lot of cooperation between, not least, the supervisory authorities in order to make sure that the implementation is reasonably harmonized across Europe. These pieces of legislation could easily set go off in 25 different directions. The supervisory authorities themselves have to cooperate and governments have to make sure that they do. But I think we will be aided in the continued work in Brussels and in the European Union by the fact that we were able to agreed on a new decision-making process in the European Union that will be far more flexible and less time consuming than before. This will facilitate and speed up the work. One area in which implementation will be crucial is that of the new directive that gives us the opportunity to form European companies, the European company statute. That is perhaps more interesting and pertinent to the financial sector than you would immediately think. If correctly used, it can act as s a powerful catalyst of continued financial integration. Forming a European company will facilitate the administration for banks, or international banking groups, when they make the transition from being organized in a subsidiary structure to a branch structure. And that transition in itself is a key to more integration and cross-boarder activity. We’re confronted with this problem now as a government and a country since one of our major banks, Nordea, which has established itself in all of the

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Nordic countries and found its way into the Baltic states, and did that with a subsidiary structure, is now going to make the transition to a branch structure and use the possibility that is now available through the European company statute. Again, this is something that I encourage. We’re sort of pioneers in using the European company statute and we’re confronting problems now that others will be confronting down the road. The transition has some far-reaching implications, for example for the supervisory authorities obviously, but I think we will overcome them rather easily. We already have a good cooperation with the supervisory authority; we just deepen and extend that. Another implication considers the deposit guarantee system, since they are built differently in different countries. When they move from a subsidiary structure to a branch structure there will be a number of complications. I’m in the midst of discussing these with the Finish government and we will have to discuss it with the Norwegian and Danish governments as well. And I have already taken the step of bringing this up with the responsible commissioner, so that the new commission can begin to deal with this problem when they take their place. These things need to be resolved and I am open for suggestions about exactly how they should be resolved. But we are breaking new and important ground and if we can arrange this smoothly and help Nordea make the transition to a branch structure, I think it would gain not only Nordea, but other organizations as well. Among the other tasks at the European level, are the capital added pursued goals that have been negotiated and now need to be incorporated, first in the European directive and then into national legislation. That is a big task with far-reaching consequences for the banks themselves and for the supervisory authorities as well. I also think issues of corporate governance will be if increasing importance at the European level and I encourage greater attention to that. I do believe that corporate governance issues are more relevant than what the financial sector and many other sectors think, and the financial sector should be heavily involved. A third area, and I’m trying to convince finance ministers in the European union o this, is that we need to move in a bit more determined way when it comes to integration between European and US capital markets. I am

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deeply convinced that further integration between the US and Europe is in the interest of both sides of the Atlantic and would bring great benefits to us both, in the same way we have been able to analyze and bring out the financial benefits of financial integration in Europe. In addition to that, I believe we need to find as many areas as possible, in the economic field not least, where we can achieve constructive cooperation and good results with our US friends. We are living in a period were strains are becoming very apparent across the Atlantic and I think this is more threatening to Europe than we realize. We need to work much harder at remaining close allies. The economic field is an area where many things still aren’t done and where we need to work, and this is one of those things. In the years ahead I think it will be necessary, if this is to succeed, that we have what we’re having right now, a closer dialogue between the policy makers and the financial institutions. The legislator can provide a lot. We can provide the level of the playing field, we can stimulate competition and we can make strategic decisions that concern all of the emerging internal financial markets in Europe as well as the relations with the US, and so on. But the integration that should be achieved, and I’m convinced will be achieved within the next five or ten years, has to be market driven in order to come about. As I see it, the consumer ultimately gains the most from this integration. That makes it all the more necessary that the consumers have full confidence in the system and in the institutions that provide the services and the integration.

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4. Retail banking and economic growth – local banking in the globalizing context Moderator: Olle Rosander, Author and journalist, Sweden Panel:

• Peter Stenkula, Senior Economic Adviser, Central Bank of Sweden • Indrek Neivelt, CEO, Hansa Bank, Estonia • Urban Bäckström, CEO, Skandia Liv, Sweden

These are a few of the issues that were discussed during the seminar: Brand banking: Peter Stenkula found that the big international banks tend to concentrate on highly standardised services, leaving room for local banks to design individual services for special purposes. To be able to do that, local banks need to cooperate with other service providers in the financial sector. Combining global business with local banking: Financial capital is global but the regulations surrounding it are local. The panel members agreed that international banks could never collect the same knowledge of the local business as local banks. The products may be international, or provided by international banks, but the service needs to be local. Government regulations: The panel members disagreed on the impact of regulations. Do they hinder a healthy development or does economic growth have more to do with the business. Packaging and broader services: Indrek Neivelt thinks that banks will offer more commodities in the future and that future banks can combine services from other capital providers, and create packages. The panel also discussed the increase of customised products services and the importance of approaching different types of customers in different ways.

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Educated customers: The population is becoming more educated and know a lot more about financial systems than they used to. In the long run, banks will need to upgrade the skill level among the employees. Paneuropean paying system: Within the European Union, different organisations are working towards common prizing and accounts. In the near future the citizens might be able to open an account anywhere in the EU.

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5. Results from ’The Future of Retail Banking’, a research project funded by the Göran Collert Foundation for Research and Education Kent Eriksson Introduction The research project ’the Future of Retail Banking’ investigates how banks can meet the challenges from changes in technology, economy, society, and social behaviour. The project takes a customer oriented perspective, and investigates the consequences of the aforementioned changes to the interface between customer and bank.

The Future of Retail Banking is a Nordic research project that has been going on for five years and that presently involves 16 researchers in Estonia, Finland, Norway, and Sweden. The results from the work in the project constitute a major increase in the level of competence in research and education in banking and finance in the Nordic and Baltic region. This competence increase is described in detail in appendix, and summarized below.

o Publications

o The project has so far produced 6 PhDs and 2 Professors (chairs). 2 more PhDs are scheduled for fall 2004.

o The project has resulted in 10 books, 15 journal publications, 8 book chapters, 3 working papers, and 25 conference presentations.

o Additional results o The researchers in Finland have created a research group for

banking and finance at the Centre for Relationship and Service Marketing (CERS), under Christian Grönroos’s leadership at Hanken. CERS are world leaders in service marketing, and it is a great advantage that many of the researchers in this centre now focus financial service research.

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o Sweden and Norway jointly work to develop a model of customer oriented banking. The model focuses how banks can expand their role as being and intermediary between customers by increasing inter-customer business.

o The Estonian researchers produce research at the highest international standards in the context of an emerging economy.

o There is considerable integration between the countries involved in the project. This is manifest in joint publications and other co-operation.

o There is an ongoing dialogue between researchers and bankers, and this takes place at symposia and in research projects.

o Models for banks’ development of dynamic learning customer relationships have been made, and these have been found to increase business volume and profitability in relationships.

o Utmaningar och lösningar för hur banken kan organisera sin verksamhet kundorienterat.

o Models for internet based bank-customer interaction have been made.

o An ongoing development work focuses how banks can act to develop local growth by utilizing their position as intermediaries between local business actors. This is now developed into a pan-European research project involving 10 European countries.

o Education material, such as textbooks, courses, and curricula has been developed in Sweden, Finland, and Estonia.

The results of the project has been presented at ’The First International Symposium on The Future of Retail Banking’ in 2001,where the researchers also got input for future research. Planning is now in progress for ’The Second International Symposium on The Future of Retail Banking’, scheduled for fall 2004. Taken together, the symposium, education, research, and publications have made this project a success that has managed to reach the international research and banking and finance communities.

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Report of dissemination and human capital skills increase in the Project ’The Future of Retail Banking’ 1998-2003 Human capital skills increase o Lars Silver earned his PhD degree at Uppsala University in Sweden

in 2001. o August Aarma earned his PhD degree at Tallin Technical University

in Estonia in 2002. o Katri Kerem earned her PhD degree at Tallin Technical University in

Estonia in 2003. o Enn Listra earned his PhD degree at Tallin Technical University in

Estonia in 2002. o Helena Åkerlund earned her PhD degree at Swedish School of

Economics and Business Administration, (Hanken) in Helsinki, Finland in 2004.

o Christina Nordman earned her PhD degree at Swedish School of Economics and business Administration (Hanken) in Helsinki, Finland in 2004.

o Katri Kerem was promoted to Associate Professor at Tallin Technical University in Estonia in 2003.

o Oystein Fjeldstad received a Professors stipend in 2002, and now holds the Telenor chair in Strategy at the Norwegian School of Economics and Business Administration (BI), in Oslo.

o Kent Eriksson was promoted to Professor in 2003, and is now at the Centre for Retail Banking, the Royal Institute of Technology – KTH, in Stockholm.

o Christian Grönroos accepted in 2002 to serve as part-time guest professor of service management at Lund University

o Jelena Hartsenko received her Masters degree in 2000 at Tallin Technical University in Estonia.

o Kertu Fedotov (previously Roostalu) received her Professional master degree on the field of finance and insurance mathematics from the University of Tartu in 2003 "Pension Insurance Models on the Basis of Estonian Data".

o Teet Parring received his MBA degree at Estonian Business School in 2003.

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o Enn Listra was promoted to Professor in 2002 and holds the Chair of Finance and Banking in Tallinn Technical University.

o August Aarma was promoted to Associate Professor at Tallinn Technical University in 2002.

o Ly Hõbe received her Masters degree in 2002 at Tallinn Technical University. "Private banking - trends in the world and necessity in Estonia"

Dissemination and Public attention Awards o Christian Grönroos was awarded outstanding management book of

the year, 2002, by the Finnish management association. Events o The First International Research Symposium on the Future of Retail

Banking, Skepparholmen, Sweden (2001) o Special track on ‘Banking and Finance’ at the industrial Marketing

and Purchasing Conference in Oslo, 2002 o Key note speach at European Marketing Association Conference in

2002, by Oystein Fjeldstad, Bergen, Norway. o The Estonian-Finnish Joint Seminar on Economic Integration and the

European Union Enlargement, 22-23 November 2002, Tallinn, co-organizer and co-editor of the seminar papers edition Vello Vensel (see published books).

o The Fifth Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002, Tallinn, co-organizer and co-editor of Conference papers edition Vello Vensel (see published books).

Publications report Books

1. Åkerlund, H., 2004, Fading Customer Relationships, Swedish School of Economics and Business Administration, Helsinki, Finland.

2. Nordman, C., 2004, Understanding Customer Loyalty and Disloyalty - The Effect of Loyalty-Supporting and -Repressing Factors, Swedish School of Economics and Business Administration, Helsinki, Finland.

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3. Eriksson, K., 2000, The Managment of Relationship Development, CeFin, Södertörn University College.

4. Silver, L., Credit Risk Assessment in Different Contexts, diss. Uppsala University, Department of Business Studies, Uppsala

5. Grönroos, C. (2000), Service Management and Marketing. A Customer Relationship Management Approach, John Wiley & Co, Chichester, UK, 2000 (also in Chinese 2001, in Finnish 2001, in Swedish 2002, in Portuguese 2004)

6. Jaamu Viljar. 2003. The Methods and Instruments for Solving the Banking Crisis and the Development of the Banking Sector in Estonia. Thesis on Economics H7. Tallinn: TTU Press, 226 p.

7. Vartiainen, Hannu and Vello Vensel, eds. 2003. Papers of the Estonian-Finnish Joint Seminar on Economic Integration and the European Union Enlargement, 22-23 November 2002, Tallinn. TTUWPE No. 03/91-03/103. Tallinn: FEBA at the Tallinn Technical University, 237 p.

8. Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. 2002. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002, Tallinn. Working Papers in Economics, Tallinn Technical University, TTUWPE No. 02/65 – 02/90. Tallinn: FEBA at Tallinn Technical University, 362 p.

9. Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. 2002. Foreign Banks and Economic Transition. Working Papers, Department of Economic Policy and Development Planning at the Poznan University of Economics. Poznan: Poznan University of Economics

10. Kirikal Ly. 2003. Life Insurance. Textbook for EBA distance learning courses. Tallinn: Estonian Banking Association (in Estonian)

11. Vensel, Vello and Clas Wihlborg, eds. 2001. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Collection of Papers Tallinn: Department of Economics at Tallinn Technical University, 423 p. + xxv.

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12. Aarma, August. 2001. Segmented Analysis of Bank Customers and banking Information: the Estonian Case. Thesis on Economics H1. Tallinn: TTU Press, 88 p. (extended abstract).

13. Listra, Enn. 2001. The Development and Structure of Banking Sector: Retail Banking in Estonia. Thesis on Economics H2. Tallinn: TTU Press, 106 p.

14. Vensel, Vello. 2001. Bank Performance Analysis and Financial Management I. The 2nd, improved and complemented edition. Textbook for post-graduate students. Tallinn: TTU Press, 130 p. (in Estonian).

15. Hlebnikova, Jelena and Erlike Kumar. 2001. Credit Risk Management II. Textbook for EBA distance learning courses. Tallinn: Estonian Banking Association (in Estonian).

16. Hlebnikova, Jelena and Erlike Kumar. 2000. Credit Risk Management I. Textbook for EBA distance learning courses. Tallinn: Estonian Banking Association (in Estonian).

17. Wihlborg, Clas, August Aarma, Tadeusz Kowalski, Danuta Staniszewska, Vello Vensel. 2000. Operational Efficiency of Polish and Estonian Banks in 1994-1997. CERGU’s Project Report Series No. 00:7. Göteborg: CERGU.

Journal articles

1. Eriksson, K. & Mattsson, J., 2002 , ’Managers' Perception of Relationship Management in Heterogeneous Markets, Industrial Marketing Management, 31, pp. 535-543.

2. Eriksson, K. & Sharma, D.D. 2003, ’Modeling Uncertainty in Buyer Seller Relationships’, Journal of Business Research. 56, 961-970.

3. Lindberg-Repo, K. & Grönroos, C. (2004), Conceptualising Communication Strategy from a Relational Perspective, Industrial Marketing Management (forthcoming)

4. Grönroos, C. (2004), The Relationship Marketing Process: Communication, Interaction, Dialogue, Value. Journal of Business & Industrial Marketing (forthcoming)

5. Grönroos, C. & Ojasalo, K. (2003), Service Productivity: Toward a Conceptualization of the Transformation of Inputs into Economic Results in Services, Journal of Business Research, (forthcoming)

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6. Grönroos, C. (2003), Taking a customer focus back into the boardroom: can relationship marketing do it?. Journal of Marketing Theory, Vol. 3, No. 1, pp. 171-173

7. Brodie, R., Grönroos, C. & Helenius, T. (2001), Contemporary Marketing: A Comparison of Practices in New Zealand, Scandinavia and Thailand. The Asian Journal of Marketing. Special Millennium Issue, No. 1, pp. 72-81

8. Grönroos, C. (2001), Communication, interaction et “valeur-consommateur” dans les services (Communication, interaction and value consumption in services). Market Management, No 4, pp. 64-69

9. Grönroos, C. (2001), The Perceived Service Quality Concept – A Mistake. Managing Service Quality, Vol. 11, No. 3, pp. 150-152 (non-refereed; scientific)

10. Grönroos, c. (2000), Il marketing dei servizi: consumo e marketing di processo (The marketing of services: comsumption and marketing of processes). Problemi di Gestione, Vol. 23, No. 1, pp. 79-100 (non-referee; scientific)

11. Grönroos, C. (2000), Relationship marketing: Interaction, dialogue and value. Revista Eusopean de Dirección y Economía de la Empresa, Vol. 9, Núm. 3, pp. 13-24

12. Grönroos, C. , Heinonen, F., Isoniemi, K. & Lindholm, M. (2000), The NetOffer Model: A Case Example from the Virtual Marketspace. Management Decision, Vol. 38, Vol. 4, , pp. 243-252 (non-refereed; scientific)

13. Grönroos, C. (2000), Creating a Relationship Dialogue: Communication, Interaction and Value. The Marketing Review, Vol. 1, No. 1, pp. 5-14 (non-refereed; scientific)

14. Grönroos, C. (2000), Vad som är bra för företaget var också bra för samhället – hur är det idag? (What was good for the firm was also beneficial for society – how is it today?). Ekonomiska Samfundets Tidskrift (The Journal of the Economic Society of Finland), Vol. 53, No. 1, pp. 89-90 (non-referee; scientific)

15. Lustsik, O. (2003) "E-pangandus Eestis: kiire kasvu põhjused ja tegurid". Journal Kroon&Majandus, 2003 nr 3, Eesti Pank, ISSN 1406-801X. Lk 23-34

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16. Kerem, Katri. 2003. The History and Successes of Internet Banking in Estonia. - Baltic IT Review, 29, 54-57.

17. Listra, Enn. 2003. The Financial Market and Financial Intermediation in Estonia. - The Journal for Money and Finance (Bančni Vestnik), 52, 7-8 (July-August), 87 – 97.

18. Vensel, Vello. 2003. Development of the Financial Sector in the Globalizing World: An Emerging Market Economy Case. - Electronic journal Papeles del Este: Transiciones Postcomunistas (ISSN 1576-6500), 6, March, 27 p.

19. Sõrg, Mart and Vello Vensel. 2002. Banking System Development under the Estonian Currency Board. - International Advances in Economic Research, 8, 1, February, 35-48.

20. Vensel, Vello. 2002. Banking Sector Development in Estonia. - The Journal for Money and Banking (Bancni Vestnik). Special Issue: Banks in the Countries of Central and South-Eastern Europe, 51, 7-8, (July-August) 41-49.

Bookchapters

1. Esken, A., Keerig, M., Liikane, K., & Tamm A., Corporate Missions of Major Banks in Estonia, Estonian Banking School Review, 2001, pp. 82-88.

2. Grönroos, C. (2003), Asiakkaiden odotusten ylittäminen – paveluyrityksen johtaminen (Exceeding customer expecttions - managing service firms). In Kilpailuetumme. Tutkimusmatka kehittyvään K-kauppiasyrittäjyyteen (Our competitiv advantage. An expedition into K-retailer entrepreneurship). Helsinki: K-kauppiasliitto, pp. 122-131

3. Grönroos, C. (2001), Utveckling av en relationsdialog – en integrerad del av framgångsrik relationsmarknadsföring. I Grönroos, Christian & Järvinen, Raija, eds.., Palvelut ja asiakassuhteet. Markkinoinnin polttopisteessä. (Services and customer relationships. Marketing in focus). Festbok till Uolevi Lehtinen. Vantaa: Kauppakaari, pp. 178-191

4. Grönroos, C. & Järvinen, R., eds. (2001), Palvelut ja asiakassuhteet. Markkinoinnin polttopisteet (Services and customer relationships in the focus of marketing) (co-edited together with Raija Järvinen). Helsinki: Kauppakaari,

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5. Grönroos, C. (2000), I Did It My Way. Contribution to Services Marketing Self-Portraits: Introspections, Reflections, and Glimpses from the Experts, edited by Fisk, Raymond P, Grove, Stephen J. & John, Joby. Chicago, IL: American Marketing Association, pp. 71-108

6. Grönroos, C. (2000), The Marketing of Services. In Blois, Keith, ed., The Oxford Textbook of Marketing, Oxford University Press, pp. 500-516

7. Grönroos, C. (2000), Relationship Marketing: The Nordic School Perspective. In Sheth, Jagdish N. & Parvatiyar, Atul, eds., Handbook of Relationship Marketing, Thousand Oaks, CA: Sage, pp. 95-118

8. Grönroos, C. (2000), Service Reflections: Service Marketing Comes of Age. In Swartz, Teresa A. & Iacobucci, Dawn, eds., Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage Publications, pp. 13-16

Working papers

1. Eriksson, K. & Mattsson, J., 1998, Bank Managers on Developing Customer Relations, Working Paper 1998, Department of Business Studies, Uppsala University.

2. Olga Lustsik. “E-banking in Estonia: reasons and benefits of the rapid growth”. Working Paper series, University of Tartu, Faculty of Economics and Business Administration. Nr 21/2003. Also published on Social Science Electronic Publishing web site http://papers.ssrn.com/sol3/papers.cfm?abstract_id=460260.

3. Olga Lustsik. “Profitable E-Banking Services: Myth or Reality. Based On Activity Based Costing Calculations in an Estonian Bank”. Draft of the article, November 2003

4. Janc, Alfred, Agnieszka Krymaryc-Balcerzak and Vello Vensel. 2002. Retail Banking Services in Poland and Estonia – A Comparative Empirical Study. In: Liuhto, Kari, ed. Business in Poland – Experiences of Finnish Companies in Doing Business in the Largest Eastern EU Candidate Country. Studies in Industrial Engineering and Management, No. 18. Lappeenranta: Lappeenranta University of Technology, pp. 131-151.

5. Aarma, August and Vello Vensel. 2001. Banks’ Retail Customer Satisfaction and Development of Bank-Customer Relationships. In:

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=460260

Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn: Department of Economics at Tallinn Technical University, pp. 85-106.

6. Listra, Enn. 2001. Development of the Financial Sector and Banking Services, In: Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn: Department of Economics at Tallinn Technical University, pp. 107-122.

7. Sõrg, Mart and Vello Vensel. 2001. Estonian Currency Board Arrangement – The Cornerstone of Economic Stabilisation. In: Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn: Department of Economics at Tallinn Technical University, pp. 3-22.

8. Sõrg, Mart and Janek Uiboupin. 2001. Internationalisation and Entry of Foreign Banks into Estonian Market. In: Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn: Department of Economics at Tallinn Technical University, 2001, pp. 45-70.

9. Vensel, Vello. 2001. Estonian Banking System Performance, 1994-2000. In: Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn: Department of Economics at Tallinn Technical University, pp. 23-43.

10. Uiboupin, Janek and Vello Vensel. 2001. Motives and Impact of Foreign Banks Entry into Estonia. In: Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn: Department of Economics at Tallinn Technical University, pp. 71-84.

11. Vensel, Vello. 2001. Trends and Visions on the Future of Retail Banking. In: Vensel, Vello and Clas Wihlborg, eds. Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Tallinn:

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Department of Economics at Tallinn Technical University, pp. 137-159.

12. Sõrg, Mart and Vello Vensel. 2000. The Currency Board in Estonia. In: Iliana Zloch-Christy, ed. Economic Policy in Eastern Europe: Were Currency Boards a Solution. Westport, CT; London: Praeger, pp. 113-143.

13. Mart Sõrg and Vello Vensel 1999. Successful Experience of Operating the Currency Board Arrangement in Estonia. In: Ü. Ennuste and L. Wilder, eds. Harmonization with the Western Economics: Estonian Economic Development and Related Conceptual and Methodological Frameworks, Tallinn: Estonian Institute of Economics at TTU, pp. 11-39.

