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Western EuropeMay 1 2013

Turkey's banks embrace the digital generation

In Turkey, banks have stopped talking about alternative delivery channels. They consider all channels – including branches, ATMs and mobile – a core business, and this rise in digital banking is spurring competition and, as a result, innovation.
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Turkey's banks embrace the digital generation

Just a few years ago, Sina Afra would have never considered relocating to Turkey, his parents’ home country. However, a business trip turned into a life-changing event when the then-director for European corporate development and mergers at eBay was tasked with acquiring a local player for the company and joining its board.

“I came to stay for 18 months, on behalf of eBay, but then I realised how empty [the Turkish e-commerce] market was. I saw the potential,” he says. Following this, Mr Afra set up Markafoni, a members-only online shopping network that Bloomberg cites as the world's second-most visited website of its kind.

“It was the best decision of my life,” says Mr Afra.

Turkey's e-commerce sector is booming, thanks to a growing economy, a young, technology-hungry population and high credit card penetration rates. According to Soner Canko, CEO of Interbank Card Centre (BKM), over the past five years, online shopping has grown in Turkey by 50% annually. Card payments via e-commerce transactions amounted to €13bn in 2012, and Mr Canko expects this figure to rise to €150bn in 2023. BKM’s data shows that in 2008 €5 of every €100 spent on cards was spent via an e-commerce transaction. This has increased to €9 in 2012, and it is estimated that it will reach €18 by 2023.

Underlying this growth in virtual payments is a solid banking and payments infrastructure and a sector led by bankers that consider digital banking a core business, instead of – as is the case in many developed economies – an alternative to bricks-and-mortar banking. As Galip Tozge, the executive vice-president of retail banking at Akbank, puts it, there is no longer such a thing as ‘alternative delivery channels’. “Now, we call this business stream direct banking. It is a prime channel, not an alternative,” he says.

Largest banks by number of Turkish branches

The digital generation

It is the cumulative effect of various social, economic and even political factors that has brought about the rise of a digital generation in Turkey. The country ranks second in Europe in terms of credit card numbers – with 55 million credit cards – and third in terms of debit card numbers, with 93 million. Its cards sector is mature compared to most other retail banking products, says Mr Canko, and with world-renowned loyalty schemes, it is also highly competitive and widely distributed.

About half of Turkey's population is under the age of 30, and much of this young, tech-savvy population are active users of social networking sites. There are 9 million Twitter users in Turkey, and 42% of the population has a Facebook account, making it the sixth largest country globally in terms of Facebook users.

Turkey's mobile phone penetration rate for those aged more than 18 years olds is close to 100%. Smartphones account for 20% of all mobile phones in use, according to Garanti Bank’s executive vice-president of delivery channels, social platforms management and customer satisfaction, Didem Dincer Baser. This figure, along with tablet usage, is growing thanks in part to government initiatives such as the Fatih Project, which gives students and teachers tablets for educational purposes.

Furthermore, for an emerging market, Turkey’s logistics infrastructure is relatively sophisticated. In the International Institute for Management Development's World Competitiveness Yearbook 2012, Turkey scored 6.93 points out of a possible 10 for its efficiency in the distribution infrastructure of goods and services. This put it ahead of other European countries such as Poland, Hungary and Italy.

“All of these factors positively affect the growth of the internet economy. This fast-growing e-commerce market has created a new digital generation, whose consumer behaviour is totally different from their predecessors,” says Gokhan Erturk, executive vice-president of the retail banking group at DenizBank. As such, banks in Turkey are the gateway between the digital and physical world.

“Today’s younger generation will one day become income earners. As income levels grow, consumerism of IT does too,” says Cahit Erdogan, the CIO of Yapi Kredi Bank. He calls this the "technology refreshment". “When we first introduced internet banking, we got 100,000 active customers in three years. When we introduced mobile banking, we got 100,000 customers in three months,” he says.

