Opening Speech by
Dr. Joseph Torbey
Chairman, Union of Arab Banks
At the
Visa CEMEA Middle East Symposium
23-24 September 2002
Istanbul – Turkey
Distinguished Guests,
Ladies and Gentlemen,
Good morning,
It is indeed my honor and pleasure to participate in this important event which gathers this elite group of bankers and card centre executives.
On this occasion, I would like to extend my deepest thanks and appreciation to Visa CEMEA, President and senior executives, for availing me the chance to share you this outstanding symposium which addresses significant issues to both the financial services industry and plastic card business.
Ladies and Gentlemen,
The topic we have before us for this symposium, “Survival of the Fittest”, is indeed very appropriate and timely for the years to come. This is because the remarkable technological advancements in the last decade have permeated several aspects of our economies and have offered boundless possibilities in the financial system, for both bankers, mainly retail bankers, and plastic card managers. The introduction of electronic devices, mainly the Internet, to banking and financial activities is offering seamless opportunities, sweeping through the global system and challenging the existing business structures and systems. The rules today are being redefined, new players are emerging, and new ways of doing things consistently challenge the way we think.
Allow me to give our perspectives of some of the broad issues changing the face of retail banking amidst these global changes, and the card industry as well, besides proposing some recommendations for sound and successful fitting by banks to these global changes.
The Changing Face of Retail Banking
With the advent of modern technology-driven solutions, the branch as a delivery channel of banking services is rapidly becoming less important to retail customers and two expensive for retail bankers to support. By comparing yesterday’s retail banking services with those of today’s we find that they have not changed, as they still comprise deposits, loans, transfers, remittances, foreign exchange, letters of credit…etc. What has really changed dramatically, however, is the ways and means in which these services are delivered by retail bankers to their customers. Self-service terminals, home banking devices, and telebanking technologies have been rapidly occupying the forefront in the financial services industry.
New technologies such as ATMs, POS, personal computers, and the telephone, are estimated to capture at least two-thirds of retail banking transactions in developed countries and in some emerging countries, thus leaving the traditional branch with only one-third of this business.
These changes in retail banking, have been accompanied with a dramatic increase in plastic cards (credit, debit, charge and more recently smart cards). Cooperative technology among banks, as well, has had a profound impact on the evolution of retail banking. The Visa and MasterCard associations for plastic cards along with SWIFT network for the communication of interbank international transfers, allow customers to benefit from financial services and retail banking operations across international boundaries.
The technologically advanced delivery and the card explosion have given the retail banking community scope to come up with other new and innovative services.
Banking organizations are focusing increasingly on their e-banking activities and are globally expanding Internet banking activities, exploring the use of wireless network and venturing into some new areas of electronic commerce.
Banks offer e-banking services to defend or expand market share or as a cost saving strategy to reduce paperwork and personnel. The Internet also provides banks with substantial opportunity to extend their customer reach beyond existing boundaries. However, the nature of the open network and the evolution of electronic commerce exposes banks to significant competition from both banking and non-banking firms. In addition, electronic delivery channels operate in an uncertain legal and regulatory environment that differs by jurisdiction. All these factors present new challenges for financial institutions in managing security, integrity and availability of services provided while remaining sufficiently profitable.
The change in retail banking delivery is being triggered by electronic engineers, whose wonderful discoveries and inventions are being adapted by the bankers to deliver banking services as far away from the traditional branch as possible, more conveniently and more economically to the bank, all in an effort to gain a competitive edge by one bank against the other.
While technology has been quite helpful for banks, it has also proved to be their biggest competitive threat. Technological developments offer non-banks direct access to the banking field and an opportunity to attach profitable segments of the business without the burden of the historical overheads which banks must carry. There are several examples of successes by non-banks in the banking field using technology, especially in the area of credit cards, where the major department stores, car, airline and telephone companies, among others, issue their own cards to their customers. There are also the direct telephone sellers in banking and insurance, who have exploited the existing technology to provide their services at significantly lower costs than banks.
What will all this change mean for the management of banks? In plain words, it adds up to a period of still more competition and raises further the importance of investing in technology to give banks a shield against competition not only from within the banking industry but also from outsiders. In his book “The Road Ahead”, Bill Gates refers to banks as dinosaurs and expects major changes in the delivery of financial services in the years ahead.
The trend towards securitisation and the disintermediation of banking services can only get stronger. As people get older they will acquire greater wealth and will no longer be content to hold it, as their parents did, in bank deposits. Furthermore, the growth of the fund business means that there will be increasing securitisation of higher quality credit assets. As a result, the role of banks as the primary suppliers of credit to high quality borrowers is likely to be eroded further over time, as a result of the development of the commercial paper market by non-banks.
There will also be increasing competition on the liabilities side of the balance sheet. Banks must expect competition from credit card companies, from retailers, from insurance companies, from fund managers, or even from software companies. So here too there will be a premium on staying ahead of the game by offering customers attractive and competitive services using the best that technology can provide in this respect.
The Changing Payments Landscape
The use of plastic cards as a method of payment has been expanding rapidly around the world. In fact, we are witnessing today a revolution in the card industry, motivated mainly by the continued growth of electronic banking, venturing into highly sophisticated areas like smart cards and into developed electronic funds transfer systems to facilitate interbank payments and settlements.
