Trends suggest that banks capturing an expanding retail business catering to the mass ranks of financial-services-hungry populations in emerging countries will be tomorrow’s global giants. 

It is not just Starbucks coffee-houses that are springing up across the globe from Brazil to China. Consumers are also acquiring a taste for finance and, along with their skinny lattes, they want retail financial products such as mortgages, car loans and current accounts that have been largely non-existent for the broader population in many emerging markets. 

Today marks the beginning of a new retail banking revolution whereby huge swathes of the world’s population, previously unbanked, are entering a new world of available financial services.

The revolution is also twofold, because there are not only millions, if not billions, of new customers from Mongolia to Madagascar being exposed to new financial products, but the institutions providing these services are also having to undergo a radical transformation to understand and meet the needs of these new as well as existing markets.

By 2015, the number of bank customers worldwide could have conceivably doubled and the volume of banking assets multiplied. But who will be the prime providers of the future and will the world’s top 20 banks in 2015 differ markedly from today’s leaders? Will established retailers such as Wal-Mart and Tesco develop strong banking franchises?

This retail revolution combines seizing the opportunities from the new markets opening up as well as using creative systems and technologies to distribute new products to new and existing customers. “Retail is a matter of distribution,” Jean-Paul Votron, CEO of Fortis, explained to The Banker recently, and finding and developing new means of distributing various products will be a critical differentiator between the winners and losers in the retail wars ahead. It may also lead to new and interesting partnerships and alliances between major players and local banks as the former contribute their product expertise and the latter their distribution.

Organic development

A recent study by Accenture of 118 retail bank executives in the US, Europe and Asia-Pacific showed that bankers were very optimistic about their banks’ ability to grow and outperform the market. “Clearly, organic growth is the strategy of choice,” noted Piercarlo Gera, managing director of Accenture’s financial services practice. “These aggressive growth expectations are quite striking and global.

“This will set up a challenging market that rewards those banks with thoughtful and differentiating strategies, critical investments in people and systems, and a laser-beam focus on attracting and retaining customers.”

The study emphasised some key factors: a large majority (93% in the US, 79% in Europe and 86% in Asia-Pacific) recognise the need to intensify their cross-selling efforts while, in the drive for significant organic growth, three areas of excellence were noted – market and product management, distribution, service and fulfilment.

To understand why a genuine banking revolution is at hand it is critical to gauge the full potential of the untapped banking markets that are only beginning to develop. Over recent years the impact of globalisation, low interest rates and economic growth, among other factors, has produced a breathtaking expansion in retail lending in emerging markets.

According to a recent Standard & Poor’s report, the so-called BRIC countries – Brazil, Russia, India and China – saw loans to individuals for housing, car purchases, and other consumer spending more than triple from 2001 to 2005, from $145bn to an estimated $477bn. While this is still low compared with similar loans in Germany, which totalled $1700bn in 2005, S&P acknowledges that BRIC retail lending grew at 40% annually in the four years up to 2005 and those loans could be expected to reach $1800bn by 2009, with medium-term growth seen at 20%-30%.

S&P also explains the stark contrast between retail loan markets in mature economies and those in emerging economies. In Germany and the US, for example, mortgage and consumer loans constitute 62% and 99% of GDP respectively. In the BRIC countries plus Turkey and Mexico, total loans to households range from just 4% to 14% of GDP, a significant difference to the developed economies. The continued retail growth in these emerging economies is naturally predicated on continued economic expansion as well as improvements in the legal environment and financial infrastructure, not a simple task. But S&P is confident that trends in these areas are broadly positive in most emerging markets and it believes that “retail lending will continue to steam ahead”.

“When developing countries get to a certain level of wealth, which is not always well defined, the population can support a new array of more sophisticated financial services,” says Carol Leisenring, co-director of the Wharton Financial Institutions Center. “Typically it starts with basics such as chequing accounts and savings accounts, and then it gradually evolves into something that looks more like what we have with mutual funds, credit cards and lending services.”

However, unlike ordering a cappuccino, the ability to provide more sophisticated financial services, especially in emerging markets, is not easy. In fact, many domestic banks lack the expertise and product knowledge to provide the financial services that are increasingly in demand. And as margins and growth in mature markets decline, the booming new economies, such as China, India, Russia and Turkey, are becoming increasingly attractive to the global players. With huge untapped consumer markets and the prospect of wider profit margins in retail lending than corporate banking, it is no surprise that the world’s major banks are looking to these markets rather than their home markets for growth.

Retail is the next frontier of cross-border expansion – both in developed and in emerging markets, says Sam Theodore, managing director of ratings agency DBRS Europe. “Most banks have concluded that retail in many markets, as opposed to wholesale, offers high and sustainable revenues, low risk, and the opportunity for good diversification into non-banking products and services that can be cross-sold to individuals and small businesses.

“In contrast, wholesale banking, including financial markets and investment banking, can generate more volatile revenues and has the potential for higher risks, some of them hidden or with possible ripple effects, such as reputation risk.”

