New Money

Despite a continued commitment to the e-banking model the majority of Middle East banks have failed to get online. Those that are online are forging ahead as they analyse existing initiatives and tailor their offerings to meet customer needs.

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By  Matthew Southwell Published  December 31, 2001

I|~||~||~|The Middle East's e-banking market is becoming increasingly polarised as those institutions that already boast Internet services assess their relative success and those without endeavour to build core banking systems capable of transacting online.

Whatever stage the region's banks are at there is no doubt that customer demand exists. Pyramid Research reports that, as of March 2001, there were 277,600 registered e-banking users in the Middle East using services in eight different countries.

More significantly perhaps, it states that three Arab countries currently have e-banking end user adoption rates equal to, or higher than, North America. Bahrain currently boasts a US equalling 17% while the UAE and Kuwait are ahead with 21% and 29% respectively.

A recent spot poll supports these findings, with 43% of respondents saying that they will change banks unless their current institution offers e-banking services in the coming twelve months.

Although the large knowledge gap between the region's existing e-banking customers and non-users will effect the currently impressive adoption rates, a combination of falling Internet costs, increased education and government initiatives will help equalise the difference.

Joseph Braude, analyst, Pyramid Research explains that the "key drivers of e-banking demand will be the availability and adoption of mobile Internet, particularly in the Gulf States, and the increased use of the Internet at home, as opposed to Internet cafes and other venues."

It is the combination of this market potential, existing demand, and the associated business benefits of taking processes online that is encouraging those banks not yet online to be so soon.

Saudi Arabia-based Rajhi Commercial Foreign Exchange, for example, is currently transforming itself from a provider of foreign exchange services to a retail bank. Souheil Salloum, the company's IT manager, explains that the ability to deliver e-banking services as soon as it goes live with its retail banking product set is key.

"All banks are starting to, or preparing to, implement e-banking. It is a service that customers should be given. We are already discussing the preparation needed to enable our Phoenix [core banking] system to work with an e-banking application," he says.

||**||II|~||~||~|Another example is Commercial Bank of Dubai (CBD), which is currently heading into phase two of a $3 million, three-year business and technology master plan that will see the replacement of its entire core banking system and the rolling out of e-banking.

Amir Afzal, executive manager, IT department, CBD, explains that the motivation for investing in an e-banking delivery channel comes from a strong customer demand.
"We completed an annual customer survey [in which we] asked about e-banking and we had a very good response. As a result of that survey we [believe] that there is sufficient justification and demand for us to create an e-banking channel," he says.

As a result, the bank is hoping to develop its Internet initiative in parallel to the work it is completing on its core banking system. Scheduled to go live in the third quarter of next year, Afzal and his team are currently putting a number of vendors through a pre-qualification process.

However, the IT manager explains that this selection process is not without its problems as many solution providers lack reference sites.

"It is more difficult to select [an e-banking solution] than a core banking system because there are not the established solution providers. They claim to have the reference sites but, in reality, there are not very many," he says.

Syam Pillai, vice president of IT, Habib Bank AG Zurich, concurs. "There are quite a few software companies claiming that they have e-banking solutions. But, frankly speaking, there is no serious development work happening in the Middle East on this front," he says.

To counter such problems, a number of the wealthier, better-resourced banks have taken the in-house route. Pillai believes that the region boasts a number of banks that are very aggressive in their approach to business and this shows through in their IT developments.

"E-banking was considered a high-tech area in banking and they [the banks] tried to give the impression to the customers that only they are going to be offering futuristic services. So, some of them ended up offering e-banking and in the process, incurred higher costs," he says.

Once again, Pillai and Afzal are in agreement as Afzal says that although it differs from bank-to-bank depending on individual strategies and strengths, the major banks will carry on working on their own systems, "even if it means reinventing the wheel and spending millions."

National Bank of Kuwait (NBK) has been working on its Internet initiative for the past four years. Although certain things, such as the development of specific software packages, is outsourced to the subcontinent, its internal IT team retains complete development control and responsibility for the service.

Habib Bank AG Zurich also took the in-house development approach and a team of around ten designed a centralised architecture and a core banking solution from scratch using open source software. Once this was in place, the bank extended the core banking system to the Internet to offer e-banking.

Pillai recognises that such highly skilled development is not an option for all of the Middle East's financial institutions. The two remaining solutions, he suggests, are either outsourcing to an application service provider (ASP) or buying an e-banking application and integrating it with existing systems.

While Afzal and CBD have taken the latter, and are currently happy with the decision, Pillai is sceptical about the ease and success of such an implementation.

"If the bank is big enough or if the bank does not want to go with an ASP, there is only the hard approach. The bank has to implement middleware that can talk to its fragmented core system components and buy an e-banking solution that can talk to this middleware.

This is not easy and, depending on the complexity and number of core system components, it can take anywhere between six months and several years to complete," he says.

||**||III|~||~||~|Although fine in theory, the ASP option continues to raise eyebrows among the region's banks. Pillai says that he "doesn't know of any reliable ASPs that offer such services in the Middle East." Simon Clements, general manager, e-business group, NBK, adds that the overriding concern for data integrity makes the model a suspect one.

