Banking on the IT advantage

Tumbling trade barriers and the uptake of virtual banking in the region are intensifying the competitive atmosphere that local banks must operate in. As these factors gather momentum local financial institutions are increasingly turning to IT solutions, to reduce operating costs, target the most profitable customers and find new channels to market.

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By  Mark Sutton Published  February 27, 2001

Introduction|~||~||~|The financial services industry has always been one of the most forward thinking when it comes to technology. In the serious business of making money, banks and other financial institutions are always on the look out for the technological advantage that will give them the competitive edge. So it is no surprise that as the banking sector in the Middle East looks towards a tougher market in the next few years, that many banks are hoping that Internet initiatives will help them stand out from the crowd.

Banks in the region face a shake out in the near future as trade barriers are removed and international competition moves in. At present, there is a proliferation of smaller local banks in the region, some medium sized institutions and a few multinational players. The local banks generally enjoy a protected status — in the UAE, international banks are restricted in the number of branches and ATMs they can operate. But the situation is changing. Membership of the WTO will mean that the region is opened up to increased foreign competition on an even footing. “I think that banks have to start preparing themselves for a totally new landscape when it comes to competition with much bigger players from the region and internationally,” said Maher Khalil, senior manager for Accenture. “A lot of regulatory directions haven’t yet materialised but they do mean that banks are going to have to compete on a more regional basis; the scale of operations of foreign banks has always been limited but the new regulation is going to open the boundaries.”
For many banks in the region, Internet banking is being adopted as the selling point that will set them apart from their competitors. There are 27 million online banking users in the US according to Dataquest research, so the impetus to try and carve out market share is high. Banks such as National Bank of Kuwait, National Bank of Abu Dhabi and Emirates Bank International (EBI) are some of the first banks in the region to offer online services. Mohammed Al Jallaf, senior manager of electronic banking services at EBI says that although online services were originally conceived as a value-add, they will become a standard requirement very quickly. “It’s a service that you must have, because if you don’t have it, no-one will bank with you. It is similar to ATM machines — in the early 80s no one had ATMs, now if you don’t have an ATM, no one will bank with you. In two to three years time, if you don’t have Internet banking, it will be the same.”

It is a popular view. Many local banks seem to fear that if they cannot offer their customers the latest services straight away, then they will find themselves in trouble once the barriers to competition do come down.

Central banks are keen for the local banks to merge so that they can meet the challenge, but so far the region has shown little consolidation. There has been more talking about mergers than actual activity, according to Ashruff Jamall, PricewaterhouseCoopers director of assurance & business advisory services. Banks are keen to preserve their own national identities, and also want to avoid redundancies that would affect local unemployment. But without mergers banks risk not being able to compete. “I can see [consolidation] coming at some stage perhaps in a year or two,” said Fiona Nicholas, partner with PricewaterhouseCoopers. “It will happen when the banks realise that to compete they have got to grow, because they can’t develop the systems and products they need to compete due to their lack of size.”

But the situation may not be that simple, according to Patrick Hayati, regional director for Hewlett Packard’s Middle East Financial Services Industry team. For a start, many of the banks are not that far behind their multinational competitors in the services they can offer. “When the foreign banks come in, they never offer things that are beyond what the local banks can offer, he explained. “They offer things that the local banks have made a strategic decision not to offer. This impression that foreign giants will come in and eat up the market, it is true, but that is not because they are offering things the others don’t — HSBC has decided not to roll out their net banking here — most of the time the difference between the local banks and the international banks is more in the policy, procedures, set-up and organisation rather than technology.”

Hayati also said that closing the technology gap with a competitor was much easier today, allowing new services to be rolled out in just months or weeks rather than years, especially in this region. “It is a lot easier to deploy WAP in the Middle East than it is in the UK, for example. If a bank in the UK wants to develop WAP banking it is going to cost them millions, because they have backend systems that are 15 years old, and not integrated. Whereas a lot of the banks in this part of the world over the last five years invested in modern technology, they have less of a mess on the backend, and it will cost them a lot less [to integrate]. The question here will always be ‘do I have enough Internet users within my customer base to justify the investment?’”

||**||II|~||~||~|The problem of cost effectiveness has already been tentatively addressed by EBI. The bank is planning on offering its e-banking platform to other banks through an ASP model. “We spoke to many banks about it, they found it interesting — it is cheaper for them, and in a couple of weeks they can offer Internet banking to their customers without spending money on the middleware or building it from scratch,” explained Al Jallaf.

