Chilean banks are wooing middle and lower-income workers with unprecedented ardour and a wide range of seductive products. Their target: an estimated one million Chileans who remain outside the formal banking sector.
Corporate banking profits have slimmed in recent years and banks have switched attention to the retail sector where, with information technology cutting transaction costs and bringing remote areas within reach, profits are attractive.
For example, market leader Banco Santander Santiago reports that 82% of its core revenues in 2005 came from the retail sector – 63% from individuals and 19% from small and medium enterprises. Second-placed Banco de Chile says retail and middle-market loans contributed more than 42% to its loan portfolio during the same period.
Retail profits contributed largely to the banking industry’s healthy 18% return on capital last year.
The allure of the retail sector has drawn new competition. Department store chains such as Falabella and Ridley, which have long offered credit to customers, have also opened banks in recent years.
Room for growth
Despite increasing competition and rising interest rates, growth potential remains strong. Only one in four of Chile’s 6.3 million workers has a current account – but this is changing quickly. With robust GDP growth of about 6% a year and an improving job situation (unemployment dropped below 8% last year), the number of people with bank accounts rose by 5% last year and that rate is accelerating.
As Santander Santiago CEO Oscar von Chrismar says: “The Chilean market has very strong growth potential, especially in retail banking, which we expect to grow at nearly twice the rate of GDP as people move up the economic ladder and are offered a wide range of products.”
Following consolidation in recent years, Chile’s banking sector has narrowed, with the five top banks sharing 74% of total loans.
Courting custom
In competing for the workers, the top four banks – including a state-owned bank – are vigorously expanding outlets as well as products, including mortgages, geared to the lower end of the market. Not surprisingly, the private banks are concentrating on the major population centres while the government’s Banco del Estado is extending its reach to the remoter parts of this long, thin and geographically diverse country.
Santander Santiago, a unit of the Spanish giant, started with a small presence and grew through acquisition. It took over Banco Osorno, Chile’s third largest bank, in 1996 and merged with Banco Santiago in 2002 to vault into first place in loan share. But it was Santander’s little-noticed acquisitions more than a decade ago that paved the way for its current dominance in the retail sector.
In 1994, when banks were still focusing on corporations and higher-income clients, Santander bought, and merged, a credit card issuer (Fincard) and a consumer finance company (Financiera Fuse). The result: a consumer bank geared towards the middle and low-income market that quickly became the group’s fastest growing and most profitable operation.
Renamed Santander Banefe two years ago, it also revamped its image. Some of its branches, such as a Banefe branch that opened near Santiago’s central railway station last December, look nothing like traditional banks.
Suits and ties are nowhere to be seen – even the manager goes to work in a T-shirt. Sitting in front of computer terminals, the gaily garbed staff of 10 – half of whom are female – are chosen for their sales skills. Based on incentives, their job is to sell new products as much as service existing clients.
“We are targeting those who earn between the minimum wage of 140,000 pesos [$260] up to $800, as well as micro-enterprises,” says branch manager Daniel Parraguez. “We offer colourful surroundings and make sure people are treated very nicely.”
According to zonal manager Francisco Jerez, Santander Banefe is rapidly increasing its network, adding 21 branches in 2005 (to make a total of 92) and planning another 20 in 2006. Banefe loans grew 25% last year and officials predict similar growth this year.
Consolidation
Confronted by this Iberian aggression, Banco de Chile, the country’s oldest bank – established in 1893 – merged with fourth largest Banco Edwards in 2002 and is now in second place overall with an 18% market share.
Led by a marketing-oriented CEO, Pablo Granifo, the bank is meeting its Spanish rival head on. Banco de Chile is rapidly increasing its network of CrediChile branches which, like Banefe, is targeted at middle and low-income earners and micro-enterprises.
“We have a new business model targeted at the retail sector,” Mr Granifo told The Banker. “As well as offering more products to the 500,000 people who already draw their salaries through our bank, we are aggressively expanding CrediChile, especially towards those who earn the equivalent of $500 a month or less.”
Mr Granifo aims to expand CrediChile’s branch network to about 100 sales points this year, up from the current 70.
The impassioned chief executive says technology is central to Banco de Chile’s new retail strategy. “When you enter a branch of CrediChile, you enter something more like a retail business. There are no tellers. Instead, there are about five people who offer a whole range of products and everyone is connected to head office,” he says.
“The system is built more on technology than people, because in the end your proposal to the client needs to be very low cost, and because at the end you are trying to create critical mass.”
Since he took over, Mr Granifo has been infusing a culture of marketing into a bank steeped in tradition. “He has imposed a culture of selling,” says one senior staffer. “Staff receive commissions for any new business they bring in.”