"There are a number of issues here for banks which represent significant cultural changes. Firstly you are handing customer and transaction data to a third party as well as the performance, security and availability management. You would have to be absolutely convinced that the ASP is capable of meeting the high security requirements banks must have, along with their ability to manage both the application environment and external connections effectively," explains Clements.

Sankar Krishnan, vice president and region head, Middle East, South Asia & Africa, Citibank, has concerns about how taking the ASP route would be seen by a bank’s customer, as well as the associated costs of the model.

"The big question is how can banks outsource without the customer feeling the difference in service quality. If [the] customer got to know that it was a third party and not [the bank] it would not be good," he says.

"Also, from an economic point of view it is about entry costs and exit costs. With an ASP model the entry costs are OK but the exit costs are high. If it goes wrong then it is the bank's customers that are going to suffer and they need to think about the costs of that compared to investing in it themselves," he adds.

Despite these concerns the ASP model may well take off as the 82 top 100 Arab banks that are yet to get online cave into market demand. And, as Clements says, the model is not without its benefits.
"Of course it should be a lot cheaper for the smaller banks to go this route… and if they [the ASPs] can overcome the significant challenges they face then larger banks may also move to this model in time," he says.

The issue of cost is integral to how a bank moves forward when it comes to the Internet. According to Krishnan, it doesn't make sense for banks to forget the legacy systems that they already have in place because the value of the existing infrastructure has not depreciated enough to justify ripping it out to install a web-enabled offering. "This is why we have seen a growth in middleware companies that provide the two-way plugs for the systems. We ourselves have a technology subsidiary that provides middleware to other banks," he says.

Pyramid Research's Braude explains that a financial institution that wishes to go online can typically expect to pay an average of $10.05 per account for a solution provider's 'seat-based licence.' In addition, the company can expect to pay $9-10 per account for the necessary IT professional services and approximately 18% of its total licence fee annually for maintenance of the system.

"For example, a bank with $15 billion in asset value and one million demand in depository accounts will pay roughly $1 million for licensing and professional services, plus nearly $100,000 in maintenance fees for its first year of online operations," he explains.

||**||IV|~||~||~|However, even if those banks that are not online yet, but opt to join the e-banking market in the coming 12 months, could well find a very different e-banking landscape when they arrive. Currently, the majority of the 18 top 100 Arab banks, which offer online transactional services are in the process of assessing the performance of their Internet initiatives and seeing how they can move them forward.

What this means in practical terms is that banks are placing more emphasis on integrating e-banking with their existing delivery channels. Clements explains that, while the Internet is a strategic channel that can lower the cost of delivery, it is only one part of an overall strategy.

"We have a solid base of 50,000 customers with 35,000 using the service on a regular basis. The Internet channel forms a key part of our integrated delivery strategy, [but] it does not replace other channels, it complements them," he explains.

Krishnan has similar feelings and he explains that Citibank has ceased to look at any of its products as a standalone delivery channel. "We are not looking at the Internet channel alone and making plans for that — to do this is a recipe for disaster. What we are saying is that we have a customer base that is loyal to the brand, so let us give them a value proposition, and deliver another channel," he says.

This reassessment has led banks such as NBK and Citibank to shift the focus of their e-banking services. "The Internet has not grown into a customer-acquiring channel. The majority of this is still done in traditional ways. Where the Internet is really coming in is on the maintenance of a customer after acquisition," explains Krishnan.

The reason for this, he adds, is that a lot of the banks that are already online have decided to forget technology and are focusing on the value proposition for the customer and examining the touch points that help a bank create an overall better customer experience for the user.

A good example of this is NBK, which, although continuing to add functionality to its online services, is making its site more sales and marketing focused by employing individual customer profiling. Braude believes that such profiling will help financial institutions collect important data that will allow banks to better create marketing, delivery and customer service strategies.

"The added value of this data is considerable in terms of customer satisfaction and retention, giving banks with online services a strategic edge over their competitors," he says.

Just how e-banking will develop in the coming 12 months is unclear. Pillai believes that there won't be any drastic change in the market over the next year, although he does predict that another eight or twelve banks will launch Internet initiatives. Krishnan sees a growing focus on the corporate side of the industry, as companies take more and more of their processes online.

Whether or not those banks that fail to get online face heavy customer losses remains unanswered. Clements thinks that, as more banks launch Internet services and Internet penetration across the region rises, those that do not have an e-banking offering will have to do something, otherwise "they will see increasing customer attrition in their profitable segments."

Krishnan adds that it may not be a case of losing customers due to the lack of e-banking services, but rather the lack of value proposition as, in the rush to deliver e-banking, banks settle for second rate services.

"Banks [will] only lose customers if the customer experience on that particular channel is poor. For example, if a strong back-end is not in place and the front end is poor," he says.

Jawad Abbassi, president of Arab Advisors Group, cannot see customers defecting due to the lack of e-banking services, whatever their standard. He also says that the question will, eventually, become moot as all banks will eventually get online. "E-banking is a competitive edge right now but it will eventually become like ATMs, a prerequisite for a good banking relationship," he says.||**||

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