MCE Banking

by Marc Dellaert (Executive Director) and Christian Dekoninck (Senior Associate)

Challenges and opportunities for retail and corporate banks in a fast changing and globalizing world
The deep crisis in the banking sector and the fast-changing environment are forcing retail and corporate banks around the globe to change their business models, and to look for new prot opportunities. Banks in mature markets are focusing on deleveraging their balance sheets, complying with solvency and liquidity requirements, and increasing their operational efciency. Return on Equity expectations have been gone back to pre-2002 levels. At the same time, there are plenty of growth opportunities in the new economies. Management Centre Europe sees a big opportunity for banks serving the growing middle class and the still unbanked population in the new world. Small and Medium Enterprises (SME) are a major driver of economic growth. Some of the emerging markets are leapfrogging ahead on infrastructure and taking the lead in the convergence between banking, mobile communication and retailing.

A. Growth opportunities in emerging markets

1. Fast growth of the middle class
Strong growth in the young urban educated population results in an important increase of Consumer Lending, both for housing and personal loans. We observe a fast-growing portfolio with relatively high yields and good risk indicators in countries like India, Russia, Turkey and selective African countries. At the same time, the Wealth Management segment is booming in almost all emerging markets, and especially in new oil- or natural resource-rich economies. The growing demand for Asset Management products creates a strong need to improve the quality of service and to develop advisory servicesfor the wealthy and middle class population. The major challenge for banks is to become customer-centric while increasing the banks protability.

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2. SME banking is the driver for economic growth

In emerging economies, Small and Medium Enterprises have even a higher impact on economic growth compared to the Western world. Moreover, they develop faster than large corporations. Now they are already responsible for up to 50% of GDP and over 70% of the workforce. SMEs are critical for the economic and social development in creating jobs and generating income. Offering services to SMEs is a key opportunity for economic growth. Often these companies are too large for micro-nancing and too small to obtain loans from international institutions (funding gap). Creative solutions might include the development of innovative nancial packages with smart subsidies from local government to sustain SME nancing, local-international partnerships to mitigate currency and transactional cost risks (local banks with offshore partners), or the structure of lending to SMEs with the option to convert credit in to equity at lower interest rates. To increase customer loyalty, a customer-centric model and a relationship approach are needed. The creation of a simple value proposition to cover customer needs (current account with overdraft, simple cash management, user-friendly electronic banking system, payment cards, number of allowed transactions within basic price) combined with risk-adjusted relationship pricing and dedicated relationship management will make the difference. It is clear that the SME segment (different from Corporate) requires a standardized and centralized process for up to 90% of its transactions and a special track for long-term investment loans.

3. Access to nancial services for the 'unbanked'

In places like Africa and India, a high percentage of the population lives in rural areas not meeting the qualifying criteria to open a bank account. In these countries, the government, together with central banks, are setting up programmes for regulatory reform, liberalization, and modernization of the

banking industry. The focus is on payment systems, settlement and clearing to support economic growth. A key success factor of the business model is to lower the cost of retail banking to service low-income customers with high efciency and protability. The combination of a high percentage of unbanked (over 70% ofpopulation), the boost in sales of mobile phones (over 400 million), the partnerships between mobile operators and banks and the governmental support (regularity reform) allows Africa to lead the way in mobile banking. Today already 37% of cell phone owners in Africa use mobile banking services (compared to 8,5% in leading European markets). By 2015, 238 million Africans (or 55% of cell phone owners) are expected to be using mobile nancial services. It is the opportunity to reach a new customer segment and to boost fee revenues while limiting the costs. One of thesuccess stories is M-PESA in Kenya, in partnershipwith Safricom. M-PESA made the mobile phone the ATM, point of sale and internet banking in one, creating access to nancial services for the large un-banked (poor) population. It has a large network of 17.500 agents compared to only 840 bank branches to reduce the costs, generating high volumes of daily transactions with interesting margins at lower costs for the clients. The nancial services include payments (mobile wallet), account management and mobile micro nance. India required a different solution to provide safe, fast and easy payments for the unbanked population. Only 1% of the cell phone owners in India uses it for banking transactions. Branchpenetration is low, while cost of banking intermediation is high.The Federal Bank of India introduced an innovative payment strategy to improve access to banking channels and to boost electronic transactions. A unique 12- digit number linked to basic demographic and biometric information (photograph and nger print scan) prevents fraud and makes it possible to offer personal payment service from person to person, domestic and international, in a few seconds. The same number can be used for payments with both cards and mobiles.

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B. Challenges for banks

Given these trends, Management Centre Europe sees ves major challenges for retail and corporate banks around the globe:
1. Setting up for increased competition and expansion Prepare for new global players entering local markets. Expand in new geographies with relevant customer value propositions. 2. Keeping customers loyal in a multi-banking environment Become and remain the customers bank of choice in times of decreasing customer loyalty. 3. Investing in the right technology Invest in technological innovation to achieve or maintain leadershipin a fast changing market place. 4. Ensuring protability Adapt the operating model to ensure efciency and protability. 5. Managing risk through the economic cycle Focus on sustainable growth while managing risk and complying with Basel III requirements and new regulations.