A third major player, Banco Credito Inversiones (BCI), a private bank founded in 1937, has also expanded its retail activity through acquisition and innovation. In 2003, BCI bought a troubled consumer finance bank with 56 branches and revamped it under the name Banco Nova de BCI. It replaced a single product – a consumer finance loan – with a comprehensive range of products.
Just as importantly, says BCI’s chief executive officer, Lionel Olavarria, there were no lay-offs following the takeover. “In fact, we added staff and boosted low morale through incentives, empowerment and training,” he says.
“We hugely improved the efficiency of the sales force and added door-to-door sales.” The subsidiary turned around quickly, he says, reporting a 50% profit rise in 2004, followed by a 25% gain last year.
In addition to transforming its new unit, BCI is expanding its own retail network. In 2006, it plans to add 25 branches to the current network of 150.
New products
On new products, Mr Olavarria says BCI recently launched a Happy credit card, which has the unusual feature of allowing consumers to pay in instalments based on a proportion of income rather than debt. This appears to be popular and more than 10,000 cards have been issued.
BCI has long been aggressive in using technology to cut costs and Mr Olavarria says this helped reduce its cost-to-income ratio by one point to 49.69% in 2005. The bank aims to bring that down to 45% over the next few years. All this helped BCI to cross the threshold of $200m net income for the first time last year.
Far from lagging behind its privately owned rivals, state-owned Banco del Estado has become a highly competitive operation in recent years, with the help of several managers brought in from the private sector. As a result, and despite its social role as a government entity, the bank achieves profits in line with the industry average. In 2005, it reported a 23% return on equity.
As a long-established bank through which most government salaries are paid, Banco del Estado has 8 million customers, which is about half of the total population of Chile. It also has a responsibility to provide financial services to the whole country, including the sparsely populated northern and southern regions.
“One-third of our comunas [counties] are unserved and in another 40% we are the only player,” notes CEO José Manuel Mena. To expand coverage of financial services in remote areas, especially to low-income individuals and micro enterprises, the bank is spending $100m from its own resources.
It is spearheading this drive with an innovative low-cost, high-tech scheme that uses a Caja Vecina (neighbourhood box) for clients to make transactions. Based on a concept imported from Brazil, the Cajas are installed in places such as village shops or stores, where clients can use debit cards to deposit, withdraw or transfer funds. The points of transaction will be run largely by small-scale merchants who, as well as receiving a small commission, expect to increase sales through more frequent visits by bank clients, says Mr Mena.
The bank recently launched the Caja Vecina scheme in the mountain towns of Carmen and Quilleco in the south and Mr Mena says it aims to open 300 such outlets in 2006 and 2000 over the next three years.
The smart cards used in the scheme contain microchips carrying customer information, including an identification number that all Chileans are given from birth. Mr Mena, who is president of the company that manages these biometric cards, says their use and scope could be widely extended in the next few years.
Banco del Estado is also the leading provider of insurance policies in the low and middle-income market, which services 1.3 million customers, with premiums costing as little as $1 a month for life insurance.
Homeowner frenzy
Nowhere has the retail battle been fiercer than in Chile’s well-developed mortgage market.
Santander Santiago bolstered its reputation as a brash upstart when it created a furore a few years ago by introducing the SuperHipoteca or ‘super mortgage’ from its Spanish parent. The new facility halved rates from 14% to 7.8%. This provoked a strong reaction among other banks. “Some wanted us kicked out of the bankers’ association,” recalls a Santander senior official. One rival banker says the action “destroyed the value in the market – we had spreads of 4% that were reduced to about 1%.”
Chilean home buyers gained from this, and the new rates, together with falling inflation and a stabilising currency, sparked a mortgage boom. Although other banks followed suit in lowering rates, Santander still holds a clear lead in the unsubsidised mortgage market with a 25% share.
Sharing second place in the private mortgage sector with 15% each are Banco de Chile and Banco del Estado. Banco de Chile expects its mortgage business to grow 14% (in nominal terms) in 2006. Unsurprisingly, Banco del Estado has a dominating 90% share of the low-end mortgage sector that receives subsidies from the government. “We are a machine for mortgages,” says Mr Mena. “We finance about 40,000 mortgages a year, of which about 25,000 involve those subsidised by the state.”
BCI has a 9% share of the private mortgage sector and Mr Olavarria explains that the bank is still playing catch-up after dropping out of the mortgage market for a period before 1991. It now offers a full range of mortgage products, including one with the option of deferring up to two monthly payments a year without penalty. VITTORIO CORBO: A FIRMLY GROUNDED ACADEMIC