Conference papers and presentations

1. Eriksson, K., Fjeldstad, O., and Sasson A., (2002), ‘Network intermediation in banking’, IMP Conference, Oslo, Norway (09/01)

2. Eriksson, K., and Marquardt, R., (2002), ‘Internet bank relationships’, IMP Conference, Oslo, Norway (09/01)

3. Eriksson, K., Fjeldstad, O., and Sasson A., (2002), ‘Network value creation in banking’ SMJ conference, Paris, France (09/02)

4. Grönroos, C. (2003), Implementing a CRM Perspective in Marketing: Servicizing the Customer Relationship to Support Customers’ Value Processes. Research report presented at the 2003 AMA Servsig Research Conference, Reims, France, June 12-14

5. Grönroos, C. (2002), Marketing Theses in the Age of Customer Relationships: Servicizing the Customer Relationship to Support Customers’ Value Processes. Keynote speech, Forum on Service Management. Tianjin University of Commerce. Tianjin Economic and Technologal Special Development Area, P.R.China, 10-11 October

6. Grönroos, C. (2002), From a Paradigm Shift to Implementation: Servicizing Customer Relationships. Invited plenary session invitation. Tenth International Colloquium in Relationship Marketing. Universität Kaiserslautern. Kaiserslautern, 1-3 October

7. Grönroos, C. (2002), Servicizing Customer Relationships: Supporting Customer Value Through Customer Relationship Management. Plenary session presentation. Seventh Research

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Conference on Service Management. IAE/Université Aix-Provence, La Londe les Maures, France 29-31 May

8. Solhäll, Catharina (2003) “Use and Non Use of Customer Information in Service Development – An Exploratory Study”, Proceedings, The 10th International Product Development Management Conference, Brussels, Belgium, June 2003

9. Solhäll, Catharina (2003) “Is Customer Information Needed in Service Development?”, Proceedings, AMA Servsig Services Research Conference, Reims, France, June 2003

10. Solhäll, Catharina “Utilisation of Customer Information in Service Development – An Exploratory Study”, the ANZMAC Conference, December 1-3, 2003, Adelaide, Australia

11. Nordman, Christina and Åkerlund, Helena (2002): Learning from customer relationships at risk: a proactive approach to maintaining customer loyalty, in proceedings QUIS8 Quality in service: crossing boundaries, Tax, S., Stuart, I., Brown, S. W., Edvardsson, B., Johnston R., Scheuing, E. (eds.), Victoria, Canada.

12. Åkerlund, Helena (2000): Analysing the nature of fading relationships, in proceedings QUIS 7, Service quality in the new economy: interdisciplinary and international dimensions, Edvardsson, B.; Brown, S. W.; Johnston, R. and Scheuing, E. (eds.), ISQA, New York, US.

13. Åkerlund, Helena (2003): Fading Relationship processes in Private Banking, Swedish Research School of Management and Information Technology workshop, Visby

14. Åkerlund, Helena (2002): Learning from customer relationships at risk - benefits and disadvantages of Negative Critical Incident Mapping, Frontiers in Services Conference, Maastricht, Holland

15. Åkerlund, Helena (2002): Negative Critical Incident Mapping – suitable as a tool for understanding fading customer relationships? 2nd Nordic Workshop on Relationship Dissolution (NoRD), Visby, Sweden

16. Åkerlund, Helena (2001): Fading Customer Relationships in banking, Research proposal, Scandinavian doctoral conference, NFF 2001, Uppsala, Sweden

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17. Åkerlund, Helena (2000): Analysing Fading Customer Relationships – a methodological discussion, 1st Nordic Workshop on Relationship Dissolution (NoRD), Kuusamo, Finland

18. Lustsik, O. (2003 – sept.) “E-Banking in Estonia: Reasons of the Rapid Growth”. – Proceedings of the International scientific Conference: “Financial Market and Management”, Riga, University of Latvia, Faculty of Economics and Management.

19. Nordman, Christina (2002) 2nd Nordic Workshop on Relationship Dissolution, September 20-22, Visby, Gotland, Determinants of bank switching: findings from the retail banking sector.

20. Nordman, Christina and Helena Åkerlund (2003) Kundutvecklingsdagen, February 20, 2003. Seminar arraged by Relationship Group. Presentation: ”Kundrelationer i riskzonen”.

21. Nordman, Christina (2001 - nov) National tutorial in Marketing, University of Oulu

22. Nordman, Christina (2001 - dec) Research seminar, Swedish School of Economics and Business Administration

23. Nordman, Christina (2002 - nov) National tutorial in Marketing, Swedish School of Economics and Business Administration

24. Nordman, Christina (2003 - nov) Manuscript of doctoral thesis presented at doctoral manuscript seminar.

25. Janek Uiboupin, Mart Sõrg and Vello Vensel. Conditions and Results of Foreign Banks’ Entry in CEECs: Comparative Empirical Evidence. In: Petr Chadraba and Reiner Springer, eds. Proceedings of the 11th Annual Conference on Marketing and Buiness Strategies for Central & Eastern Europe, 4-6 December 2003, Vienna. DePaul University and Wirtschaftsuniversität Vien, 2003, pp. 8-25.

26. Vensel, Vello. Corporate Governance and Bankruptcy Procedures in Croatia, Estonia and Poland. VI International Scientific Conference on Finance in EU Accession Countries: Experiences and Solutions, 17-18 October 2003, Tartu. Proceedings, Volume 2, Panel B: Financial Markets and Institutions. Tartu: Tartu University, 2003, pp. 389-402.

27. Listra, Enn. 2003. Banking Services in Estonia: the Results of Survey. In: International Conference “Economics and Management – 2003” Proceedings, Volume 3, Section “Financial Management

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Trends - 2003”, 25-26 April 2003, Kaunas (eds. M. Dapkus, A. Jurkstiene, J. Nedzveckas, G. Startiene). Kaunas: Technologija, pp. 32 – 34.

28. Vensel, Vello. 2003. Financial Services Development in Estonia. In: International Conference “Economics and Management – 2003” Proceedings, Volume 3, Section “Financial Management Trends - 2003”, 25-26 April 2003, Kaunas (eds. M. Dapkus, A. Jurkstiene, J. Nedzveckas, G. Startiene). Kaunas: Technologija, pp. 75-77.

29. Rahu, Katrin. 2003. Efficiency of Thin Developing Capital Markets. In: International Conference “Economics and Management – 2003” Proceedings, Volume 3, Section “Financial Management Trends - 2003”, 25-26 April 2003, Kaunas (eds. M. Dapkus, A. Jurkstiene, J. Nedzveckas, G. Startiene). Kaunas: Technologija, pp. 45-47.

30. Sõrg, Mart, Janek Uiboupin and Vello Vensel. 2003. Consolidation and Internationalization in the Financial Service Sector: The Comparative Empirical Evidence. In: Vartiainen, Hannu and Vello Vensel, eds. Papers of the Estonian-Finnish Joint Seminar on Economic Integration and the European Union Enlargement, 22-23 November 2002, Tallinn. TTUWPE No. 03/108. Tallinn: FEBA at the TTU, pp. 151-170.

31. Kerem, Katri, Olga Lustsik, Mart Sõrg, Vello Vensel. 2002. E-Banking in Estonia: Development, Driving Factors, and Effects. In: Chadraba, Petr and Reiner Springer, eds. Proceedings of the 10th Annual Conference on Marketing and Business Strategies for Central & Eastern Europe, 5-7 December 2002, Vienna, Vienna: Wirtschaftsuniversität Wien; Chicago: DePaul University, pp. 293-312.

32. Aarma, August and Vello Vensel. 2002. Bank-Customer Relationships Development in Majority Foreign Owned Banking System. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002, Tallinn. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/65, pp. 3-20.

33. Janc, Alfred, Agniezska Krymaryz-Balcercak and Vello Vensel. 2002, Retail Banking Services in Estonia and in Poland: A

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Comparative Empirical Study. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/75, pp. 143-158.

34. Tadeusz Kowalski, Janek Uiboupin and Vello Vensel. 2002. Motives of Foreign Banks’ Entry into the Transitional Economies: The Comparative Empirical Evidence from Estonia and Poland. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/78, pp. 177-190.

35. Listra, Enn. 2002. Retail Banking Development in Estonian Foreign-Owned Banks: Results of a Survey. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/80, pp. 201-216.

36. Sõrg, Mart and Urmas Varblane. 2002. Expansion of Estonian Banks to Foreign Markets. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/81, pp. 217-238.

37. Uiboupin, Janek and Vello Vensel. 2002. The Impact of Foreign Banks Entry into Estonian Banking Market: Survey Results, In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE 02/82, pp. 239-250.

38. Hartsenko, Jelena. 2002. Comparison of Retail Payment Instruments in the Baltic Countries. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/85, pp. 283-294.

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39. Kerem Katri. 2002. Electronic Retail Banking in Estonia. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No, 02/87, pp. 305-316.

40. Kirikal. Ly. 2002. Life Insurance and Its Selling Possibilities in Retail Banking via Internet. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Papers of the 5th Conference on Financial Sector Reform in Central and Eastern Europe: The Impact of Foreign Banks’ Entry, 26-27 April 2002. Tallinn: FEBA at Tallinn Technical University, TTUWPE No. 02/88, pp. 317-322.

41. Uiboupin, Janek and Vello Vensel. 2002. Foreign Banks Entry into the Estonian Market: Motives and Impact. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Foreign Banks and Economic Transition. Working Papers, Department of Economic Policy and Development Planning at the Poznan University of Economics. Poznan: Poznan University of Economics, pp. 179-193.

42. Vensel, Vello. 2002. The Quality of Banking Services and Relationship Development in Foreign-owned Estonian Banks. In: Kowalski, Tadeusz, Robert Lensink and Vello Vensel, eds. Foreign Banks and Economic Transition. Working Papers, Department of Economic Policy and Development Planning at the Poznan University of Economics. Poznan: Poznan University of Economics, pp. 195-217.

43. Vensel, Vello. 2002. Bank Financial Analysis: Methodology and Empirics. Proceedings of the Conference on Accounting and Companies’ Performance Management, 25-26 October. Tartu: Tartu University, pp. 205-213.

44. Listra, Enn. 2001. Development of the Banking Services in Estonia: From Non-Existence to Bank-Customer Relationship Through Internet. In: Proceedings of the IV International Conference on Topical Financial Problems in Transition Economies, 9-10 November 2001, Tartu, pp. 181-190.

45. Vensel, Vello. 2001. How Has Estonian Banking Business Performed? Methodology and Empirical Analysis. In: Proceedings of the IV International Conference on Topical Financial Problems in Transition Economies, 9-10 November 2001, Tartu, pp. 155-165.

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46. Vensel, Vello. 2001. Empirical Research of the Development of Bank-Customer Relationships: An Estonian Case. In: Proceedings of the 9th Annual Conference on Marketing and Business Strategies for Central & Eastern Europe, 5-7 December 2001, Vienna, eds. Petr Chadraba and Reiner Springer. Vienna: Wirtschaftsuniversität Wien; Chicago: DePaul University, pp. 218-237.

47. Vensel, Vello. 1999. Banks Performance in Emerging Market Economies. In: The Proceedings of the Ninth Annual Conference of the Congress of Political Economists (COPE), International, 14-19 July 1998, Barbados. Bloomsburg: Bloomsburg University of Pennsylvania, pp. 70-88.

48. August Aarma and Vello Vensel. 1999. Development of the Estonian Banking Sector, 1994-1998”. In: Proceedings of the ACE/Phare Conference on Building Financial Institutions in Transition Economies, 14-15 May 1999, Poznan. Christopher Green, Tadeusz Kowalski and Robert Lensink, eds. Poznan: Poznan University of Economics, pp. 141-162.

49. August Aarma and Vello Vensel. 1999. How Are Banks Doing in a Transition Economy: An Estonian Case”. In: Proceedings of the 5th Biannual Conference of the EACES, 10-12 September 1998, Varna. Mitko Dimitrov, Wladimir Andreff and Laszlo Csaba, eds. Sofia: Gorex Press, pp. 265-280.

