For most banking customers, the idea of replacing cash with a mobile phone, checking their credit card’s balance via an inbuilt screen or speaking to a teller via an ATM’s video link is sheer science fiction. In Turkey, however, this particular vision of the future is already a reality.
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It might be surprising to discover that much of the technology being deployed by the Eurasian republic’s financial institutions is of a level of sophistication that their Western peers can only dream of. After all, Turkey is usually classed as an emerging, or at best, newly industrialised economy. And for years, its entire financial system seemed to be in a perpetual state of crisis, while its banks offered only the most basic of services.
Unexpected or not, in some areas at least Turkish banks are at the cutting edge of financial technology. So what has enabled the Turkish banking sector to open up such an enormous lead over its more experienced counterparts? The answer is multifaceted, but these nuances are underpinned by one basic driving force: explosive growth.
Radical reforms
The watershed moment for the current incarnation of the Turkey economy was a catastrophic financial crisis in 2001, which saw almost a third of its financial institutions go bankrupt. Prior to that, the fiscal situation was hardly stable, however. Alpaslan Özlü, Akbank’s executive vice-president of IT, describes the years leading up to the crisis as “a disaster”. “We faced economic crises every two, three or four years and about 70% to 80% inflation,” he says.
In 2002, the Turkish government embarked on a programme of radical reforms, which resulted in the economy tripling in size between 2002 and 2008, when the economic woes being felt across the globe led to a contraction in gross domestic product. This proved to be a minor blip. Because of the strict regulation imposed on the financial markets and banking sector following the 2001 crisis, Turkish banks boasted comfortable capital levels and minimal exposure to toxic assets. This allowed them to bounce back fast, helping the country's economy to grow by 8.9% in 2010.
Money available
As the banking sector expanded, so too did IT budgets, freeing up generous sums of money for technology projects. But that was not the only accelerant. Even in times of plenty, spending requires at least some justification. In Turkey – where the median age is just 28.5 years, according to the US Central Intelligence Agency’s World Factbook – that has often been in order to cater for the county’s youthful, technology-hungry population. “Every day they are asking for more,” says Mr Özlü.
And spending soon begat spending, says Mehmet Demirkol, Finansbank’s executive vice-president of IT and process management. “There has been a huge evolution in the past decade. Technology led to profitability, so management invested more, which started a positive cycle.”
It should be noted that mobile telephone and internet penetration in Turkey is actually comparatively low, however. About 85% of the population has a mobile telephone subscription, as of 2010, according to International Telecommunications Union data. That still amounts to a grand total of 61,769,600 however; a substantial user base. Likewise, despite just 39.82% of the population being internet users, Turkey has the fourth largest number of Facebook accounts (behind the US, the UK and Indonesia). “That’s a lot of potential online banking customers,” says Yapi Kredi’s CIO, Cahit Erdoğan.
The sheer number of young, tech-savvy customers has forced Turkish banks to compete directly on technology offerings rather than including them (or not) as something of an afterthought. “In Turkey, technology has been a big part of competitive differentiation for banks. Banks base advertising campaigns around new technology and invest in it even if it doesn’t give great returns. It’s a prestige issue,” says Nilgun Kuruoz, Türk Ekonomi Bankası’s (TEB) IT group director. “We’re young and restless," says colleague Turgut Güney, the bank’s IT group assistant general manager, adding that the environment in Turkey at the moment is very dynamic. “You have to keep up with the competition. You’re sometimes at the front, and sometimes at the back, but you have to keep up.”
Impressive developments
This perfect storm of demand for, and ability to supply technology has led to some truly impressive, and in some cases unprecedented, pieces of banking IT, far beyond the usual online platforms and token iPhone app.
Sophisticated online banking portals are the norm. Mobile banking tools of various natures are also a priority throughout the market. Chief among these, at the moment at least, appears to be giving customers the ability to pay for goods at point-of-sale with a touch of their mobile phone.
Contactless payments are not a new concept of course. Passengers on London's public transport networks, for example, have been using rechargeable Oyster cards instead of paper-based tickets since 2003. Similar systems are in use across the globe, from Nigeria and New Zealand to Sweden and Iran.
Subsequently, contactless credit and debit cards have been launched in various markets. However, they have often struggled to gain mass acceptance due to a lack of involvement among major retail groups, and perhaps, a lack of customer familiarity or desire.
