It is hard to believe that just a century ago, the Ottoman Empire as Turkey was then known, had acquired the unflattering nickname of "the sick man of Europe".

Having ruled over a quarter of the world’s population at the height of its power, the six-century old regime was in the final throes of dissolution. It had ceded power to all but a handful of countries and its multicultural population was witnessing the beginning of the end of an historic era.


Today, Turkey is in a transition once more. With its geopolitical position firmly embedded at the crossroads of Europe and Asia, the country’s youthful and ambitious population is driving change within consumer finance services. Demand for retail banking products has grown over the past three years and financial institutions are paying close attention to the channels through which customers access their services.

With more than half of the population aged under 30 and over a quarter of the country’s residents registered on Facebook, demand for internet-based, easily accessible services is becoming a must for banks seeking competitive edge.

Youthful population driving demand for innovative services

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Enis Kurtoglu, director of consumer banking at Finansbank, told Retail Banker International that the traditional methods used by Turkish customers to access banking products were changing.


"The usage of alternative distribution channels is increasing rapidly in the market. Younger people are more advanced users of technology such as online banking, call centres and automated teller machines," he says.

It is little wonder, therefore, that retail banks in Turkey are investing in ever more innovative ways to channel their products to web-savvy individuals. Taylan Turan, head of retail banking at HSBC Turkey, told RBI that banks were beginning to recognise the demand for more accessible services.

"The range of channels and digital capabilities of retail banking have been improving in the industry. Turkey has a very online-savvy population and digital, multi-channel internet-based financial services are and will continue to be very important over the coming years," he says.

The latest statistics are testament to this forecast. According to HSBC Turkey’s most recent research, demand for credit cards, personal loans and mortgages has been rising steadily.

"Credit card spend per month is a good indicator of market demand," Turan says.

"This is currently at about $17bn per month. The balance of [the] retail loans market is close to $100bn and, if you look at the last five or ten years, lending has been growing at about 20% year-on-year while the number of branches have been growing by 10%. This year, while branch growth is slowing, we expect 15% growth in lending of retail banks," he adds.

Part of this growth may be attributable to the fact that Turkey has managed to withstand the worst effects of the global financial crisis. As countries nearby stand precariously close to requiring bailouts from the Eurozone, Turkey’s financial institutions have proven both resilient and well-capitalised.

Bank lending levels initially contracted sharply following the 2008-to-2009 financial crisis, but rebounded in May 2009 and have grown steadily since then.

Growth potential

Banking system assets in Turkey have increased from 63% of GDP in 2005 to 90% of GDP in August 2011, according to the International Monetary Fund (IMF). Loans from the banking sector have grown at an annual rate of just over 25% in real terms and real GDP growth stood at 8.9% in 2010, according to the Organisation for Economic Cooperation and Development.


But, while the country has seen economic growth in the post-crisis years, the level of banking penetration is yet to be fully tapped.

Out of Turkey’s 73m inhabitants, approximately 26m have bank accounts.

Kurtoglu of Finansbank says this presents a positive picture for growth opportunities in the sector.

"The ample room for retail banking to grow in Turkey is evident in international comparison. Growth in retail lending in Turkey has been very strong over the past decade but this came off from a very low base," he explains.

"Retail loans as a ratio to GDP in Turkey are less than 20%, which represents a very low level compared to European countries where the average is around 60%.

This shows that the retail segment in Turkey is still under-banked and there remains a huge convergence potential with mature economies."

Geographically, Kurtoglu said that banking penetration tended to be more clustered in urban centres than more sparsely populated, rural regions of the country.

"Retail banking is quite developed in big cities where the economic activity is also concentrated. Especially in Anatolia there is still huge potential for retail banking growth where we see much less branch concentration in comparison to big cities and the western side of Turkey."

This picture is gradually beginning to change, however, as the population becomes better informed about long-term financial planning. With a youthful and well-educated population, the retail opportunity is seen to be ripening. Turan says that this presents a lucrative opportunity for the retail banking sector.