Today, the competition in the card industry is growing, fueled mainly by the competition among international card leaders themselves, and from commercial and retail banks which are increasingly issuing their payment cards. In fact, costs for banks with a large number of customers and a small number of ATMs can be significant. Banks, therefore, have been forced to increase the number of ATMs.
The growth of electronic banking for years around the world and the increased focus of banks to become progressive users of electronic payment systems is the main reason for the increasing use of plastic cards in the world in recent years.
But I believe that there is a series of developments that is challenging the payments systems and the card industry today.
Consumers and businesses want innovative payment services, and the ones we have today are insufficient to facilitate electronic commerce and e-banking. On the internet, businesses are not looking for new ways to deposit money or check transaction balance but to consummate transactions. Payment services are what the game is about. In all the rules that govern payments, we are either an issuer or an acquirer. That is not the way the world is working now. It is buyers and sellers coming together to trade, and they are doing it in real time. And everything in the enterprise is automated except for payment.
Most financial services companies compete on the basis of technology interfaces, instead of creating systems that will deliver data in any format the customer wants, any time the customer wants it.
That is a value proposition to make: I will let you initiate a wire transfer any time you want, any place you want, in the formats you want, as long as I authenticate you. And I am going to do it at a unit cost that is low.
Most people do not know the companies that are emerging to meet such needs. The companies are coming out of the payments area, and the principals in those concerns tend to come out of marketing, and are highly focused on customer needs.
There is also the collapse of the payments value chain. Today’s card value chain is at risk because of high costs that result from the division between issuers and merchant acquirers, from too many parties, “touching” a transaction.
Over the past few years, there have been a number of initiatives on the Internet payment front. Ever since the dawn of e-commerce, cards have ruled the roost, primarily because there were already in wide circulation and used extensively by the brick and mortar business. However, cards, while great for the day-to-day purchases in the physical world, came across one big problem in the virtual world.
Cards have managed to take care of security through signatures and photocards. But in the virtual world, how is anyone supposed to check the signature of the facial features of someone logging in from half a world away?
So as you can expect, the card number and PIN numbers were the only proof of identity. This meant that security became a big concern, so much so that card companies started charging higher for Internet enabled merchant accounts (the account the merchant needs to accept credit card payment on the Internet). This meant that credit cards became too expensive for smaller purchases.
Also, identity fraud and inordinately high levels of charge backs, issues that do not exist in the physical world, also make the credit card payment system a poor fit for business on the Internet. The automated clearing house network will not be a viable competitor , either, unless it changes its governance model and operating rules and develops a rich reporting capability.
What we are talking about is debits and credits. They are supposed to move together. But payment networks are constructed to accommodate the physical world, where there is no true network effect. One party to a transaction was served by one bank, and the other side of the transaction was served by another bank. Rarely did the two come together. But on the Internet, both parties can be the same.
Recommendations of Success
Faced with these harsh realities in the developments of retail banking and payment card industry, how can retail banking companies fit best and ensure a strong survive and rewardable interaction?
In today’s retail banking world, the branch of a bank must cease functioning as an independent operations center. Instead, the bank should create a single processing capability to serve all branches along with its other delivery means. The customers should view the branch merely as a point of contact for them to conduct their banking transactions just as if the contact were made via an ATM, POS device, a P.C, or via the Internet.
A successful retail banker, in today’s world, is the one who is able to supplement branch re-engineering by a range of efficient automated alternative delivery mechanisms to conventional branch, be it an ATM , POS, credit or smart card or otherwise. Such would not only serve the customer more conveniently around the clock and around the world from the office, the shopping center or the home, it would also diminish the unit cost of transaction processing, even reduce the number of branches needed to serve the growing number of customers and with it the overall cost of bank operations.
Retail banks need to depend more on electronic money, or the smart card, which is fast becoming a reality and which is increasingly surfacing in many countries around the world.
The continuing growth of electronic banking means that within the next five years, up to 70% of transactions conducted by a bank could be carried out via telephone, personal computer, or smart cards. Banks who are willing to allocate the necessary resources to invest in technology and adopt a more aggressive approach in introducing new products are likely to reap the benefits of larger market share and boost long-term profitability.
It is really up to the individual bank to have the vision and courage to embrace and exploit the advantages that technology can bring. This is an expensive business and there must be at the end of the day reasonable return for the shareholder. Banks are not showrooms to exhibit the fastest and most powerful computers, which people in systems and operations tend to always want to acquire. The chief executives of banks must have the business acumen to decide and lead in this domain.
Now are the customers ready for change? Just like the importance of changing the culture of bank employees to that of marketing, selling and customer service, acceptance by customers of these new delivery mechanisms is absolutely vital for the success of bank investment in automation. This is often difficult and always requires a long time and expense because what we are trying to change here are the behavioral habits of people. But, with more user friendly systems and devices, incentive programs and persistence, change can be achieved.
The success of the bank in getting its retail customers to use the new home banking and self service devices should be monitored closely. Management needs to periodically review by-product statistical activity reports in order to ensure that the number of teller transactions in the bank is steadily declining in favor of the automated channels of delivery. Otherwise, more effective programs and incentives would need to be instituted before the cost saving benefits of automation can be realized.
On this expose, I thank you for your kind listening and wish you a successful and beneficial symposium.