50. Mart Sõrg and Vello Vensel. 1999. Experience of Operating the Currency Board Arrangement in Estonia. In: Horton, Joseph, Franklin D. Rubin and Vello Vensel, eds. Proceedings of the Tenth Annual Convention of Congress of Political Economists (COPE), International, 13-17 July 1999, Tallinn: TTU, pp. 259-278.

51. Conference papers (in CD-ROMs, mimeos, forthcoming in Proceedings, etc)

52. Aarma, August and Jaan Vainu. 2003. Possibilities of Using Econometric Models in Bank Analysis. Presented at the 14th Annual COPE International Conference (COPE 2003) “Global Business: Economic, Political, Social and Cultural Issues”, 12-19 July 2003, Mexico City (full text forthcoming in Proceedings in 2003, editor Liza Wilder).

53. Aarma, August and Jaan Vainu. 2003. Comparison of Estonian Banking and Social Development. Presented at the International Conference „Conditions of Sustainable Development: New

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Challenges and Prospects”, 11-12 September 2003, Riga (full text forthcoming in Proceedings in 2004, editor Tatyana Volkova).

54. Vensel, Vello. 2003. Foreign Banks’ Entry – Does It Influence Sustainable Development? Presented at the 5th Annual Conference “Conditions and Sustainable Development: New Challenges and Prospects, 11-12 September 2003, Riga (full text forthcoming in Proceedings in 2004, editor Tatjana Volkova).

55. Jumpponen, Jari, Kari Liuhto, Mart Sõrg and Vello Vensel. 2003. Estonian and Russian Banks Expansion to Foreign Markets. The 14th Annual COPE International Conference “Global Business: Economic, Political, Social, and Cultural Issues”, 12-18 July 2003, Mexico City (full text forthcoming in Proceedings in 2004, editor Liza Wilder).

56. Hartsenko, Jelena. 2003. Development of Retail Payment Instruments in Transition Countries: The Case of Baltic Countries. Presented at the 14th Annual COPE International Conference (COPE 2003) “Global Business: Economic, Political, Social and Cultural Issues”, 12-19 July 2003, Mexico City (full text forthcoming in Proceedings in 2004, editor Liza Wilder).

57. Jaamu, Viljar. The Development and Crises Mangement of the Banking Sector. Presented at the 14th Annual COPE International Conference (COPE 2003) “Global Business: Economic, Political, Social and Cultural Issues”, 12-19 July 2003, Mexico City (full text forthcoming in Proceedings in 2004, editor Liza Wilder).

58. Mart Sõrg, Janek Uiboupin and Vello Vensel. 2003. Banking Market Liberalisation and Development in Estonia. International Workshop on Business, Law and Economics, 28-29 November 2003, Joensuu (full text forthcoming in Proceedings in 2004, editor Lasse Pöyry).

59. Kerem, Katri. 2003. Estonian consumers' attitudes towards environmentally friendly products. Paper accepted for publishing in the Proceedings of the International Conference Proceedings on Integrative approaches towards sustainability, Jurmala, 23-29 March 2003 (mimeo).

60. Sõrg, Mart, Janek Uiboupin, Urmas Varblane and Vello Vensel. 2003. The Internationalisation of Estonian Banks: Inward Versus Outward Penetration. 24th SUERF Colloquium on Stability and Efficiency of Financial Markets in Central and Eastern Europe, 12-

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14 June 2003, Tallinn (full text in the SUERF Web-site, forthcoming in a collective volume in 2004, editor Eduard Hochreiter).

61. Jaamu, Viljar and Vensel, Vello. 2003. Bank Performance and Efficiency in a Small Open Economy on the Threshold of the European Union. In: Meyer-Dinkgräfe, Daniel, ed. Proceedings of the 8th International Conference of ISSEI (International Society for the Study of European Ideas) “European Culture in a Changing World: Between Nationalism and Globalism”, 22-27 July 2002, Aberysttwyth, Wales, 11 p. (in CD-ROM, ISBN: 0-9544363-0-X; full text would be published in a collective volume in 2004, Meyer-Dinkgräfe, Daniel, ed.).

62. Vensel, Vello. 2003. FDI into the Banking Sectors of Some EC Candidate Countries: Comparative Empirical Evidence. In: 7th Vaasa Conference on International Business, 24-26 August 2003, Conference Proceedings. Vaasa: University of Vaasa, 18 p. (in CD-ROM, full text forthcoming in Proceedings in 2004, editor Jorma Larimo).

63. Aarma, August and Jaan Vainu. 2003. Production Functions of Estonian Banking 1995-2002. Presented at the International Conference “Finance in EU Accession Countries: Experiences and Solutions”, 17-18 Oktober 2003, Tartu. Tartu: TU Press, (forthcoming in December 2003)

64. Vensel, Vello. 2003. Corporate Governance and Bankruptcy Procedures in Croatia, Estonia and Poland. Conference on Finance in EU Accession Countries: Experiences and Solutions, 17-18 October 2003, Tartu: TU Press, (forthcoming in December 2003).

65. Jumpponen, Jari, Kari Liuhto, Mart Sõrg and Vello Vensel. 2003. Estonian Banks’ Entry to the Foreign Market and Some Comparisons with Russian Banks. The 3rd Annual Hawaii International Conference on Business, 18-21 June 2003, Honolulu, Hawaii (in CD-ROM: ISSN 1539-722X).

66. Kowalski, Tadeuez, Evan Kraft, Andrew Mullineux, Vello Vensel, Clas Wihlborg. 2003. Bankruptcy Procedures, Corporate Governance and Banks’ Credit Policy in Croatia, Estonia, Poland. 24th SUERF Colloquium on Stability and Efficiency of Financial Markets in Central and Eastern Europe, 12-14 June 2003, Tallinn (full text in the SUERF Web-site).

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67. Kerem, Katri. 2003. Adoption of electronic banking: underlying consumer behavior and critical success factors. Case of Estonia (full text in the electronic conference proceedings at www.emtelconference.org., 2003).

68. Uiboupin, Janek and Vello Vensel. 2002. The Impact of Foreign Banks’ Entry into the European Union Candidate Countries. In: Meyer-Dinkgräfe, Daniel, ed. Proceedings of the 8th International Conference of ISSEI (International Society for the Study of European Ideas) “European Culture in a Changing World: Between Nationalism and Globalism”, 22-27 July 2002, Aberysttwyth, Wales, 11 p. (in CD-ROM, ISBN: 0-9544363-0-X).

69. Kerem, Katri. 2003. Customer Relationships in Electronic Retail Banking. Presented at the EIASM/EMAC colloquium for doctoral students in marketing, Glasgow, University of Strathclyde, 18-20 May, 2003 (mimeo).

70. Kerem, Katri. 2003. The Development of E-Banking in a EU Candidate Country: an Estonian Case. Paper presented International Atlantic Economic Society Conference in Vienna, 12-17 March 2003 (mimeo).

71. Kowalski, Tadeusz, Evan Kraft, Andrew Mullineux, Vello Vensel and Clas Wihlborg. 2003. FDI Into the Banking Sectors in Northeast and Southeast Europe: Comparative Empirical Evidence. The EACES Conference on Economic Development and Reconstruction Policies in South-East Europe: Regional Cooperation, Trade and Foreign Investment, 10-12 April 2003, Dubrovnik (mimeo).

72. Kerem, Katri, Olga Lustsik, Mart Sõrg, Vello Vensel. 2003. Development of E-banking in an EU Candidate Country: An Estonian Case. The 55th International Atlantic Economic Conference, 12-16 March 2003, Vienna (mimeo).

73. Vensel, Vello. 2003. Internationalisation of the Financial Services Sector: The Impact of Foreign Banks' Entry into the Baltic Market. International Conference “Integrative Approaches towards Sustainability (Baltic Sea Region taking the lead)”, 26-29 March 2003, Jurmala (mimeo).

74. Vensel, Vello. 2003. Motives and Impact of Foreign Banks Entry into the Baltic EU Candidate Countries Markets. Workshop on

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EU Enlargement and the Creation of Regional markets: The Case of the Baltic Sea, 2-3 May 2003, Kassel (mimeo).

75. Kowalski, Tadeusz, Evan Kraft, Andrew Mullineux, Vello Vensel, and Clas Wihlborg. 2003. The Role of Foreign Banks in Corporate Governance and Restructuring in CEECs. Dubrovnik Economic Conference, 27-28 June 2003, Dubrovnik (mimeo).

76. Lutsoja, Kaja and Jelena Hartsenko. 2003. Development of Banking Sector in Estonia: Influence of involvement of strategic investor from matured economy to the efficiency of Estonian commercial banks. The paper is prepared for presentation at the 55rd IAES Conference in Vienna, Austria, 12-16 March 2003 (mimeo).

77. Aarma, August and Vello Vensel. 2002. New Banks’ Performance: A Comparative Analysis. In: Proceedings of the6th EACES Conference “Globalisation and European Integration”, 7-9 September 2000, Barcelona. (CD-ROM, Dep. Legal B-8.032.2002, p. 607-634).

78. Vensel, Vello. 2001. Banking Innovations and Consumer Behaviour: An Estonian Case. 23rd SUERF Colloquium “Technology and Finance: Challenges for Financial Markets, Business Strategies and Policy Makers, 25-27 October 2001, Brussels (full text in SUERF Web-site).

79. Aarma, August. 2001. The Evaluation of Bank Reliability During the Transition Period Using Banalnce Sheet and Income Statemant Data. Prsentation at the 51th International Atlantic Economic Conference, 14-20 March 2001, Athens (Abstract published in IAER).

80. Aarma, August and Vello Vensel. 2001. Satisfaction with Bank Services and Development of Bank-Customer Relationships: An Estonian Case. Presentation at the Collert Foundation Workshop on the Future of Retail Banking, 1st Version, 1-3 April 2001, Norwegian School of Management, Oslo (mimeo).

81. Vensel, Vello. 2001. The Changing Landscape of Financial Intermediation: Overview of Literature and Estonian Experience. Presentation at the Collert Foundation Workshop on The Future of Retail Banking, 1st Version, 1-3 April 2001, Norwegian School of Management, Oslo (mimeo).

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82. Aarma, August and Vello Vensel. 2002. Satisfaction with Bank Services and Development of Bank-Customer Relationships – An Estonian Case. In: The Future of Retail Banking and Customer Relations. Seminar papers presented at the First Workshop of the Göran Collert Research Foundation, 13-14 September 2001, Skepparhomen. Stockholm: Göran Collert Foundation, pp. 68-70.

83. Vensel, Vello. 2002. The Changing Landscape of Financial Intermediation: Overview of Literature and Estonian Experience. In: The Future of Retail Banking and Customer Relations. Seminar papers presented at the First Workshop of the Göran Collert Research Foundation, 13-14 September 2001, Skepparhomen. Stockholm: Göran Collert Foundation, pp. 71-72.

84. Kirikal, Ly. 2001. Life Insurance Products as an Alternative to Other Investment Products. Presentation at the Collert Foundation Workshop on the Future of Retail Banking and Customer Relations, 1st Version, 1-3 April 2001, Norwegian School of Management, Oslo (mimeo).

85. Listra, Enn. 2001. Development of Banking Services in Estonia. Presentation at the Collert Foundation Workshop on the Future of Retail Banking and Customer Relations, 1st Version, 1-3 April 2001, Norwegian School of Management, Oslo (mimeo).

86. Vensel, Vello. 2001. Estonian Banking System Development. Presentation at the Fifth Workshop of Baltic-Nordic Network for Research on Bank and Finance, 3 May 2001, Tallinn (mimeo).

87. Aarma, August and Vello Vensel. 2000. New Banks’ Performance: A Comparative Analysis. Abstarct in: 6th EACES Conference “Globalisation and European Integration” – Book of Abstracts, 7-9 September 2000, Barcelona, p. 166.

