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Tuesday, 16 October 2012






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Blue oceans for banks myths and realities

Viraj Mudalige

The forthcoming era is certainly a testing period for banks. Stiff competition and high overheads make it challenging to maintain profitability.

On the other hand global uncertainties, industry convergence and technology advancements offer enormous challenges for banks in achieving their revenue targets. Amidst these pressures on both the top line and bottom line in very hostile and regulated markets can banks expect blue oceans? The writer says yes.

Those who are innovative and geared to make a difference do have immense potential. This short article examines and explains the possibilities from generic perspectives.

Changing customer behavior

Visiting a bank to spend a couple of hours was never seen as a waste of time those days. Congested roads, lack of parking space, changing lifestyles and increasing opportunity cost of time tend banking customers to look alternative ways of doing banking.

Global statistics and technology trends reveal that a considerable number of customers do their banking transactions without visiting banks.

What banks need to understand is how fast this has been happening and how best they can retain the existing clients and attract new clients who will prefer to do banking outside the bank premises.

Similarly, technology advancements and competitive offerings have compelled the banking customers to expect everything over the counter.

Months or weeks taken to process a facility have come down to minutes and seconds. Both individuals and corporate firms demand quick response on line real time. Realizing this, using traditional resources is quite expensive and risky.

Reaching the customers

Whether the reason to open a branch is achieving internal targets, harness opportunities or CSR initiatives, extending the reach by opening physical branches needs careful analysis than never before.

We see in many places isolated small villages and communities with 50 to 100 families with sizeable economic activities.

Can a bank open up a branch to serve them? A local bank may incur a sum of Rs 10 to 20 million to open a new branch. In addition to the upfront investment, the recurrent expenditure is also quite significant. Providing the other necessities including trained personnel is also a challenge.

On average, a new branch will take between 18 to 24 months to break even. The legislative and regulatory issues, presence of competing banks in the same vicinity and increasing costs thus make opening up of a new physical branch a very complicated decision for any bank.

When customer preference is to do banking without visiting physical branches, such decisions to open new branches have to be necessarily re-examined.

As urban markets were saturating, the banking industry became hostile looking for unbanked and under banked customers.

Financial inclusion was a buzzword for banks in the past decade and technology was considered as an inevitable factor in reaching the unbanked in a cost effective manner. When technology based solutions are becoming common there again banks face the challenge of differentiating their offerings to increase the appeal.

Banking beyond branches

As at present, multiple channels and devices are in use by banks in reaching the customers offering on line real time banking.

The channels include internet, agents/dealers and the customers. The devices include personal computers, EDC POS terminals, PDAs/Palmtops and mobile phones.

It should be noted that use of devices which are not meant for payments can cause serious problems in view of multi faceted vulnerabilities. For an example, the mobile phone is not a payment device.

However, it could be converted to a payment device with appropriate software. Allowing users to engage in on line real time banking using such devices needs comprehensive evaluation of software and vendors.

Creating an interface and using a mobile phone for many other purposes is no more a secret. As more and more generation Y people are using mobile devices and IT skills are increasingly misused in fraudulent and unethical activities, it is essential that foolproof technologies that adhere to stringent security standards are in use.

Failure to do so, due to negligence, preferences and/or economic benefits can lead to severe financial losses, legal consequences and damage to reputation.

Among the alternative devices available, the EDC POS terminal is preferred and recommended due to many reasons over the other devices.

Firstly, the EDC POS terminal is a payment device and therefore it comes with certain features and specifications that facilitate and ensure secure transactions. Secondly, the EDC POS terminal is always kept with a third party who has a legal binding with the bank/financial institution. Therefore, fraudulent usage by individual customers is minimal.

A third reason which has been the primary factor highlighted by many banks in the region using branchless banking with EDC POS terminals is its ability to incorporate sophisticated security measures and strong user authentications such as biometric verifications.

This facilitates the banker or the agent to properly verify the customer in the field. Since the device is compatible with all the available communication channels it is easy to access all the targeted customer segments.

Convergence or encroaching?

Disruptive technologies continue to change the competitive landscapes of industries. Telecommunication industry was considered as a supporting industry for banking until mobile service providers started offering banking services in different parts of the world. Whether we call it industry convergence or not, it ends up by making the banking industry quite hostile. New and dynamic players can easily attract the new generation tech savvy customers to do banking on mobile devices instead of queuing up in a bank branch.

High overheads prevailing in the telecommunications industry, stiff competition and lowering margins in traditional products more and more telco firms may enter into banking industry. High mobile penetrations close to or exceed 100% in the region certainly appeal the innovative players to harness the ubiquitous connectivity of millions of people within their networks.

Despite the global trend for free market activities, banking industry will continue to be a regulated industry compared to other industry sectors due to its importance to economies and inherent vulnerabilities to be addressed collectively.

Is there a blue ocean for banks?

Therefore, foresightedness in banking on technology has enabled many banks in the region to expand their reach amidst challenges.

As banks continue to compete in red oceans whilst meeting stiff competition from other industries where channel and product innovations do have very short life spans, it is quite important to examine how some banks see blue oceans.

In Malaysia, Indonesia, Cambodia and Vietnam several large banks have selected EDC POS terminals to simulate bank branch transactions in expanding their reach instead of opening new physical branches.

When the going gets tough with saturated urban markets, increasing electronic frauds, lowering margins and inconsistencies in responsibility and accountability of staff in new and sophisticated solutions it is a proven methodology for many leading banks.

The business models vary from country to country. Whether it is called agency banking, branchless banking, microfinance, grass root banking or barefoot banking these banks have relied on the EDC POS device in offering foolproof on line real time banking.

The writer had the privilege in involving several such projects as a solutions architect and hence ends this article confirming the existence of blue oceans for local banks provided that they use innovative technologies promptly.


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