Seemingly with this in mind, Charles Prince, CEO and the new chairman of Citigroup, the world’s largest bank, has altered strategy, aiming to increase Citigroup’s net income from international business to 50% in the future, up from last year’s 38%, and much of this is expected to come from consumer financial services outside the US. The bank believes the number of ‘bankable’ households with a disposable income of more than $10,000 a year is expected to grow from 112 million to 122 million in the US by 2008, but, internationally, the number of bankable households is expected to grow significantly more, from 349 million to 415 million in the same period. “You get a chance like this once in a generation,” an official told analysts.

Banking competitors

So given such mammoth opportunities, which institutions are making the running? One important aspect of the retail revolution is that banks are not the only players in the game. For instance, GE Consumer Finance or GE Money, which has assiduously avoided creating a bank structure over recent decades, has built up more than $163bn in assets with a global presence in 50 countries and more than 118 million customers, providing a wide range of financial products from personal and auto loans to mortgages, private label credit cards and credit insurance. GE is, and will continue to be, a formidable competitor worldwide and recently formed a strategic alliance with Cosmos Bank in Taiwan.

So while DBRS’s Mr Theodore notes that “retail is the new frontier”, the retail market is not limited to banks alone. Large non-bank financial institutions, such as GE, are fast getting into the action and taking market share, especially in personal and car loans. With supermarkets and retailers, such as Wal-Mart, interested in providing financial services and the blurring of financial boundaries, the question to ask is how good are banks at providing retail services?

“The key to the future of retail banking is to anticipate customers’ interests, needs and desires and make appropriate offers, linkages and other mechanisms to facilitate the transactions that follow customer behaviour,” explains Joseph diVanna in his latest book The Future of Retail Banking. “Anticipatory financial and commerce services increase the customers’ relationship with the bank and reduce a competitor’s ability to lure them away by offering a product with a low introductory rate.”

Local tastes

Anticipating customers’ interests, needs and desires can take many forms. In Saudi Arabia, for example, Islamic banking products have taken over virtually the entire retail banking sector in just a few years and the global institutions involved, such as HSBC, have carefully crafted a new product range, HSBC Amanah, to cope with the change. Kuwait Finance House, which operates on Islamic principles and is the second largest bank in Kuwait, is busy expanding its Sharia-compliant products into a new Malaysian subsidiary and its well-established Turkish subsidiary, which has 70 branches.

Among the major banks, comments from Citigroup’s Mr Prince on the first quarter results contain significant indicators of strategic direction. Besides noting that profit outside the US surged 47%, Mr Prince stated: “We executed on our strategic initiatives, adding a record 238 new branches in 19 countries [36 in the US], as well as opening our first private bank office in mainland China. We also enhanced our ability to serve more customers through the launch of Citibank Direct, our full-service internet bank, and through a partnership with 7-Eleven convenience stores, we added more than 5500 ATMs to our US distribution network.”

The expansion of the international branch network reflects the trend in organic growth, as does the launch of Citibank’s full-service internet bank, but the partnership with 7-Eleven again highlights the importance of distribution channels. Citibank’s new ATMs located at popular retail outlets provide a huge extra distribution source and without a massive capital outlay that could be expected with an acquisition of a branch network. The partnership with

7-Eleven may not be as productive or profitable as acquiring a huge branch network, but it does mean gaining access to an enormous number of new customers, and in retail that is what future growth is all about in either developed or developing markets.

The internet is another area where retail winners are expected to be strong. And it is no surprise that the launch of Citibank Direct comes at the same time as HSBC launches a new online banking programme in the US. The HSBC online savings account, opened last November, attracted more than $1bn in deposits in its first two months but its critical advantage is that it extends the bank’s US reach beyond the seven states and the District of Colombia in which it currently has retail branches. HSBC can now reach customers in California and Texas and across the entire US, where previously it had no presence at all.

 Worldwide coverage

The international prospects for global players on the internet are only beginning to be explored. And synergies between the major banks’ networks are far from fully exploited. If a customer would like to buy property in Canada, France, India, Taiwan, UAE or the US, HSBC can put them in touch with a member of the HSBC Group in that country to arrange a local mortgage in the local currency. Alternatively, HSBC Bank International, based in Jersey, Channel Islands, provides personal loans in most major currencies (including euros) to help its customers pay for their property. An English-speaking call centre run by HSBC France has been particularly successful in running a scheme for UK residents buying second homes in France.

In emerging markets, retail lending growth could be even faster if it were not for several constraints on the development of housing loans, says S&P. While at present the bulk of consumer lending is for consumer durables and autos, in the long term S&P notes: “The greatest growth potential is to be found in housing loans rather than consumer finance. In emerging markets with relatively supportive legal frameworks and stable macroeconomic environments, house lending should prosper in coming years due to huge underlying demand.”

Central and eastern Europe is a key example of where the housing loan surge is beginning and where sharp banks are seeing the opportunities. As Western banks have clambered into the region in recent years, the volume of housing loans has risen dramatically from an almost non-existent base. As the table compiled by Bank Austria Creditanstalt shows , the growth in the more advanced markets of Hungary and the Czech Republic has been huge and will continue to grow with larger economies, such as Poland, starting later on the housing trend with mortgage loans growing by 41.2% in 2005.