88. Sõrg, Mart and Vello Vensel. 2000. Currency Board in Estonia: Past Experience and Future Prospects. In: Abstracts of the VI World Congress for Central and East European Studies, 29 July – 3 August 2000, Tampere, p. 408.

89. Vello Vensel. 1999. Bank Performance Analysis: Methodology and Empirics. Presented at the European Financial Economics Association (EFMA) Conference, 23-26 June 1999, Paris, (mimeo).

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6. The research program: The future of retail banking – summary and conclusion Moderator: Barry Howcroft, Professor, CEO, Banking Centre, Loughborough University, England Reporting panel, Research leaders:

• Christian Grönroos, Professor and Director, CERS, Swedish School of Economics, Finland

• Mart Sörg, Professor, University of Tartu, Estonia • Kent Eriksson, Professor, CeFin, The Royal Institute of Technology,

Sweden • Øystein Fjeldstad, Assoc. Professor, BI, Norwegian School of

Management, Norway • Lars Silver, Ph.D. Business Administration, CeFin, The Royal

Institute of Technology, Sweden The research program, the future of retail banking, has been going on for approximately five years. In the panel discussions the research leaders summarized their research so far. Christian Grönroos introduced the results from researchers’ at CERS study of the customer relationship. Three areas have been of particular interest. The study of switching, has changed from ‘why do customers stay?’ to ‘why are they disloyal?’. In the study of fading relationships the researchers try to find out why and how relationships become less interesting to the consumer. The purpose is for banks to be able to see when somebody is becoming a risky customer. The research of talking, or word of mouth, is an updated and in-depth study of inter-personal communication. CERS’ research also include how banks can use the customers and their knowledge when developing services and how to combine the data of customer satisfaction and internal data of customer profitability to find out which customers are interesting to keep and who aren’t.

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Mart Sörg described the organization of the Estonian research and the educational and scientific results so far. The interesting development of mediated banking services as internet banking in Estonia is an example of areas that has been in focus for the researchers. Kent Eriksson talked about the need for banks to be learning organisations. What happens in society has consequences in how people interact with banks and that is the source of change. To be able to learn from the bank-customer interface, banks need to invest in customer exploration. By talking to their customers and being able to relate to their specific life situations and what kind of solutions they need in their daily life, banks can create value for the customers. The research also shows that it is important for the banks to invest in customer education. Lars Silver introduced the research that CeFin is doing in Norrtälje, a society north of Stockholm. A small group of researchers are carrying out qualitative interviews with entrepreneurs in the area, mostly owners of small businesses. They are asked about their business and about their relationships with banks and other actors in the local community. The results from the interviews, positive and negative, are shown to the local banks, and the researchers watch their reactions to the material. The research program doesn’t provide recipes. The different actors have to decide for themselves what to do with the information. Øystein Fjeldstad called BI’s research ‘servicing other people’s networks’. The researchers see the bank as a facilitator of inter-customer trade, by providing the services and instruments that enable relationships between the customers. A bank that knows the actors in the customer’s network have a different point of understanding than a bank that only knows the customer. The results show strong effects of added value when the bank knows both the customer and the organisations the customer interacts with. The direct effect is the reducing of investments in special credit systems. There is also an indirect effect: the bank increases the connections within the network and allows customers to trade more and invest more in each other.

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7. Parallel workshops – Day 1 Discussions of the research results and their implications for retail banking:

• A service management perspective on retail banking • Banking for high growth emerging economies: Lessons from Estonia • Banks as learning organizations • Banks as network organizers: Providing virtual space for financial

flows and economic growth • Retail banking and local growth

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7.1 A service management perspective on retail banking Chair: Annika Wijkström, FöreningsSparbanken, Documentalist The Finnish research group discussed various aspects of customer relationships during the first days. Catharina Solhäll debated the customer role in service development, Mikael Berndtson presented his licentiate thesis on informal market communication (word of mouth), Helena Åkerlund reported findings from her doctoral dissertation concerning fading customer relationships and Christina Dahlblom finally presented findings related to customer loyalty and disloyalty also from her doctoral dissertation. Catharina Solhäll – The role of the customer in service development Why care about the customer in the service development?

• Since knowledge about your customers gives a better potential to develop a better offering.

How is customer information processed – or not in service development? • Catharina Solhäll has identified four customer information

processing phases: acquisition (from where?), storage (type of storage?), dissemination (type of dissemination?), usage (in what stage?).

Why is customer information processed or not in service development? • Barriers and facilitators related to: the information (e.g. too much, its

quality, ambiguous, too old), the processor (e.g. customer do not reveal info, decision maker do not trust the customer info), and the processing (e.g. nowhere to store)

• Customer information may be retrieved proactively (decision makers are interested in solving some question doing market research) and reactively (customer may give feed back, the organisation has a more passive role).

Managerial implications • There exist numerous barriers and facilitators influencing a proactive

and reactive use of customer information in service development. One way to successfully manage customer info is an increased awareness of these factors.

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• Companies should reflect on what kind of information they acquire. Is it stored in the company? Why? Why not? How is customer information disseminated to managers responsible?

• Is the information about the customer at all used in the company? If so, is it integrated?

• After launching a developed service, is customer information the acquired? How? Why? Why not?

Mikael Berndtson – Word-of-mouth communication Berndtson has on the basis of a literature review divided the theoretical background to informal market communication into five different episodes (the early social psychology, sociology, consumer behaviour, customer satisfaction, electronic word-of-mouth). Based on the review and qualitative interviews he concludes that:

• There has cultural change concerning the way people informally talk about banks and bank services

• 36% of customers choose their bank based in recommendations • Only 1% of customers choose bank based on formal market

communication • The most common way banks take informal market communication

into account is to provide high and stable customer service • This is a good point to start and a condition for positive informal

market communication, but does not take into consideration the processual aspects (the phenomenon itself) of informal market communication

• It is difficult to be systematic and think holistically when the phenomenon itself is not on focus (but customer satisfaction is)

• Banks consider it important to expand their perspective, but do not know how to do it

Berndtson emphasises that banks should adapt a more conscious way of handling word-of-mouth communication even though it is hard to calculate the cost of working with informal market communication. There are two kinds of informal market communication; 1) informal market communication which is possible to direct (elements of informal and formal market communication) 2) informal market communication that is not possible to direct/should not be directed.

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Bank relations are extremely long. More than 80 % of the bank relations follow from one generation within the family to another. Informal market communication within the family is therefore very important for bank loyalty. Informal market communication with friends and acquaintances comes into the picture during adulthood. Helena Åkerlund – Fading Customer Relationships Fading withholds potential negative consequences to a relationship, which may incorporate both observable processes and changes in the mind of the customer. Understanding relationships must take both parties into consideration. The purpose of the dissertation is to understand fading and reveal different types of fading customer relationship processes. The arena constitutes private banking, which differs from normal retail banking, where an explorative qualitative study has been conducted with both customers and financial advisors. Four different fading processes were found; the crash landing process, the altitude drop process, the fizzle out process and the try out process. A model for analysing different types of fading customer relationship processes was also developed.

Managerial implications

• Difficult to observe changes when being a part of the change. • Too tight relationship may be a problem. • Differences in relationship perceptions between financial advisors

and customers . • Easier to detect turbulent processes rather than smooth? • Advisor or sales person? How is it possible to manage the dual role? • What consequences does a focus on customer base quantity give on

the relationship development? • Focus on the value of the relationship instead of the value of the

invested capital! • Monitor fading starting from the model. What type of information is

possible to retrieve? Is it possible to discern other types of fading if broadening the study?

• Make fading customer relationships a strategic issue, not something delegated to the key client manager.

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• Monitor the criticality of the fading process. What processes lead to termination? Is termination good?

• No prestige in discussing fading or termination. Make the advisor a valuable source of information.

• Respect the customer when asking for her opinion – not all customers are positive towards large-scale questionnaires.

Christina Dahlblom – understanding loyalty and disloyalty We have a long tradition of loyalty research and a short tradition of disloyalty research, which calls for research combining the two research streams. When is your customer loyal or disloyal?

• Looking at loyalty as a two-dimensional concept based on attitudes and behaviour.

Why is your customer loyal? • Dedication-based loyalty (easy to keep) • Constraint-based loyalty (something is hindering them from

switching) • Calculus-based loyalty (focus only on price)

What makes your customer switch? • The things customer complain about does not necessarily make them

switch. • Identifying problems is one thing, but identifying what really makes

them switch in the end is something else. Managerial implications and discussion

• How does firm relationships affect the private relationship to the bank?

• What is the reason for services developed in a pilot, not giving the same success when implementing it in the whole bank?

• Problem with tacit knowledge and how you use it in the company. • Talking about change management, must be able to really make the

models work. Getting into operational issues. • Could be the psychological factor (it is new and interesting for a

small group) and scale factor (small implementation vs large) • How is it possible to identify a trigger? • Differences between a qualitative and a quantitative study. • Is there a way to identify a trigger as a manager? • Tacit knowledge. Not many banks ask their customers why they are

leaving.

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7.2 Banking for high growth emerging economies: Lessons from Estonia Chair: Indrek Neivelt, Documentalist: Katri Kerem The situation on the Estonian banking market has been fairly different from the scene in the developed Western markets. The emergence of first modern type of banks took place only in 1988-1989, just as the Soviet Union started to show first signs of collapsing. The banks started out in a basically empty market and not very encouraging economic situation. Following the high inflation of the ruble zone all the loans had lost their value and banking sector (as a part of GDP) was miniature. From the banks point of view the positive aspect was that inflation also minimized the value of problematic loans. Such a situation gave banks an opportunity to go very fast and start from the scratch with no ties to the past. The government initiated active privatization process and banks found their role as financers of these projects, thus becoming major players in the overall economic growth. The main lessons and success factors from the Estonian market can be listed as follows: 1. A bank has always to grow faster than the market in general. Growth should be prioritized over cost cutting. There are three main situations that especially foster growth:

• If you have a better product than the competitors do you can use it to win new customers

• If a banking crisis occurs it is possible to win extra market share with strategically sound business decisions

• If mergers and acquisitions take place at the market 2. Credits are the most important motor of development. Offering better interest rates and longer loan terms leads to exponential growth of the customer base and fuels the overall growth of the bank. 3. Technology deserves special attention as these investments guarantee efficient systems. It is vital to use only the latest technology that can be developed further. Besides utilizing technology it is also necessary to teach

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the customers to use it. Banks have been in the forefront of introducing new business processes in Estonia. 4. The success of Estonian banks relies heavily on their highly motivated employees. Estonians are known as people who rank work more important than any other aspect of their life. In emerging markets this factor is more important than in developed countries. This is by no means a comprehensive list or critical success factors and several other influencers can be listed as well, like attracting foreign capital, currency board system and environmental factors (liberal economic environment, favorable legal system, developed telecom market that brings along good internet connections, government initiatives in promoting ICT). Estonian market was attractive for the foreign capital from the early days onwards because of the proximity to its Scandinavian neighbors, which in turn made cross border communication and control easier. There were minimal restrictions to the inflow of foreign capital and a general laissez faire policy was adopted. This was the advantage of Estonia in comparison to its neighbors in the Baltic area. Both in early stage of development and also currently Estonian banks have been ready to take risks that have paid off generously. In the beginning loans were issued without collaterals and the financing decisions relied on gut feeling rather than anything else. Currently the banks take risk management far more conservatively and the banking market has developed to be more similar to the other European markets.

