An RBI round table held in Bahrain in October saw senior bankers and other financial services industry figures from across the Middle East region come together to discuss the challenges and opportunities of a market which continues to witness an expansion in retail banking capabilities. Dan Jones reports
For participants of the VRL retail banking round table in Bahrain in October, the key word was “opportunity”.
The launch of new products and services in the region – ranging from prepaid cards to packaged accounts to next-generation mobile and online banking services – remains a cause for optimism, though it is improvements in customer service and cross-selling that seem most likely to boost financial institutions’ bottom lines in the coming months.
Nonetheless, the effects of the financial crisis are making themselves felt in the region, even in market segments seen as emerging more unscathed than most.
Islamic banking has been touted as a beneficiary of the crisis, with many banks in the region reporting heightened customer interest and increased deposit inflows over the course of 2009. But according to Robin Watson, head of the Benefit Company, one of two credit bureaux in Bahrain, the sector will not escape the changes taking place in the wider global financial services industry.
“Islamic banking is definitely going to grow in importance but it will also have to change,” said Watson.
“Currently Islamic banking in this region has been mainly associated with real estate. A huge part of Islamic banking has been providing personal mortgage loans. Islamic banking is overbanked to some extent, and it will have to consider what it is selling other than car loans and real estate.”
That will inevitably lead to an increased focus on cross-selling, something which remains under-explored within the Middle East as a whole.
Regional trailblazers are now unveiling concerted cross-selling efforts for the first time. Suvo Sarkar, head of retail banking at Emirates NBD, told RBI in May that the bank was hoping to double its cross-sell ratio from two products per customer to four by the end of 2010, citing technological improvements that have allowed the bank to implement genuine relationship pricing tools (see RBI 612).
But the average cross-sell ratio for the wider sector remains lower still: under two products per customer, Sarkar said at the time.
Addressing the issue of cross-selling, B Chandrasekar, head of consumer banking for Standard Chartered in the region, said: “What has not happened is the creation of a central database for cross-selling products, though banks are beginning to move on this now, and we see maximising products per customer as an increasing trend.”
Training is essential
Combining such improvements in technology infrastructure with enhanced customer service capabilities holds the key to improving cross-sell ratios, the panel agreed. “I think the training of employees who communicate directly or face-to-face with customers is essential for cross-selling,” said Ahmed Seyadi, senior manager at Khaleeji Commercial Bank.
Trevor Stokes, executive director for business development at the economic development board in Bahrain, was even more forthright.
Asked to name the key challenge, opportunity and trend in the Middle East retail banking sector, Stokes said: “The key challenge is customer service, the key opportunity is improved customer service, and the key trend is improving customer service.”
Axel Hoffmann from Bank of Bahrain and Kuwait said: “In Bahrain, and probably in the rest of the region, what I see is a product-led retail banking strategy. The industry has to start thinking about the customer as a relationship and start integrating the products in a more innovative way.
“We will see standardisation, credit bureaux sharing information, and that will allow for more regional expansion. Otherwise there is no scale in what is a relatively small region.”
Stokes, a former CEO of American Express Middle East & North Africa, cited one example of the way in which customer service has already been improved in some segments: the January 2008 launch of the American Express ‘Centurion’ card in Bahrain, the United Arab Emirates and Qatar.
The high net worth product was launched in the region ahead of countries such as Brazil and Canada, but the extremely high service deliverables presented a challenge for the company: in order to provide Centurion’s 24 hour customer service, American Express had to negotiate an exemption to the Bahrain rule forbidding women from working past 8pm or before 7am in certain industries.
Once that was achieved, “the number of people who used facilities such as the concierge service, and used it extensively, was considerable”, said Stokes.
A number of other structural problems are also beginning to improve but continue to present challenges for banks in the region, according to the panel, including unreliable internet connections, the paucity of postal addresses in some areas, and high levels of card fraud.
As well as customer service, packaged accounts will also play an inevitable part in increasing cross-sell ratios, with Chandrasekhar confirming his bank was among the few in the region to currently offer such products to customers.
“Bancassurance is a big area for most banks, and I certainly think that relationship banking will be a trend and is a way to move away from the single product mentality. In our bank we believe that,” he said.
A focus on relationships
The focus on relationships is crucial given that the region is witnessing the end of a period of significant real-estate fuelled consumption. That has, in turn, inhibited the high levels of population turnover which were previously a characteristic of the region.
“The new influx of people coming to the Middle East was both a positive and a negative,” said Michael Walters, head of REAP Consulting. “In the past it led to an attitude of ‘well, we don’t need to do anything with existing customers because next week there are 20,000 to 30,000 people arriving in Dubai, so there is our new market’. This was true across all sectors.”
The drive to increase products per customer could be aided by other industries’ increased awareness of their need to penetrate further into their existing customer base. The need to cross-promote has been lacking in the past, according to Watson.
“Some industries are also realising their world is changing rapidly and they have got to become much more aggressive themselves in encouraging cross-selling, because they have been slow at actually doing so in the past,” he added.
“Trying to persuade airlines in the region to consider co-brands, for example – it took months and months and months compared with what you could have done with airlines in other regions.”
A sign of a shift in that trend came on 27 October with the launch of a co-branded credit card from Mashreq and Air Arabia, the Air Arabia Mashreq Credit Card, which offers customers the opportunity to obtain free flights through high card usage in a manner which has become common the world over.
Prepaid cards also have “great potential” in the region, according to Colin Loubser, the co-founder of prepaid card firm Tuxedo, with most banks now coming to realise the benefits of outsourcing the development of such services.
