As barriers to the provision of personal financial services and the movement of capital continue to be dismantled in Europe and elsewhere, the world’s biggest retail banks have been exploiting the opportunities. Michael Imeson and Stephen Timewell report.

Retail banks around the world are making cross-border banking a reality, expanding beyond their domestic markets and employing similar or radically different models for foreign consumers. These trends and specific cases were discussed at the Institute of Economic Affairs’ Retail Banking in Europe conference in Amsterdam in March.

Austria’s RZB Group presented conference delegates with a textbook example of how to set up a significant physical presence in foreign markets. In just six years, it has built retail banking networks in 16 central and eastern European (CEE) countries outside Austria, including some of those that joined the EU this month, such as Hungary, the Czech Republic and Poland, but also Russia, Ukraine, Bulgaria, Romania and Albania.

At the end of 2003, RZB’s CEE subsidiaries, mostly branded Raiffeisen, had 3.4 million customers (up 70% from 2 million at the end of 2002), 751 branches (up 15% from 605) and total assets of €19.6bn (up 36% from €14.8bn).

The man in charge of this impressive expansion is Sandy Vaci, senior vice-president, retail banking international, at Raiffeisen International Bank-Holding. He attributed the bank’s success to several factors, the most important of which was the unique situation of having so many emerging markets inside the EU and nearby. The growth potential was therefore high, he said.

“Across the 15 EU states, retail lending as a percentage of GDP is 53%. But in Poland, Hungary, the Czech Republic and Slovakia it is around 10%. And in parts of south eastern Europe it is even lower and only 2.5% in Romania,” said Mr Vaci. That indicated a great deal of upside potential for lending.

Foreign ownership of the banking sector was significant across the region and growing, he said. But there were major hurdles to overcome, he said:

  • commercial property prices in the new EU states were growing to unrealistic levels that were not justified by the market fundamentals;
  • the legal framework was patchy;
  • credit bureaux were poorly developed;
  • the “unbanked” populations did not understand what banking could offer;
  • direct marketing capabilities had been “frozen at a much lower level in the West” because of data protection laws;
  • there was “limited availability of local talent”;
  • and cultural differences made market research hard to interpret.

 

Local identity

In contrast to RZB, HSBC (which advertises itself as “the world’s local bank”) has a limited presence in central and eastern Europe. However, last year it bought Polski Kredyt Bank in Poland and renamed it HSBC Bank Polska. It now has a branch in Prague dealing with the wholesale, corporate and private banking sectors.

Graham Flower, head of customer management at HSBC Bank in the UK, said he believed that operating a “local trans-national bank” with a single brand created more value for customers, shareholders and the host country.

He accepted that even HSBC had retail businesses that were branded differently: First Direct in the UK, CCF in France and Household in the US. Asked if any of these, in particular First Direct, would be rebranded shortly, he was non-committal but said: “Watch this space.”

In all the countries where HSBC had a presence, customers wanted the same things, said Mr Flower. “They want their value to the bank to be recognised. They want to be treated as an individual, to be left in control, the bank to be on their side and be easily available, and they want their bank to notice what they say. The only differences we have found around the world is the relative mix of these things. In some cultures, knowing the customer as an individual is less important.”

Direct banking

In just a few years, ING Direct, the direct banking division of Dutch group ING, has established businesses in eight countries on three continents. It claims to be “the world’s leading direct bank” with 8.5 million internet and telephone customers and €99.4bn in deposits.

Ben Tellings, chief executive officer of DiBa Allgemeine Deutsche Direktbank, the German division of ING Direct, told the conference that the secrets to building a successful direct banking model were “simplicity and efficiency”. This included using the same brand name everywhere, although an exception to the rule was the retention of the DiBa name. Although DiBa had been wholly-owned by ING Direct since last year, it would soon be rebranded as ING DiBa, he said.

“A lot of money has been invested in the DiBa brand,” said Mr Tellings. “Its brand awareness is more than 50% in Germany, and it would be a pity to throw it away. You have to be flexible and make decisions that suit the local environment.”

ING Direct’s strategy was based on early entry into large, mature markets – which it had done in Spain, Germany, Italy, Netherlands, UK, US, Canada (where the concept was piloted) and Australia, said Mr Tellings. “In the initial stages, we focus on selling low-cost savings products, adding mortgages at a later stage.”

That was the “simplicity” part of the equation. As for “efficiency”, that was helped by simple products, not having branches, and by huge economies of scale, he said. “The proportion of our operational costs to assets dropped from 96 basis points (bps) in 2001 to 49bps in 2003. Our operations are therefore five times less expensive than those of a multi-branch bank. We can give part of those costs back to the customer.”

Cross-border joint venture

A cross-border deal of major proportions is Bank of Ireland’s joint venture with the UK Post Office, announced last October and signed in March, to provide retail financial products through 17,000 Post Offices. “We now have the largest branch distribution footprint in the UK,” said Des Crowley, the bank’s chief executive for retail financial services in Ireland.

The products would be branded Post Office, not Bank of Ireland, he said. The first, a personal loan, went on sale in March across the UK, after being piloted in two regions. “Our objective is to be a significant business within about five years, breaking even in about 30 months, and to gain a 2% to 5% share in six simple product areas.

“The good thing about this is that it is complementary. What we bring is the capital, the banking licence, the manufacturing capability and the sales capability. What the Post Office brings is the network of 17,000 branches and a brand that is one of the most trusted in the UK,” said Mr Crowley.

A critical factor for success would be to ensure the products remained simple, he said. “The proposition is to match the Post Office brand, which means simplicity, convenience, access, trust and value for money. We must not complicate the products. The products need to sit with the brand design and if we ever lose that, we will lose the customers.”

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