Some have taken the technology further, installing contactless chips in mobile phones alongside 'virtual wallets', which allow a customer to choose between a selection of electronic credit or debit cards at the touch of a button.
This may be the pinnacle of contactless technology, but deploying it is not just a case of downloading the latest application. To allow a mobile device to make payments, it must have an internal chip or 'secure element' (similar to those found in a chip-and-pin enabled card) and an antenna, which will allow it to communicate with a payment terminal via near field communication (NFC). This can present a sizeable stumbling block, as overall progress is invariably governed by the appetite of handset manufacturers to incorporate the necessary hardware.
Seizing the moment
Despite these potential barriers, Turkish banks seem confident that now is the time for payments via NFC-enabled phones. Turkcell, the country's largest telecoms firm, launched a new mobile wallet service with Yapi Kredi earlier this year, following the launch of an NFC service from Garanti Bank and rival mobile operator Avea. Akbank is also preparing a 'mobile wallet' with Turkcell, says Mr Özlü.
Turkcell has even attempted to circumvent the problem of customers without NFC-enabled phones. It offers a choice of add-on antennas, and even its own handset.
The retailers are on board too. There are currently about 45,000 contactless terminals in Turkey, including in the all-important supermarket chains such as Carrefour.
Customers should, banks hope, soon be used to the concept too thanks to various trials and gateway technologies. Last year, Akbank launched Europe's first microSD-based contactless mobile payment system in conjunction with Visa, which will allow standard mobile phones to become payments devices, thanks to the insertion of a card in its microSD memory socket. Akbank did not have high hopes for this from a commercial point of view, but that was not its intention, says Mr Özlü. “We’re not expecting so many customers. It isn’t a pilot so much as something of an experiment to prepare customers. NFC is the real thing, microSD is a failed technology already.”
Upgrading ATMs
In Turkey, many banks have elevated the humble ATM to the status of full-blown alternative channel, offering numerous added services such as the ability to make utility bill, tax and social services payments. Some even allow customers to speak to tellers via video link.
This approach has proven popular. DenizBank, which offers a wide variety of information and sales options via an ATM, now sells more products (such as credit cards and insurance) through ATMs than it does via traditional call centres, says Dilek Duman, the bank’s executive vice-president for IT and support operations.
When it comes to customer authentication, the envelope is being pushed too. Some firms, including İşbank, have begun rolling out biometric authentication devices, which the bank’s head of IT architecture and security Sabri Gökmenler describes as the “last point of authentication for the customer”.
Mr Gökmenler concedes that the process has not always been smooth, however. İşbank installed the devices on ATMs in 2010, and every branch is now equipped with registration equipment. But in some cases, he says, customers have not been willing to sign up. He adds that as long as the technology is being pioneered by only a few firms, it will never meet with broader success. “Biometric authentication can’t succeed with just İşbank. The government and other banks have to get on board too,” he says. Mr Gökmenler remains confident, however, likening uptake to the first wave of online banking services. “In 1997, the number of internet transactions could be counted by hand, but now there are more conducted online than in-branch… Biometrics will be the same,” he says.
Pay and display
Despite the dual threat of mobile payments and biometric authentication, for some, there is life in physical cards yet. TEB is currently working on installing small screens on its credit cards, which allow customers to view their balances, due dates and available limits. “We’re the first in the world…and we’re finished and finalising now,” says Ms Kuruoz at TEB. “We’re just testing to iron out battery life issues, or accidental activation.”
Finansbank, on the other hand, is making use of Visa’s SimplyOne card, which combines debit and credit payment options on a single piece of plastic. Mr Demirkol dismisses the possibility of display cards, however. “We’re not interested in them, Finansbank doesn’t like products that are just show off, we’re interested in profit. When a customer reaches their credit limit, we want them to use their overdraft, not another card. That creates value for us and means another one of our products is used.”
What do the rise of these sophisticated alternative payment channels mean for the traditional physical banking branch? That depends on who you ask. “We believe that bank branches have started to lose their importance because of the limited time that working people [have],” says Aktif Bank’s executive vice-president of IT, Mutlu Özdemir. “That’s why our alternative delivery channels are our main delivery channels. People don’t like to spend time at bank branches.”
Not opening branches is in fact a key part of Aktif’s strategy, says Mr Özdemir. However, the group does offer basic cash withdrawals, deposits and transfers via an agreement with the Turkish post office channels, giving it an effective network of 4000 outlets.