Tailor-made products

The majority of Turkey's banks have established a dual focus towards banking services, combining a technology-based approach with a life-cycle approach. Using data mining techniques, these banks analyse customer behaviour, needs and expectations, which allows them to offer more personalised services. One such service is Finansbank’s banking product that is aimed exclusively at nurses and doctors. Usually, such specific banking services come under the umbrella of more general banking segments for affluent customers, mass market, students, pensioners, etc.

“In terms of customer analytics, we are able to calculate the lifetime value of each customer, measure their tendency to churn, and gauge their propensity to buy or use a specific product or service,” says Yalcin Sezen, the deputy CEO of Isbank.

This makes retail banking even more competitive than it has traditionally been, and investments in branches, ATMs, mobile, social network-based and other digital banking services are common.

“This digitilisation means every channel has its own special place. No channel replaces another. The consumer chooses the channel that is most convenient to them. So we have to make sure there is a seamless experience between channels,” says Garanti Bank’s Ms Dincer Baser. Through its e-banking platform, Garanti offers live online chats between consumers and its advisors.

Such social media initiatives are not exclusive to the top four banks. Finansbank, for instance, is building advisory services into its online channels, too.

Digital inroads

Other recent product launches in Turkey's retail banking space have included Isbank’s integration of square barcodes (QR technology) into its mobile banking solution, Parakod. Parakod saves card details on the user’s phone, enabling the user to scan a bar code on a payment terminal or website to pay with their mobile wallet, instead of having to type in their card PIN. Users can also make cardless cash withdrawals and pay their mobile phone bills with the mobile application.

“This year, we will further expand the merchant network for Parakod and add new features to the existing system,” says Mr Yalcin.

Finansbank is another lender making digital inroads. It has launched a digital direct banking branch, called Enpara, with which it will target deposits. “By eliminating the costs associated with bank branches, Enpara offers customers the opportunity to benefit from higher interest rates to their savings without any service charges,” says Erkin Aydin, the retail banking executive vice-president of Finansbank.

Enpara is being promoted with high interest rates for depositors, but Mr Aydin believes that the real long-term value for customers will be in the 'no hassles, no frills' service. That means, as he puts it, “simplicity, transparency and equal customer treatment; for example, no negotiations, or discounts for certain customers”.

DenizBank, meanwhile, has established a Facebook banking service, which offers money transfers to a user’s Facebook friends, as well as offering asset management, details and information on its products, a customer care centre and loan applications.

“The greatest development in the field of marketing and communications in the past few years has been the growth and influence of social media channels – without a doubt,” says Akbank’s executive vice-president of direct banking, Orkun Oguz.

Akbank’s social media initiatives include a Facebook- and Twitter-based customer service that is available 24/7 and collects what Mr Oguz calls “social customer relationship management” data. Akbank also sells products and services directly via social media channels.

Bricks and mortar

As part of banks' seamless cross-channel services, ATMs in Turkey offer more than just cash withdrawals. They offer many of the same services that are available in branches, including the option to make utility payments (they include coin dispensers, enabling them to give accurate change) and make cash deposits.

At Garanti, for example, only 48% of ATM transactions are actually cash withdrawals. The bank's multi-functional ATMs are one way of keeping its costs down. “Cost efficiency in digital channels is always on our mind," says Mrs Dincer Baser. "So we implemented recycling ATMs, which cut down our logistics costs [from transferring money from and to ATMs] and our customers can withdraw the cash that has been deposited into the ATM.”

Even so, branches are still very much part of the banking service. According to Mr Tozge, they are an important way of maintaining the proximity of the bank-customer relationship. “Branches and direct banking channels complement each other and we are investing in both,” he says.

But the rise of digital channels has allowed to role of the branch to evolve. As branches get less busy, staff can focus a lot more on quality consultation such as offering mortgage advice. Many branches are also being equipped with tablets and other digital services so that consumers who have no internet access, for instance, can do their banking in-branch.

Banks are continuing to expand their branch numbers, especially smaller banks. Finansbank, for instance, started a major branch expansion programme in mid-2012. Currently, it has nearly 600 branches across the country, and has set a target of having more than 900 branches in the next four to five years. DenizBank has opened 110 branches in the past two years and is now one of two banks to have branches in all 81 cities in Turkey. It plans to have a total of 655 branches by December 2013. Akbank will be close to having 1000 branches by the end of the year.