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7.3 Banks as Learning Organizations Chair: Maria Granö-Isaksson, Branch Manager SEB, Sweden, Dokumentalist: Sara Jonsson SEB has recently undergone some strategic changes and can now be considered to be a retail bank again. The focus has been shifted from being a bank only for large corporation to being a bank providing services to SMEs. During this session the work- and learning processes at SEB constituted an example throughout the discussion. In order to make the SEB organisation more flexible, top management has delegated responsibility down to the organization. The decentralized responsibility has fastened the decision process and customers can be better served, both in terms of speed and customized products. As a consequence of the increased responsibility, the branch manager has taken the role as “path finder” and the employees the opportunity to gain valuable experience. The majority of the managers at SEB have felt inspired by the new power and now they feel they have increased power to make a positive impact, both for the customer and for the local market. Maria Granö-Isaksson has tried to establish a business-oriented environment among the employees. To do this, talking about successful businesses has proved to be a good approach. If a co-worker has signed a new customer it is important that this news is spread to encourage the other employees. However, it is also vital to talk about failures and problems and through that create an accepting environment. In this way, an environment that promotes learning is established. The work is trial and error based and sometimes mistakes are necessary in order to learn and grow. The acceptance of mistakes also encourages the employees to experiment. SEB has expressed the intention to increase the focus on relationship. In order to do this, it is necessary also to see and learn about the person behind the corporation. In this way, the bank can also serve the entrepreneur as a private person. When learning about a new customer both standardized and customer adapted approaches is used. In a first step the business advisor tries to get to know the person behind the company. The

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new customer is interviewed about his or her financial flow, about the customers and suppliers. These meetings are sometimes not enough for serving a customer in the best way, and being able to offer the right products. Therefore Granö-Isaksson has found that follow-up meetings are necessary, especially if the products need to be customized. It can also be relevant to discuss certain customer groups and their special needs and characteristics. (For example, female entrepreneurs have been found to be more risk-averse than men.) The follow-up meetings are both formal and informal and have been proved valuable. To be a learning organization a system for documentation is needed. SEB uses a CRM- system to collect information after meeting with a client. This way the employee knows what has been discussed during previous meetings and how customer needs can be met more accurately. The question was raised whether the increased responsibility and focus on relationship are backed up by education. Granö-Isaksson responded that SEB arrange workshops for their employees and hold regularly meetings, where topics such as “how to address customers” are discussed.

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7.4 Banks as network organizers: providing virtual space for financial flows and economic growth Chair: Siv Svensson, Head of Regional Banks, Executive Vice President, Nordea, Sweden Dokumentalist: Amir Sasson The participants had a very constructive and open discussion on both research and practice oriented challenges with the aim of advancing the join knowledge of banking. The researchers reported their work on the thesis of banks as network organizers. The researchers have covered important issues to bankers as well as researchers. They examined the factors affecting customer commitment, the cost and availability of capital to small and medium size firms, customer bankruptcy prediction and bank solvency. The researchers reported that they have gathered impressive quality and quantity of data. The data was collated in Norway, Sweden and Italy. The researchers have information of firm-bank relationships of ca. 1000 Norwegian firms, 235 Swedish firms and 160 Italian firms. Customer commitment: The researchers developed a knowledge perspective on value creation in organizations that employ the mediating technology to facilitate inter-customer relations. Mediators, individually and collectively, build networks of customers between whom linking can take place, and they provide services that facilitate inter-customer exchanges. Earlier research has shown the importance of size and standardization in mediation. A different stream of research has shown that contextual knowledge is important for problem solving and innovation in organizations. Combining theory of the mediating technology and theory of situated problem solving the researchers posited that inter-customer relations constitute the fundamental context for value creation of firms using the mediating technology. LISREL, statistical software was used to

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test relationship-level, cross-sectional hypotheses that link knowledge of inter-customer relationships, added value, and customer commitment in bank services to small firms. This work extended Thompson’s work on the mediating technology with implications for organization action by demonstrating that mediators’ knowledge of inter-customer relationships is an important resource in intermediation. The researchers contributed to strategic management and organization theory by developing the understanding of the relationship between knowledge and committed customers, two fundamental resources for firms using the mediating technology, and by extending the use of the situated knowledge concept to inter-customer relations and thus explain performance beyond the contexts to which the concept has earlier been applied. Our findings have implications for segmentation practices, organization domain decisions and the corresponding organizational structures and practices that can provide effective service to inter-customer relations rather than atomistic independent customers. Cost of debt capital. The researchers argued that the composition of a mediator’s customer base impacts the value that the customers derive from affiliation with the mediator because knowledge pertinent to the service of a particular customer is available through the network of firms affiliated with the mediator. The researchers applied the argument to bank service for small and medium sized firms and used hierarchical linear modeling to test hypotheses that link properties of the affiliation network defined by a bank’s customer base and the properties of the customer’s bank network to customer credit terms. The researchers used an original dataset of bank-customer relationships for which they also had information about inter-customer relationships and bank affiliation for the two firms in the triad. The results support that the underlying composition of bank customer set and the degree of concentration of the customer’s relationships with banks impact customer value. The bank having direct links to a given customer’s respective suppliers or customers moderates the impact of the customer’s bank network configuration. The findings have broad implications for future theoretical and empirical research on organizations that use the mediating technology to organize collectives and for organizational networks. Bankruptcy. Organizations are affiliated with mediators, i.e. firms that employ a mediating technology to facilitate exchange relationships. This leads to a duality whereby the behavior and performance of the former

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affect the behavior and performance of the latter and vice versa. In the context of the banking industry, the study examines how the properties of the underlying network of affiliated organizations affect the survival of affiliated organizations and the performance of mediators. The results show that firms that are affiliated with economically central banks or with banks having concentrated industry-specific organizational affiliation increase their chances of survival. Furthermore, banks that are economically central experience lower loan lose than economically peripheral banks. The study contributes to strategic management by: (1) providing new knowledge about mediators which are central but understudies type of organization in the network economy (2) suggesting new sources of competitive advantage which advance as well as complement the findings of earlier research into the sources of competitive advantage. Implications for the network perspective, the economic theory of the banking firm, as well as firm and mediator management are considered. Examine the process of automization. Postbank which has put together the back and front offices has no contact with customers besides internet contact. Loans are approved within minutes by a fully automated procedure. The bank has become the 5th largest bank in Canada and is moving fast in the U.S. and Eastern Europe. It should be noted that in Sweden the number of minutes used to approve a private loan has been reduced from 60 minutes to less than 5 minutes within a few years. This supports the example of Postbank. Under those circumstances the thesis that by servicing related customers, banks and customers should be better off is questioned. In reply, it was argued that the thesis of banks as mediators is actually supported the more services are automized. The thesis of servicing related customers and spending resources on information acquisition was questioned. However, unlike the examples above, the research has focused on medium size firms, which are less affected by the process of automization.

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7.5 Retail Banking and Local Growth Chair: Carl Eric Stålberg, chairman of the Board, Swedbank, Sweden, Documentalist: Fatima Vegholm The Norrtäljeproject was presented at the workshop, Retail Banking and Local Growth, as the base for the discussion. The purpose of the Norrtäljeproject is to study entrepreneurship in different context. The project is based on an assumption that the growth and development of small businesses mainly depends on the local community, more specifically on what kind of contribution they can get from local actors. By local actors we mean mainly the local banks, the local politicians and the local accountants. The relationship between the small businesses and the local actors will therefore be analyzed. The growth of the small businesses was discussed. The small businesses in Norrtälje have not the ambition to grow. Thus, the majority of the small businesses are small with fewer than 20-25 employees. There are very few larger and middle size companies represented in Norrtälje. Questions discussed in the workshop were:

• Should the small businesses be pushed to grow? • How can the small businesses be encouraged to grow? • Should the banks give the small businesses advice to grow? • What create local economic growth?

Another important question is how to measure growth. There are no good measurements available today which can be used to measure growth, the growth of the small businesses and/or the growth of the local community. If there are no measurements for growth how can we know if the project has contributed to the growth of the local community? The role of the local actors in the local community was emphasized. A special focus was put on the local banks and their role in the local community.

• Should the local banks be involved in the local growth and development?

• Why should they want to be involved in the local community?

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• Should the banks intervene as business partner for small businesses?

The banks should be more involved in the local community. They should participate more in the discussion in the local community and make it easier for the small businesses. With a closer relationship with the small businesses the banks can gain more business opportunities. The banks have also a need for growth, and a prerequisite for their growth is the growth of the local community. The managers of the banks should be given right incentives to work as long-term partners to the small businesses. Without incentives it is very difficult to implement changes.

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8. Centre for Banking and Finance at The Royal Institute of Technology: Visions priorities and strategies Moderator: Stellan Lundström, professor and Director, CeFin, The Royal Institute of Technology, Sweden Panel:

• Anders Flodström, President of KTH, The Royal Institute of Technology, Sweden

• Ulrika Boëthius, Second vice President, Financial Sector Union of Sweden, Sweden

• Lars G. Nordström, CEO, Nordea, Sweden

Anders Flodström talked about the development in the scientific world over the last 30 years. Technology has become an important part in the other sciences, such as natural sciences and social sciences. Research in medicine and telecommunication are examples of this. This has influenced the way engineers are educated in Sweden and, lately, it has also promoted a new development in research. Technology has become integrated in research of for example psychology and economics. CeFin is an example of research where sciences collaborate and at KTH CeFin has the benefit of comprehensive research and educational capacity in for example Urban management, IT – Business systems, Applied economics, Financial Matematics and Philosophy and ethics. According to Anders Flodström, five or ten years from now technological universities will include all faculties. He also sees universities in Europe changing from faculty based systems to American school based system, with many different education programmes. Ulrika Boëthius introduced the Financial Sector Union’s view of CeFin and what they expect from the program. Bank employees has to adjust to the globalisation and technical development in the financial sector, their competence needs to be developed constantly. There is also a generation shift going on in the banks, over the next ten years retirement will exceed

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recruitment. A challenge will be to find new ways of transferring experience at the same time as a new way to work is needed. CeFin offers education and development of competence for the already employed in the banking sector. According to Ulrika Boêthius, the Financial Sector Union is hoping for further development in university education to strengthen the basis for employment. Lars G. Nordström wants to see more knowledge of management, leadership and organisational issues in the retail-banking sector and thinks that would be an interesting area for CeFin to move into. How do you include good leadership into retail banking? In his experience management theories are often a mixture of religion and personal agendas, rather than based on science. He also raised the question how the bank customers’ knowledge is to be reflected in an ideal organisation

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9. The emerging financial environment in Europe Barry Howcroft, Banking Centre, Loughborough University, England Leo Verhoef, Professor, Eindhofen University of Technology, The Netherlands Kristina Persson, Deputy Governor, Sveriges Riksbank, Sweden Lars Silver, Ph.D. Department of Business Studies, Uppsala University, Sweden Moderator and introduction: Loe Verhoef Presentations Barry Howcroft: The Emerging Financial Environment in Europe Universal Trends in Banking

• Internal competition • Changes in regulation • New technology • Global competitive pressures • Fast evolving strategic objectives of banks • Major diversification • Decline in bank margins

Period Stage Characteristics Early 1960s Production

Era Emphasis on Product volume

1960s to early 70s

Promotion Era

Emphasis on Product Quality and advertising

Mid 1970s to 80sMarketing Era

Emphasis on Selling and greater emphasis on promotion

1990s to date Market Control Era

Marketing concerns drive the organization – emphasis on quality, customer service, segmentation, retention, etc.

Formal Analysis of Secular Changes in Banking Demands

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The Answer to Several Questions: • What is a bank? • Why do banks exist? • Who can be a bank?

Theory of Banking No general theory of banking BUT as with any firm, banks exist for one or two generic reasons.