The necessity of traditional branch infrastructure cannot be overstated for Finansbank’s Mr Demirkol, however. “They’ll never disappear, and will always be the most important channel,” he says, though he adds that functionality may shift. “We’re currently investing in branches, really working on customer profiling and looking at products, sales opportunities and complaint history.” TEB's Mr Güney concurs: “Mobile and internet is nothing without bricks. We have to provide everything for everyone. I believe there has to be a point to touch the customer.”
Different populations
From a technological point of view, providing everything for everyone in Turkey can be difficult, given decreasing, but still present, economic and social disparities. Appetite for mobile banking and internet uptake among the villages in the east of the country, for example, is low, says Mr Özdemir. Here, it is replaced by higher demand for SMS banking services.
DenizBank, which services retail, small and medium-sized enterprise, commercial, corporate and agricultural banking customers has to juggle numerous different requirements too, says Mr Duman. Even parts of the farming community, not always known for displaying a hunger for the latest technology, are looking to manage accounts online, he adds.
TEB, on the other hand, has launched a 'practical internet banking' portal aimed at elderly, less tech-savvy customers, which offers 80% of commonly used functionalities, but 20% of the complexity, says Mr Güney.
These levels of technological complexity and deployment are undeniably impressive. But Turkey’s apparent banking technology mastery may be somewhat illusory; the strength of its retail banking services is undeniable, but this does not extend across all market segments, cautions Mr Güney. “Because Turkey is developing there are some weaker points, a lack of vertical depth, and complex products, particularly in investment banking products,” he says.
Yapi Kredi’s Mr Erdoğan agrees. “Turkish banks are advanced in technology in some areas, but in others have a long way to go. We’re truly advanced in alternative delivery channels, cards and payment systems,” he says. “And being advanced in these areas gives the aura of being advanced all round…[however] insurance, financial planning, savings, personal wealth are not so advanced thanks to relatively lower net worth.” He adds that he expects these segments to experience high growth in coming years, however.
Future fears
But growth may not be all the future brings. The scope, and sheer speed, of technological change cannot be continued indefinitely, especially if Turkey's central bank’s efforts to control the country's economy are successful. As a result, IT budgets will inevitably suffer; there will no longer be limitless sums of cash to sink into any and every promising new technology.
Mr Demirkol at Finansbank suggests that if efforts to reign in rampant economic growth are successful, then more money will have to be diverted towards two long-standing priorities of IT teams in Western banks: saving money and boosting efficiency. “Now Turkey doesn’t want to grow quite as fast, and if you don’t grow you have to look at your cost base, and IT is high up that. Budgets will definitely not be as high as previous years.”
An additional strain will come from the sophistication and scale of recently installed technology itself, says Mr Erdoğan. “In the past, it was easy to handle unconsolidated, relatively unsophisticated platforms due to their small size. In the next 10 years it will not be so easy to move and replatform.
As a result, banks will have to start looking to different IT strategies, rather than just deploying technology for technology’s sake, he says. “From a logical point of view, credit and debit cards, for example, are already ridiculously engineered luxury products, which may not even be needed. Banks should consider beginning to share infrastructure not directly involved in revenue generation, or leave it open to international providers.”
Obstacles remain
Unfortunately for Turkish banks, these opportunities are not always as easy to come by as they are in other territories, partly because some channels that are shared elsewhere are directly involved in revenue generation. The chances of a Turkish interbank ATM network, such as the UK’s Link scheme, is unlikely, for example, given the sophisticated nature of each bank’s cash machines.
However, Mr Erdoğan expects that this will eventually start to change. “At the moment, you’ll see four ATMs next to each other from different banks, or a number of different point-of-sale terminals. We’ll start to see this squeezed out, and non-profit and non-competitive functions outsourced.”
Just how far appetite and capability to provide for the hottest technologies will last remains to be seen. If profits and margins begin to be squeezed across the business, as many bankers expect, then IT priorities will likely begin to mirror those of US and European banks, and innovation will suffer.
Given that the Turkish population is still relatively underserved from a banking point of view, however, this may not be too immediate a danger, especially in light of still strong growth and a burgeoning middle class. Indeed, Mr Erdoğan and Mr Demirkol both expect IT headcounts to increase significantly in the coming year. Even if they do not, the rest of the banking world has some way to go if it is ever to catch up.