Non-disclosure agreements and confidentiality agreements will protect data, and the ASP will be run as a separate company to EBI. The service will be offered to banks anywhere in the region, regardless of country-location, using virtual private networks to connect EBI with client banks.

There are infrastructure challenges that have to be overcome before reliable, secure Internet services can be offered, said Abdelhamid Suboh, also senior manager Accenture. “Saudi still has an issue with Internet infrastructure. They still need to do a lot of work to get to a level where they can conduct any serious business on the Internet,” he said.

National Commercial Bank of Saudi Arabia (NCB) had to overcome these problems when it upgraded its systems in 2000. The bank wanted to create a multi-tiered network infrastructure to allow multiple delivery channels, including telebanking, Internet banking, ATMs, and an internal intranet, with capacity for next generation multi-media channels when they become available.

An assessment of the bank’s information infrastructure discovered serious limitations for future development. The bank faced severe bandwidth limitations, restricted network traffic, obsolete equipment and a lack of adequate network recovery facilities according to Rasem Al Mansouri, head of communications and support for NCB. The bank also wanted to make maximum use of its existing infrastructure, to protect past investment until it could be replaced, particularly a large X.25 DPN data network. A combination WAN/LAN, solution was developed, using Nortel Advanced Remote Node Routers and Passport Enterprise multimedia switches. The Passport switches balance network traffic to maintain the best possible bandwidth from the Saudi Telecommunications Company (STC) leased lines, and provide virtually instantaneous re-routing of traffic in the event of STC lines failing.
While banks are going to great lengths to set up the infrastructure to deliver services, not all have realised the full potential of Internet banking services, said Khalil. “The Internet will pretty soon be a ‘must-have,’ however the opportunity beyond [being] a channel is absolutely limitless. Many are looking at the Internet as a simple channel to offer a few transactions. But others are looking at becoming real players in e-commerce, whether by becoming the payment gateway or having B2B marketplaces.”

A consortium of local banks including National Bank of Kuwait, Arab Bank of Jordan, Saudi American Bank (SAMBA), Egypt’s Commercial International Bank, the National Bank of Dubai and Citibank UAE, recently announced that they would be creating a B2B marketplace that would serve its corporate customers. The consortium will provide financial services including payment and settlement services for traders on the marketplace. Barclays Bank’s provides similar financial services for its own shopping site,, acting as the clearing and payment party between merchants and banking customers. “I think banks with their traditional role as the people managing the money and the payments are more typical players to come into that [e-commerce] space and start building that infrastructure for e-commerce,” Khalil added.

||**||III|~||~||~|Another focus for banks is in customer relationship management (CRM). It is a truism that is costs ten times more to attract a new customer than it does to retain an existing customer, but it is a principle that has been slow to catch on in the region. “We’ve seen recently more of a focus on CRM, and I think [banks] are realising the importance of CRM and customising products and services to customers rather than offering them to everyone in the same way,” said Suboh. “A lot of banks are really addressing the systems aspect of it, the cultural aspect will probably come after. In general most banks are at a stage where they are realising they are losing customers to other banks that are offering better service.”
Call centres are one means of delivering quick and efficient CRM that is gaining popularity in the region, according to Suboh, although few banks are looking at an integrated point-of-contact solution that provides the customer with a uniform service through telephone, Internet and branches.

Customer retention is especially important in the GCC region, because of the number of lucrative customers — the high net worth individuals. Hayati believes that although many high net worth customers have long established relationships with local banks, the prospect of international competition is still a threat. “Who wouldn’t be worried if Citibank comes in and invests millions of dollars in the country — this is why local banks have made a major push in technology, just to build that gap,” he said.

The real trick for the local banks, he said, is not just in retaining the high net worth customers, but in being able to identify which customers are the most profitable. “The question that comes up is how does the bank know who its best customers are? For 90% of the banks the answer is they think they know, but they are not able to put a dollar amount on it.”

Datawarehousing projects are already underway at Emirates Bank Group and the National Bank of Kuwait, in an attempt to garner detailed customer data. Better identification of the customer, especially the profitable ones, allows banks to target their marketing at specific areas. “Everybody in the banking industry is pretty much aware of the fact that they need to move towards understanding their customers more,” said Paul Dodd, of Midas-Kapiti International “This allows you to tailor and target your product offerings towards different types of customers — when you are in a market such as the Middle East, which is often over-banked it is extremely competitive, therefore it is even more important.”||**||

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