Too much, too soon?

If banks continue to move so quickly in rolling out new technologies, is there a danger that market will become saturated at some point? Perhaps, but this is not a question that bankers in Turkey are worrying about at the moment – they are too focused on thinking about the next generation of innovation that will penetrate the banking sector.

Ms Dincer Baser describes what is taking place at the moment in Turkey as ‘contextual banking’. She says that services evolve in accordance with consumers’ changing and evolving habits.

These habits, of course, will continue to evolve over social media channels, which will be increasingly accessed via mobile devices. And, with the rise in the Internet of Things, which will see devices such as cars, fridges and bank cards become connected to the internet as well as to each other, banks will have to keep pace with their fast-moving consumers.

“We have to create banking services that relate to the contextual environment consumer finds themselves in – the time, network, place – to offer timely services and assist them in making financial decisions. Just like a life coach,” says Ms Dincer Baser.

There is, however, the potential – not necessarily a risk – that this fast-paced innovation cycle could leave banks sitting on technology that consumers are not quite ready for. For instance, various types of near-field communication (NFC) technologies, which enable users to tap their mobile device against a payment terminal to make a payment, have been around for years. These include SIM-cards, antennae that can be stuck to a phone and a sticker that can be glued to a phone, all to enable NFC transactions – but mass uptake of NFC has not yet commenced.

Mr Erdogan believes that the mobile network operators and handset manufacturers have to get the ball rolling first. He says that about 44% of Yapi Kredi’s e-banking customers use Apple’s iPhones, so if Apple built an NFC-enabled phone, “it would be a trigger for us banks to approach merchants and educate them” on the uses and benefits of NFC payments.

“NFC is a gateway technology, similar to WAP-based banking. WAP-based banking enabled online banking but that only really took off when smartphones, tablets and 3G came together. NFC needs to get to this inflection point first,” says Mr Erdogan.  

Setting standards

Any rapid change and increase in new technologies requires common rules for all stakeholders to adhere to. In Turkey, this is the responsibility of BKM, which was established in 1990 by 13 public and private banks. It was tasked with creating payment solutions and developing common rules and standards for debit and credit card payments.

Just under a year ago, BKM launched a national digital wallet, BKM Express, which sits alongside propriety mobile wallets. It frees online shoppers from the usual requirement of having to type in card details when making a purchase. Instead, the user saves their card details on BKM Express and can then choose to pay via the wallet by clicking on its icon on a merchant’s website.

As many Turkish consumers have several credit cards, the wallet integrates these into one place from where the consumer can pick which card to pay with. As an extra layer of security, the user receives an SMS password from their bank to complete the purchase. So far, BKM Express has acquired 110,000 users and signed up 95 merchants, many of which are nationwide retailers.

In future, BKM Express will be developed into a fully fledged electronic and mobile wallet, says Mr Canko. It will include services such as money transfers, contactless payments and even hold details such as identification, receipts, tickets and coupons.

Nurturing innovation

In addition to industry efforts, Mr Aydin at Finansbank says that a recent legal change that supports angel investments and provides tax exemption and tax credit to those that invest in new technologies will provide a further fiscal boost to e-commerce.

“High-net-worth Turkish individuals are now starting to look at venture capital investments as a tax-conscious way to look for high returns. This will help infuse further capital into technical innovation and flourishing e-commerce businesses,” he says.

“It used to be that white-collar professionals would start a small venture and see if it picked up while they kept their day job. Now stories of the ‘young getting rich’ is encouraging more talented individuals to get into e-commerce."

But, despite his personal success, Mr Afra maintains a level-headed view of Turkey’s digital market. He says that the next step to unlock innovation will be to get rid of the hindrances: financing opportunities for start-ups. “As soon as we have more alternative and diverse financing options and there is a wider investor pool for companies to choose from, there will be more innovation," he says.

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