• Exclusivity • Comparative advantage

Reinforcement of the Generic Factors by Banks

• Economies of scale • Information problems • Market imperfections • Delegated monitoring • Insurance role • Regulatory subsidy

Major Pressures Shaping the Future of Banking

• Competition • Technology • Regulation • Changing consumer behavior

Leo Verhoef: The new challenges of banks in the glocal economy • Thesis 1

Increased competition between banks and the pressure from risk based prudential rules will lead to cherry picking of the most attractive customers and neglect or even exclusion of (vulnerable) user groups.

• Thesis 2 Increased competition does not necessarily work to the benefit of users.

The present reaction, i.e. the fixation of banks on efficiency and products might destroy the nature of the European “Diversity in Unity” banking landscape that is a central ideology in Europe

• Thesis 3 Banks are not plain companies. Given the new (international) challenges

and the importance of financial products and services availability to society, effective user involvement and representation of the user

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perspective within banks, on local as well as national level, is more than ever necessary. Kristina Persson: Banking and regional development

• Question 1 Can technology be utilized to an even greater degree and in new ways in

order to further vitalize the relationship between banks and their customers?

• Question 2 How can the information that remains once banks have made their lending decision be passed on and channeled to other sources of financing? • Question 3 What do national authorities need to do when the banking market becomes increasingly open to global competition?

Lars Silver: Banking and local growth • Thesis 1 – The banking industry is shaped by legislation rather than customer needs

– Increased legislation makes bankers focus even less on their customers and more on the rules regulating banking

• Thesis 2 – Customers seek informal and personal long-term relationships. Banks

focus on short-term sales of financial products – Customers demand personal responsibility. Bankers avoid personal responsibility by referring to laws and internal procedures • Thesis 3

– Local branch managers are provided with neither the mandate nor the encouragement to participate in the development of the local community

– Without a firm platform in the local environment banks embarks on a one-way road to standardization, which in the end will leave them open to competition from other industries Thesis for discussion

• The increased competition leads to cherry picking and exclusion of users

• The increased competition destroys the European banking landscape • Involvement and representation of user’s within banks is necessary • Technology can vitalize the relationship between banks and users • There is a lesser role for national authorities in a global banking

market

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• Increased legislation makes bankers focus less on their customers • Banks avoid personal responsibility by referring to laws and

procedures • Without embedding in the local communities, banks will be left open

to competition from other industries

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10. Parallel workshops – Day 2 Group discussions where conducted in five separate groups with different topics of discussion:

• The future financial system from an EU perspective • Risk-analysis • Building customer relations • Banks as networking catalysts • Urban development and local banking

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10.1 The Future Financial System From an EU Perspective Lars Otterbeck, Assoc. Professor, The Royal Institute of Technology, Sweden Cecilia Hermansson, Economist, Swedbank, Sweden Kent Eriksson, Professor, CeFin, The Royal Institute of Technology, Sweden Documentalist: Sara Jonsson During this session the topic was divided into three different perspectives:

1. Global financial economic systems 2. Regional political and industrial systems in the EU 3. Customer linked system

Global Financial Economic Systems Cecilia Hermansson pointed out a number of global trends that have been observed in the global financial market in recent years. Globalization and deregulation were mentioned as significant changes, as well as the expansion of the European Union and the introduction of the Euro. The fast development of technology has affected the financial, as well as other markets. Furthermore, inflation has been low for a period of time. This has resulted in financial actors feeling safe and taking on bigger risks. Other effects of the recent changes were also highlighted. New, greater markets will probably be formed and new products will be developed. We will likely witness more mergers and acquisitions, and a strive for economics of scale. Hermansson anticipated a greater emphasis on standardization vs. specialized bank services. In this area, a number of outcomes are possible. However, the most probable is a global integration resulting in both global giant banks, providing standard customer services, and niche banks, offering individual customers services. It is not excluded, however, that the same bank will use both these strategies.

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Regional Political and Industrial Systems in the EU Lars Otterbeck narrowed down the perspective and presented a number of trends and their effects on the European financial market. Otterbeck anticipated more mergers and possibly takeovers by American and Asian firms. He also mentioned the possibility of mergers between banks and insurance companies. Because of the introduction of the Euro, new regulations will probably emerge, and the role of the central bank might be revisited. Furthermore, the customer values will probably change which will influence the focus and work processes of the bank. Basel 2 might also have an impact on the way banks will operate. The business environment in Europe will probably be less national, partly due to the increased number of mergers. Furthermore, the Nordic region, as a union, will probably be less significant.

Customer Linked System Kent Eriksson made the perspective even more concentrated and focused on the bank-customer interface. Eriksson argued that the competence of both the seller and the buyer of financial services would have to increase in the future. It is also important that both financial service firms and society can support the buyer and seller. If the customers are ignorant they may invest in “bad” companies, which would be unbeneficial to society. Ideas for future research The discussion that followed resulted in the suggestion of five future research areas:

1. Is there a trend towards customer linked banking –“the old style” – optimization of customization/standardization?

It was argued, that in order to go back to customer linked banking, more competence and knowledge about the customer are needed. It is also important to understand the macroeconomics and to be able to communicate this to the customer.

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Furthermore, it would be necessary to investigate how customer value customized and standardized products. The size of the market for customized products would have to be investigated. 1. Comparison of European and American financial systems and trends If theory is correct we will approach the US system. 2. Innovative Retail models that can be applied to financial services. To benchmark retail banks with other retail industries was suggested as a relevant research area, since the retail market probably has many similarities, no matter what industry. Another approach would be to choose a number of profitable retail banks in different countries and study their differences and similarities. Such an investigation could also be done locally. 3. Alternative models/scenarios as a tool to educate actors in the financial service industry It might be relevant to make model descriptions of what will happen if patterns break down and if the unexpected would happen, for example a terrorist attack. Another approach is to study different scenarios, for example what would happen if the Japanese lost their confidence in the yen? 4. How do retail customers value values and ethics? The outsourcing trend and its implications for the banks were addressed. Will banks focus more on their brands, like Nike for example, and outsource different activities? It was argued that in such a case it is important to distinguish what the customer values, and how much of the added value that can be controlled.

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10.2 Risk analysis Chair: Boualem Djehich, Documentalist: Katri Kerem

In researching risk issues two main approaches can be taken – qualitative and quantitative. It may be easier to talk about risk issues utilizing quantitative measures but some risk areas need clearly qualitative approach. In quantitative finance three major research areas can be mapped as follows:

• Pricing of financial and insurance contracts • Quantitative analysis of financial and insurance risks • Portfolio construction and optimization

Attitudes to risk and different forms of risk can be summarized with a set of basic ideas:

• Risk is the single most important production factor • Risk must be used efficiently and it must not be avoided • Risk is to be taken only if it is expected to be rewarded • Risk should be taken where the marginal contribution to return

is highest • Three different risks are to be considered

o Demographic risks (not controllable) o Strategic risk (strategic asset allocation) o Active risk (risk budgeting)

• Interactions between these risks

Ideas for future research The main task of the workshop was to list five research ideas for the future projects. After a long and fruitful discussion the topics that emerged were:

1. Pension fund management, demographic trends that are dramatically altering the scene.

2. Issues about distributing risk (developing products that help household to minimize risks in addition to conventional insurance, utilize technology to create better risk avoidance options than in present day

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insurance systems). Some of the areas that were outlined as a suitable framework for this type of research were saving for future education (and insuring against the situation where education does not pay off), better coverage of medical cost, solving issues emerging in connection with giving birth, etc. A sub-area could also be research based differentiation of risk based products.

3. Perception of risk. Discussing risk avoidance without proper insights about what is risk and how different customers perceive it is quite a fruitless effort. Analysis of risk behavior also helps to identify where people fail most as risk managers and why severe mistakes can occur in decision processes.

4. The problem of asymmetric incentive systems in portfolio management. If risk is rewarded highly and no negative consequences follow wrong decisions the managers are often tempted to take excessive risk that is not in the best interest of their customers. The research could focus on developing a bonus system that would retain motivation, be in the interest of moth clients and managers and still keep high work motivation.

5. The possibilities of reducing asymmetry in risk bearing, for example on the level of fiscal system and legal system. One of the examples is a case when bank will not take interest rate but a share of future profits instead. In many fields recent years have witnessed the transfer of risk from society to the individual level but not many people have yet realized it. Current tax system rewards taking risks but will not help covering losses.

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10.3 Building Customer Relations Chair: Christian Grönroos, Professor, Swedish School of Economics, Finland and Jan Lidén, CEO, Swedbank, Sweden Dokumentalist: Helena Åkerlund

Christian Grönroos - Building customer relations with a service business logic – challenges and pitfalls Two basic axioms of marketing:

• Marketing has to take place where the customers are and where it influences them, their perceptions, and their decision making. Are we making marketing activities where they are most efficient? A lot of the things we are doing, and not managing as marketing, is effectively marketing.

Research topic 1: What are we doing as right, and wrong from a customer perspective?

• The customers, not the marketer, decide which resources and activities of a firm are marketing resources and activities. We cannot decide what influences the customer. The customer decides what activities are marketing.

Research topic 2: How is the customer’s view of what should be organized, managed, implemented under the heading of marketing?

• The question we must ask: How and where does customer interact with the firm? Never start with the thought that we should manage, the customer should manage! What activities of the firm do they interact with? Meaning: which are the real marketing activities of the firm? And do the two meet?

Where is the customer? • Where is the consumer of packaged goods? Watching TV, reading

newspapers and magazines, exposed to billboards, working on the Internet, glancing at direct mail (communication channels) in stores looking for buying goods, looking at, comparing and using goods, comparing prices, and where is marketing? In the best case it is there as well!

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But, there are situations where it does not work. How about customer relationships with more content? Typical such situations are consumer service relationships, business-to-business relationships, consumer durables.

• Where is the customer in a relationship with more content? Both a communication, interaction and a customer value process. Exposed to sales and communication media, exposed to physical products and other tangible items, exposed to price offers and comparing process and in a host of service processes (including hidden services such as service failure and quality problem recovery, product and service process documentation, invoicing, electronic and mobile encounters etc.)

And where is marketing? • Normally mostly absent!

What is important from the customer’s point of view? • Both processes are important, but the traditional activities gives

promises to the customer and the service processes must fulfill the promises. The service process is more important to the customer. Only when introducing new services, we need communication through some traditional media. If the service process is not made clear in marketing planning, then we do not market where the customer is. We need to develop what the company is doing in line with the customers value process. Promises given must be fulfilled, we must do relevant things for the customer.

• If we are in a service business: to support the customer’s value generation in his/her/its processes, better than the competitor. It is not the bank that produces value, the customer creates value! What is the idea of a service? To do something for a customer in order for the customer to create value him/herself. Service is to support the customer’s value generating process.

How is value generated? • Customer perceived value = transaction value +/- relationship value.

Transactional dimension (the service core) and the relational dimension (we do business with this particular supplier). From where does the value come? From the host of solving problems!

• Generally firms destroy their core value through the way they take care of customers! Most competitors are generally equally bad. The competitive advantage: how do you enhance the relational dimension of value.

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Three fundamental problems: 1. Marketers are interested in their products, whereas customers are

interested in their own processes (not interested in loans, I’m interested in something that concerns me). Products do not exist anymore, resources exist! What counts is what is surrounding the product.

2. Marketers tend to act as if the firm delivers pre-produced value to its customers (value-in products). We as a firm create value! Although in reality it only supports value creation in the customers’ processes (value-in-use)

3. Marketers tend to think in terms of mass markets, although from time to time someone in the firm meets each and every customer as an individual. For the customer, the most important marketing situation is when he/she meets somebody from the company.

How to develop an internally efficient service business without hurting its customer relationships?

• The business has to be internally efficient with a high level of productivity, but for building enduring customer relations an externally (by customers) perceived value-supporting operation has to be maintained. Conclusion: it is absolutely critical to understand productivity form a service business logic point of view.