"The demographics in the Turkish market are highly favourable. The average age is 29 and nearly half of the population is aged below 25. That by default means that there is a retail opportunity in this marketplace. We expect around six million new entrants into the banking sector over the next five years".

Remuneration structures changing

As banks adapt to the changing demands of Turkey’s population and economy, the business model of retail institutions has also evolved.


Kurtoglu of Finansbank points to a change in remuneration structures in recent years, reflecting different economic circumstances and behavioural trends.

"Since inflation remains [at] around 7-8%, banks have started to focus on new income sources and the share of fees and commissions income [has] increased over the past three years. Banks that compete with low interest margins need to compensate the lost income streams through fees and commissions to maintain their profitability levels," he says.

"The low interest rate environment has also triggered the need for investment products for higher income groups. Most banks launched capital guaranteed mutual funds and similar new investment products to capture this customer segment," he adds.

As in much of Western Europe, a move is also underway to shift retail banking away from a product-oriented approach to a more customer centric approach.

Turan says HSBC is committed to ensuring customers are given a holistic, rather than sales-driven, service.

"We are focussed on building long term relationships with our customers rather than having a product-led approach. We want to be more customer-centric by understanding customers’ needs within the context of their life cycle. Thus, for example, if you are a single 25-year-old professional, your needs are naturally going to be different to someone who is 45-years-old, in business, married and with two children," he says.

Distribution of the market

While the population remains under-banked, the retail banking market as a whole is expanding. There are currently 35 different retail banks in Turkey which fall into three main categories; tier one, tier two and tier three.

Tier one banks comprise four privately-owned and three state-owned banks. The largest privately owned bank in this category is Isbank based on assets.

Approximately ten retail banks make up the tier two bank category, among them Finansbank, TEB – BNP Paribas’ Turkish retail banking operation- and Denizbank. The tier three banks comprise a mixture of individual and small retail chains such as Sekerbank and Tekstilbank.

As the youthful Turkish population edges towards the home acquisition phase of their life, demand for mortgages, personal loans and retail banking products is expected to rise.

Gaining new customers

Tapping into this trend, Turan of HSBC aims to increase the number of retail banking and wealth management customers at HSBC in Turkey from 3.5m today to 5m within three years. To this end, the bank has invested in a global initiative to enhance the training level of its relationship managers and is expanding its geographical footprint across the country.


"We are investing in branch expansion. We plan to open 30 new shops in Turkey by the end of 2012 including 12 relocations taking our network to 343 branches and we will continue to invest further in 2013 as well," he says.

Recognising the popularity of credit cards in Turkey – where it is not uncommon for individuals to have up to five credit cards – the bank released an upgraded version of its existing credit card proposition earlier this year.

"We re-launched our credit card proposition in the first half of the year having built an entirely new set of features around customer needs that built on our market first Kreditnet loan campaign which was based on complete transparency to customers," Turan says.

Upgrading products and services

The drive to increase market share and innovate products and services is a common theme within Turkey’s banking sector. Finansbank has equally ambitious growth plans for the coming years.

Kurtoglu told Retail Banker International that he anticipates further growth within the personal loans space in the years ahead.

"Credit cards and personal loans will be the fastest growing product segments in the coming years," he predicts.

"After the 2008 financial crisis and the recent European financial stability problems we saw a slowdown in the growth of these two products as a result of tightened lending criteria in the market. I believe in the coming few years we will see an increase in the number of credit cards issued as well as the usage of personal loans as a result of more stabilized global financial environment."

Kurtoglu added that he would like to increase Finansbank’s reach by expanding the number of branches available across the country and aims to increase sales in a number of key product areas.

"We would like to increase the number of our branches from 530 to 700 over the next two years and as a result of planned investments we plan to increase our personal loans market share to 8.5% from the current level of 6.83%. We also want to raise our market share in the mortgage market from 8.03% to 9% and our market share of credit cards from 13.95% to 16%," he said.