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C. Strategic directions to future growth in emerging markets

1. Customer centricity to improve customer trust and loyalty
When competition increases in an industry, the best companies stand out from the rest. Typically they do this by structuring a customer-needs-based approach (value proposition and segmentation) combined with a proper right pricing strategy (relationship pricing and risk based pricing) for each customer segment. The same principle applies to the banking industry. Because of the higher customer protability a strong focus on the Wealth Management segment (advisory, different product mix, relationship banking) is needed. Not too many banks give great customer service. Therefore, it is exactly in service excellence that a competitive bank can differentiate itself from rivals. This is the key to retaining existing customers and gainingnew ones. Having the right prole of front end staff and giving them the necessary training and coaching is critical for success. There are clearly cross-selling opportunities between the corporate, SME and retail segments if the one customer approach for both the private and company needs gets implemented. A full integration ofSME services in the Retail Branch network makes sense, as well as crossselling to corporate businesses (promoting salary domiciliation, unsecured overdraft and loans,debit and credit cards). Russian mid-sized private banks, for example, have a tremendous opportunity to gain market share if they develop a customer centric business model with focus on service excellence and innovation. to limit the cost of the branch network. In Brazil the Central Bank of Brazil plays a leading role in technological development creating efciency and reliability for the whole Brazilian banking system seen as one of the best in the world.

3. Efcient operating model to export to global markets

A centralized service with multi-product and multisegment capabilities together with lean processes (standardized, automatic, digitized, paperless and real time) ensure safe, fast and easy service. Its important to focus on the core activity and to consider outsourcing of non-core activities. An industrialized approach for the mass market and SME segments offering standard packages and relationship pricing ensure cost effective processes. And with the right pricing strategy, you can drive the customers to the most efcient channel. There are attractive opportunities for partnerships with mobile operators and retailers to capture the high volume business amongst the low income population, through a low-cost distribution model. There are plenty of examples in Africa with existing partnerships between banks, mobile operators and retailers.

4. Smart branch network expansion or direct mobile banking?

With strong GDP growth in emerging markets, competitive focus is on expansion and not on cost optimization. The question becomes how to expand in a protable and cost-effective way while adjusting to the local business environment. The right multi-channelmixbetween branches, ATM, Mobile Banking, Internet and Call Centre provides the customer a 24/7 accessibility, while directing him or her to the most efcient channel. In this mix, we see a clear trend to move more towards mobile banking, complementing or even replacing the branch network. For mass afuent and unbanked customers, it is the right time to introduce Direct Mobile Banking 2.0 with the full range of Retail Banking services. In particular markets, there are still opportunities to expand the branch network. This is thanks to the high economic growth, fast-growing middle class and still relatively low branch penetration. The new branch model will be advisory and service and sales oriented with a customer friendly pro-active approach towards the most protable segments (middle class, Wealth Management and SME) and this way improve cross-sales and customer protability.

2. Technological enhancement to support Customer Centricity

To be customer-centric and to be able to do the right segmentation, it is important to invest in data capture and analytic capabilities. A 360-degree customer view and CRM tool is needed to understand and develop the needs of the different customer segments and to create sales and crosssales opportunities. A high-performance core banking platform (automated, real time) is a competitive advantage. Payments can be a money maker, but high-tech development is needed to make it safe, fast and easy. Multi concepts, language, currency,... facilitate the transfer to global markets. Plenty of examples in Africa (mobile banking), India (unique customer identication) and Brazil (ATM) demonstrate the implementation of high tech solutions to capture new customer segments and

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Another possible solution to limit costs of distribution is the use of mobile branches as Equity Bank in Kenya does. It has a good mix of prestige branches for afuent customers, regular branches servicing all, with separate service for each segment, and mobile branches (vans) to serve rural communities up to twice a week. In Brazil, ATMs are high-performing and enable the customer to execute all standard retail banking transactions. Banks in Brazil favor expansion of the ATM network rather than expanding their branch network.

of capital passed to borrowers). Emerging market bank can be more optimistic thanks to a higher investment appetite (historically good return of banking stocks), growth potential of their economies, and having escaped much of the crisis faced by the West. A major concern for banks is to maintain healthy credit portfolios and to growin acontrolled way, monitoring all key credit ratios carefully to avoidtoo high write offs. In particular markets, fast economic growth and a boost in consumer lending during the last decade led to huge losses for banks. However in Brazil, the second private bank, BancoBradesco, grew its market share to 15% and has become one of the leaders in assets with a very healthy credit portfolio.

5. Managing risk through the cycle

Western banks worry about the negative impact of the new Basel III requirements on their protability and economic growth (higher cost

How can MCE help you to effectively address key challenges in the banking industry
MCEs Senior Associates all have hands-on international senior management experience in the banking industry. We help you to implement strategy andmake change happen in an effective way. HowMCE adds value to your bank Helping to make the transformation happen through workshops and advisory services on strategy execution. Building specic solutions for internal management and organizational development. Conducting workshops for individual managers to exchange ideas with international peers (open enrolment workshops). Coaching and mentoring individuals and teams to make them gain competence in new roles or environments.

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About Management Centre Europe

Management Centre Europe (MCE) is the largest provider of organizational, management development and strategy execution programmes for international companies, wherever they have operations. We enable individual managers and management teams to deliver on their strategic goals, through open enrolment workshops, in-company workshops, advising, business coaching and mentoring, and a variety of tools, assessments, and simulations. For more information, visit www.mce-ama.com If you have an issue that needs a creative solution you would like to discuss, contact us: Main Ofce (Brussels, Belgium): +32 2 543 21 20 Email: info@mce-ama.com

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