In countries such as Turkey and Russia, new mortgage laws, where none existed previously, are expected to provide a long-awaited boom in housing lending for customers and those institutions providing viable mortgage products.

In western Europe, huge potential also exists in housing. The size of residential mortgage lending in the EU12 has tripled from €1500bn in 1990 to €4700bn in 2004, equal to 45% of EU GDP and 6% annual growth, according to Francesco Burelli, principal consultant at London-based Capco. This figure is expected to reach €6000bn by 2010.

Capco research indicates that mortgage markets in France, Greece and Ireland are expected to grow at double digit rates while Germany, Italy, Netherlands, Spain and the UK are expected to grow at smaller rates.

And banks such as Italy’s Unicredit are showing the way in Europe. Unicredit is a new force in European banking, serving 28 million customers in 19 countries through more than 7000 branches. Acquisitions in the past five years have given it the largest European branch network and the largest central and eastern Europe (CEE) franchise, and retail head Roberto Nicastro is keen to leverage the bank’s 19-country network while listening more and more to customers.

France’s BNP Paribas is aiming to remain a major global player, as its recent $10.9bn takeover of Italy’s Banca Nationale del Lavoro clearly shows. BNP chief executive Baudouin Prot welcomed the 800 branches, 3 million retail and 39,000 corporate customers into the group, saying: “We really needed a retail franchise in Italy because it is high-growth, fragmented and we already had a strong presence there.

“Italy has more potential than most of Europe because while it has a high savings rate, the level of mutual funds and life insurance per inhabitant are still very limited.

“If you look at mortgages, the growth potential is very high. The same goes for consumer credit. For the past five years the Italian market has been growing faster than other European countries, but there is more to come.”

Mr Prot also stressed BNP’s long-term strategy of maintaining retail at about 55% of overall revenues, a figure with which HSBC broadly concurs. BNP’s Prot, like other enlightened bankers, is keen to have 10% or 15% market share in key products but is also concerned by innovation. “We are very eager to do product innovation, much like GE, and process innovation like Toyota,” he says.

Joint ventures

Fortis’ Mr Votron is also anxious to use innovation and see his group’s core competences increase profits from outside his core Benelux region to 30% by 2009, from 18% today. He wants to leverage Fortis’ multi-channel distribution skills to “white label” products for banks in other regions, to form strategic alliances in order to sell more insurance products and to develop joint-venture agreements, as it has done with Ireland’s post office to increase distribution channels.

A former Citibanker, Mr Votron’s retail strategy is built around not just key acquisitions in Turkey, Germany and Asia but also leveraging his bank’s skills creatively through various alternative distribution channels.

So where is retail cross-border banking heading? The CEE countries have amply demonstrated the expanding demand for products, and western banks have slowly but surely replicated their home market strategies in these new emerging markets where they have acquired local banks or built relationships.

In Latin America, the two large Spanish banks, Santander and BBVA, and a few others have also replicated their home strategies and elsewhere, particularly China, India and Russia, the future is just beginning as consumer finance, mortgages and bancassurance become mainstream products for an expanding middle class that is hungry for financial services.

Global marketplace

And on the investment side, the increasing demand for more sophisticated products will put growing pressure on institutions to satisfy needs. Like BNP Paribas providing mutual funds in Italy, customers will want the best products and seek the best providers. National Bank of Kuwait, the Middle East’s biggest bank, has outsourced its fund selection outside its region to third-party selectors and this new retail revolution will also move quickly to selecting the best global offers available.

But who will be the providers of tomorrow’s retail products? It is not clear that today’s models represent the entire future; new financial models with different players are coming. In China, western banks are experimenting with taking minority stakes in the largest Chinese institutions as well as larger stakes in smaller city banks. It is not yet clear which approach will be more successful. In some countries, national banks will compete with foreign players on their own terms; in others they may consider a foreign shareholding works best.

The importance of retail is likely to be reflected more in The Banker’s Top 20 global banks in the future with retail/universal banks expected to play a more dominant role in the 2015 listing. Trends suggest that banks that do not have an expanding retail business built on an expanding customer and distribution network will slide down the listings or disappear. Only six banks from the 1995 listing made it in recognisable form to the 2005 top 20 listing and only those with significant customer and network distribution growth can be expected to make the 2015 top 20 listing.

Business Insights recently named its top 10 global retail banks as: Bank of America, BNP Paribas, Barclays Bank, Citigroup, Crédit Agricole, Credit Suisse, Deutsche Bank, Fortis, HSBC and Royal Bank of Scotland, and these are key players. But bankers also suggest that the recent acquisitions by Greek banks of Turkish banks show that regional champions have strong potential as well as large global players. And IBM believes banks will both partner and compete against industry specialists to a far greater extent in the future (see chart download file).

Consolidation will play a critical role in deciding the leading banks in the future but organic growth, especially in retail, will also be a key determinant, and those capable of providing new models and more products through more channels will take advantage of the revolution in financial services in emerging markets and elsewhere.  

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