Productivity in product manufacturing • Since the output-input ratio in product manufacturing can be changed

without major changes in the level of quality, the productivity formula is often understood in the following way: productivity= output/input. Constant quality. Hence, productivity in product manufacturing is totally an internal affair. The customer is not involved.

• Product logic often comes into service business. Perceived quality and value goes down as manufacturing productivity goes up. Must go down in prices. Why is this happening? Because in services, internal efficiency and external effectiveness cannot be kept apart! Efficient operations may be of low interest to the customers.

• Service productivity dilemma: Unclear processes make the logic work at start, but when the processes are in order, it starts failing (counter-supporting to customer value). The traditional assumption does not apply in services.

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Jan Lidén – Is it possible for the bank to have relationships to 4.2 million customers? Complicated business model going from product value to total value in customer relationships, from short term transactions to long term relationships, from technical quality to customer perceived total quality, from production of technical solutions to development of total quality and value, from value in product to value in use. CPV – (product/service + added value)/ (price + cost of relationship) In the land of true competition, everybody tries to differentiate themselves! Increased added value – examples:

• The use of Internet and telephone channels for building customer relationships

• Differentiated offerings/tailor-made solutions • Competence/specialization – perceived skills. Must be looked at as

somebody with skills. • Proactive approach work flow

Lessened cost of relationship – examples: • Integration of distribution channels • 24 h banking • Local presence and adaptation of branch offices to changing

customer demand (i.e. FSB Private/Corporate must bring them together)

Increased business intensity resulted in more satisfied customers through increased interaction with our customers through branches, telephone and Internet. The customer perceived value of the bank relationship determines future success!

Ideas for future research 1. How does an old business model affect new thinking? What about the transition period between different business models? How does the shadow of the past shadow the future? Why do some firms fail? Companies often spend too much time discussing things instead of really thinking through the implementation of change. If you want to change the responsibility of one function, it is important to transform or move the competence to other parts of the organizational system. Management must have a hands-on approach. Strategy, marketing or management does

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however not treat implementation at all. How do you turn the organization to a customer relationship approach organization? 2. How do you see the future of customer relationships? Different customer groups want different types of relationships. Home controller, want to control the relationship themselves. Customer may furthermore not at all be very rational. There is however a lack of research taking a consumer behavior approach in a relationship environment. Is consumer behavior changing when building relationships on the Internet? How are those customers going to behave in the future? How will customer behavior change because of 3G? What does the new information technology etc mean for financial services? In Japan they are e.g. doing everything on the mobile. 3. The importance of time in relationship development? Price or money alone does not make people turn to the Internet; it is rather a lack of time, making customers accept a different type of service. Future challenges is not so much about trying to improve service at branch office level, but instead improve the Internet environment. We should however not overrate the Internet itself as a network. Internet may also be interesting in the future, but other types of networks will probably also evolve, e.g. 3G. Internet may therefore be discarded as soon as something better comes up. The importance of time is therefore interesting when looking at relationship development. How much time does the customer accept to wait for an investment? A loan? There has been a change in the perception of time related to customer behavior. We need to understand what triggers the customer (before him/herself). What does it mean to be free from time and location? What does it mean to be stuck in time and location? 4. Do customer want a proactive approach? If so, when? Which customers? What are the critical moments when they really need pro-activeness? Does the customer want to be involved? Do customer always want or need pro-activeness? We talk very much about being proactive today, but do we really know the customer good enough to be proactive? What are the critical moments when we should/should not be proactive? What kind of contacts are possible and appropriate? How is it possible to calibrate the relationship? What is the right type of pro-activeness?

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5. What influences does the customer have on the organizational processes since the customer is inside the boundaries of the company? What does it mean to develop services when the customer takes a more active role, stepping inside the boundaries of the company? How do we need to adjust organizational processes in order to take care of the new customer role? How is it possible to erase the border between the employee and the customer?

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10.4 Banks as networking catalysts Chairs: Øystein Fjeldstad, Professor, Norwegian School of Management, BI, Norway and Lars-Erik Kvist, Executive Vice President, Swedbank, Sweden Dokumentalist: Amir Sasson The participants openly discussed the future of the research program of banks as networking catalysts. Specific focus was put on the implications from the findings reported to the group on the previous day. Following is a summary of the specific topics discussed during the workshop.

Segmentation. The participants, practitioners and researchers as one, agreed that the findings have explicit implications to organizational design generally and customer segmentation in particular. Segmentation is done in terms of customer size. The researchers suggested segmentation in accordance with customer interaction with others. A framework of interaction between governmental actors, individuals and businesses was presented and discussed. The question of interest was whether such segmentation is valuable to banks. It was suggested that networks must create value to their members. Five different aspects were discussed:

• Information and knowledge sharing and learning • Services to solve problems • Risk sharing in the group • Innovation. Quicker development and improving profits • Confirmation from being in the group

A practitioner gave an example of a Scandinavian bank providing services to clusters of inter-related customers. Networks effects were identified to exist and bank services were tailored made to the fit the needs of the particular cluster of inter-related customers. The participants wanted to know more where exactly added value come from in networks. Do banks solve conflicts of interest? Provide more efficient contracts?

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Networks were highlighted to have two sides. The positive side during growth and maturity and the negative side at the end of the network life cycle when the all network may break apart. Some participants encourage taking a system approach to networks and examine the purpose of the network in the design. The role of trust was also discussed. The issue of measurement was discussed extensively. Practitioners highlighted that one cannot find reliable rating standards for small and medium size firms. Another aspect of measurement, namely the measurement of profitability was discussed. Facilitative services rather than products were argued to exist in banking. Another interesting suggestion was to examine the management skills, which will be necessary in order to implement network strategies. It was argued that current management skills are inadequate to stand the challenge of organizing in accordance with the inter-customer/network logic. The role of networks through time and geography with emphasis on servicing central actors was suggested to be a possible research topic. Finally, the role of the regulator was discussed. Emphasis was put on the impact of regulatory schemes especially in times of negative shocks.

Ideas for future research The five suggestions for future research are:

• Customer Segmentation Network. • Networks Life Cycle. • Network Purpose and Measurement. • In Depth Case-Studies & Bank As Facilitator. • Customer Needs For Network Facilitations.

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10.5 Urban Development and Local Banking Chair: Stellan Lundström, Professor and Director, CeFin, Sweden and Hans Eliasson, CEO, Svenska Hus, Sweden, Documentalist: Fatima Vegholm The chairman opened the discussion by defining urban development. According to him the urban development is about building sustainable attractive cities, ecologically and economically. It is about building sustainable infrastructure, new buildings, education etc. 1. Banks from a historical perspective – The different parts role in the development of urban cities was discussed. A special focus was put on the local banks role in the urban development. The banks are found to be too neutral, meaning that they seldom want to be too involved in the local discussion and in the political process. They do not want to choose side and are therefore often neutral in the political process. The banks should be a part of the local growth and the question is how to involve the banks in the local environment. To be able to answer the question maybe we should go back to the origin, how the banks have been historically. The retail banking has change a lot the last 20 years. There have been changes in competition and in regulation, which have affected the retail banking and it’s margins. Further on there have been changes in technology, which also have affected the banks condition. The banks, from a historical point, should be analyzed. 2. Small scale advantage – Åland bank is a local bank and can be seen as a bank doing something new compared to traditional banks. They have an own system adapted to the local customers. Thus, they do not use larger banks system to be able to benefit from of large-scale advantage. Surprisingly they have a lower transaction cost than the larger banks. The Åland bank is without a doubt an innovative bank using a small-scale advantage.

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3. Governments role in innovation and risk capital generation – It is obvious that the small businesses have a need for risk capital. The question is who will and should provide the small businesses with risk capital. Should the small businesses get together and help each other with risk capital or should the government have a responsibility to generate risk capital. 4. The role of entrepreneurship and the financial services in urban development – As new innovation and business form are created the banks role are changing. It is not sure that it will be the banks that will provide local community with bank services in the future. Who knows what will happen in the future? Already today financial services are provided by other organizations than banks and the competition will probably increase in the future. The important question is how can the financial services be involved in the urban development? The entrepreneurs’ role was also discussed. The question is whether it is possible to educate someone to become an entrepreneur, or if it is a matter of personality. 5. Multi branding – Banks customers have different needs and requirements and the banks should therefore be able to offer their customers customized services. Is it possible for a bank to have different brand/specialities? In other words: can a bank have multi branding?

Ideas for future research • Banks from a historical perspective • Small scale advantage • Governments role in producing innovation and risk capital • The role of the entrepreneurs in urban development • Multibranding

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11. Guidelines for future research Introduction: Stellan Lundström, Professor and Director, CeFin, Sweden Moderator: Folke Snickars, Dean The Royal Institute of Technology, Sweden Stellan Lundström listed recent research areas within the research project ’the Future of Retail Banking’:

• Customer relations • Urban management • Ethics, moral, values • Competition and consumer protection • The Infrastructure of the Financial system • Risk Management • Financial Contracts

Folke Snickars collected the results of each workshop-group and initiated discussions with the audience upon the relevance of the proposed research areas. Here follows a list of the 25 ideas for new research presented at The Second International Symposium on the Future of Retail Banking:

• Is there a trend towards customer linked banking – “the old style” – optimization of customization/standardization?

• Comparison of European and American financial systems and trends • Innovative Retail models that can be applied to financial services. • Alternative models/scenarios as a tool to educate actors in the

financial service industry • How do retail customers value values and ethics? • Pension fund management, demographic trends that are dramatically

altering the scene. • Issues about distributing risk (developing products that help

household to minimize risks in addition to conventional insurance, utilize technology to create better risk avoidance options than in present day insurance systems). Some of the areas that were outlined as a suitable framework for this type of research were saving for future education (and insuring against the situation where education does not pay off), better coverage of medical cost, solving issues

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emerging in connection with giving birth, etc. A sub-area could also be research based differentiation of risk based products.

• Perception of risk. Discussing risk avoidance without proper insights about what is risk and how different customers perceive it is quite a fruitless effort. Analysis of risk behavior also helps to identify where people fail most as risk managers and why severe mistakes can occur in decision processes.

• The problem of asymmetric incentive systems in portfolio management. If risk is rewarded highly and no negative consequences follow wrong decisions the managers are often tempted to take excessive risk that is not in the best interest of their customers. The research could focus on developing a bonus system that would retain motivation, be in the interest of moth clients and managers and still keep high work motivation.

• The possibilities of reducing asymmetry in risk bearing, for example on the level of fiscal system and legal system. One of the examples is a case when bank will not take interest rate but a share of future profits instead. In many fields recent years have witnessed the transfer of risk from society to the individual level but not many people have yet realized it. Current tax system rewards taking risks but will not help covering losses.

• How does an old business model affect new thinking? What about the transition period between different business models? How does the shadow of the past shadow the future? Why do some firms fail?

• How do you see the future of customer relationships? • The importance of time in relationship development? • Do customer want a proactive approach? If so, when? Which

customers? What are the critical moments when they really need pro-activeness? Does the customer want to be involved?

• What influences does the customer have on the organizational processes since the customer is inside the boundaries of the company?

• Customer Segmentation Network • Networks Life Cycle • Network Purpose and Measurement • In Depth Case-Studies & Bank As Facilitator • Customer Needs For Network Facilitations • Banks from a historical perspective • Small scale advantage

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• Governments role in producing innovation and risk capital • The role of the entrepreneurs in urban development • Multi-branding

Apart from formulating the most interesting questions for future research the discussion also focused how new applications of research results could make use of the joint knowledge within the research-project The Future of Retail Banking. There where also a great interest for how this kind of accumulated academic knowledge could be used for educational purposes and in different kinds of cooperative projects with the industry.

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Retail Banking and Economic Growth Local Banking in a Global Context

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