“I think people are starting to realise it’s not a credit or debit card; it needs functionality, mobile applications, and the ability to change quickly,” Loubser said.
“[Banks] now recognised the need for specialisation and when you look at the suppliers you have to run a programme and the opportunities across the region, that will require specialised resource. That is a difficult resource to find – for banks and even for us, because the technology is new,” Loubser added.
Deepening customer relationships
For others, the development of innovative new products and services should, perhaps paradoxically, bring with it a move away from product pricing in favour of a shift towards retail banking strategies focused on deepening relationships with customers.
“We have to stop price competition and start being a little creative, thinking about specific segments: youth, women, low-income consumers, expats, rising professionals – the opportunities are there,” Hoffmann said.
Such levels of segmentation are already being demonstrated at many of the most innovative banks in the region, not least within the affluent sector. With customer relationships an even more integral part of the business model, wealth managers and mass affluent service providers have frequently proved more refined in their segmenting strategies than their consumer banking counterparts.
The likes of Emirates NBD Priority Banking and Mayfair Wealth Management have promoted female-focused services and events in the past 12 months, while National Bank of Kuwait has maintained its focus on the youth segment via a series of ‘summer academy’ promotions.
A recent report from Boston Consulting Group also highlighted how Islamic banks too were “extremely well positioned” to capture a share of the growing female-friendly banking market in the region.
But despite such developments, the panel widely agreed that the Middle East remains a heavily overbanked region, and suggested the current economic climate would inevitably result in a thinning out of the pack.
“Because we have too many banks there is a lot of price-based competition,” said Hoffmann. “We have a very small market and banks were lending personal loans and car loans at 7 or 8 percent, which are very low rates compared with what I see in other undeveloped markets.”
For now, however, it seems the onset of the financial crisis is resulting in an increased interest in the retail banking sector, not least from others in the financial services industry.
Investment houses struggling under the weight of soured ventures and the weakened real estate market are beginning to rely on their retail banking subsidiaries for income, even as the Middle Eastern consumer feels the pain. In October, Gulf Finance House (GFH), one of the largest investment banks in the region, announced the creation of a “rejuvenated business model designed to catalyse a new period of growth”.
The business will be split into two divisions, one of which will be a commercial banking franchise centring on the retail-focused Khaleeji Commercial Bank, in which GFH and GFH chairman Esam Janahi hold a combined 47 percent stake.
Similarly, Bahrain’s Ithmaar Bank announced on 14 October that it would integrate its subsidiary Shamil Bank in order to become a “premier Islamic retail bank, [involving] both banks pooling their resources to create a single, more efficient and significantly strong retail-focused Islamic bank”.
The potential introduction of a pan-regional banking licence, however – long mooted as a hypothetical groundbreaking development in the Middle East – remains a long-term goal but one unlikely to occur in the near future, the panel agreed, with some suggesting that the need for such a licence would be mitigated by the continued development of cross-border co-operation between the financial services sector and related industries.
Educating customers on channels
Other key challenges cited by the panel, as the industry attempts to roll out alternative channels, included educating the end user, the sense that internet penetration remained relatively low for some segments, and increasing convenience for customers.
“Prepaid, online, mobile are going to become more and more important,” said Stokes. “I think you are going to continue to have intense competition on price when the region remains so overbanked, but there are companies trying to pull away from price.”
Chandrasekar concurred the implementation of electronic channels is on the rise but suggested the crucial challenge is addressing users’ inhibitions regarding the use of electronic terminals, a principal factor being security. But on a broader basis, the banker is upbeat about the opportunities in the region.
“Channels are available, it is a question of making customers feel secure,” said Standard Chartered’s Chandrasekar. “At the top end internet acceptance is very high.”
He added: “There is a lack of credit in countries like Qatar, Lebanon, Jordan, there is still a lack of credit bureaux there, so that is an opportunity for countries to streamline retail lending and help growth… The region has learned some lessons already about the non-creditworthy, about leverage being too high and so on.
“I think also the mortgage market generally has not grown as it can, so there is a great opportunity around secured lending.”
RESULTS Regional third-quarter results offer mixed views
Third-quarter results from the leading banks in the Middle East have shown the extent to which the region is now feeling the effects of the global economic downturn, with only a handful of major players reporting year-on-year profit increases.
One such bank was Emirates NBD, the region’s largest bank by assets, reporting total income of AED8.3 billion ($2.3 billion) for the nine months to 30 September 2009, up 24 percent from the year previous.
The bank did, however, see total retail income before impairments fall from AED2.3 billion to AED2.1 billion over the same period, though it noted its consumer and wealth management deposit base rose by 23 percent in the first nine months.
The imminent completion of the merger of Emirates Bank and National Bank of Dubai, the two institutions from which Emirates NBD was created, was marked in late November with the launch of the bank’s new brand identity, reflected in new branch signage, a new website and new marketing strategy.
At National Commercial Bank, the largest bank in Saudi Arabia, net income for the first nine months of the year fell by 28 percent to SAR3.27 billion ($872 million).
At Mashreq, in the United Arab Emirates, net income for the first three quarters fell from AED1.64 billion in 2008 to AED1.2 billion in 2009. Retail income before tax and impairments rose from AED1.14 billion to AED1.3 billion.
Kuwait’s retail-focused Gulf Bank saw nine month net profit drop from KWD86 million ($301 million) in 2008 evaporate into a KWD7 million loss for the corresponding period in 2009 – largely due to a fall in domestic banking net income from KWD68.8 million to KWD11.1 million.