PROJECT

MANAGEMENT OF SERVICES

Submitted by:
Tirthangkar Talukdar (A30101909 )
Vibha Pewal (A30101909 )
Manjari Narain (A30101909 )
Varun Katoch (A30101909 )
Sanjana Wahengbam (A30101909144)

AGBS 2009 - 2011

NOIDA
 TABLE OF CONTENT

1. EXECUTIVE SUMMARY 3-5

2. RESEARCH METHODOLOGY 6-8
2.1 Statement of the problem
2.2 Objectives of the problem
2.3 Research type
2.4 Scope of the study
3. INDUSTRY PROFILE 9 – 30
3.1 Banking Industry
3.2 History of banking industry
3.3 Standard activities
3.4 Channels
3.5 Business Models
3.6 Products
3.7 Types of banks
3.8 Review of literature
3.9 Growth chart
3.10 Challenges
3.11 SWOT analysis
4. COMPANY PROFILE
4.1 American Express Company
4.2 History
4.3 Vision of the company
4.4 Vertical of the company
4.5 Review of literature
4.6 SWOT analysis
5. CASE STUDY
5.1 Preparation by Vietnam’s banking sector for WTO Accession
5.2 E-business study in an online banking services

2
3
 CHAPTER 1
EXECUTIVE SUMMARY

Banking industry helps to gain an insight into the evolution of the industry and
competitive dynamics prevalent in the market. It discusses the significant developments
in the industry and analyzes the key trends and issues. It provides inputs in strategic
business planning of industry professionals. It immensely helps to management
consultants, analysts, market research organizations and corporate advisors.

The rise of retail lending in emerging economies like India has been of recent origin. Asia
Pacific’s vast population, combined with high savings rates, explosive economic growth,
and underdeveloped retail banking services, provide the most significant growth
opportunities for banks. Banks will have to serve the retail banking segment effectively in
order to utilize the growth opportunity.

Banking strategies are presently undergoing various transformations, as the overall

scenario has changed over the last couple of years. Till the recent past, most of the banks
had adopted fierce costcutting measures to sustain their competitiveness. This strategy
however has become obsolete in the new light of immense growth opportunities for
banking industry. Most bankers are now confident about their high performance in terms
of organic growth and in realising high returns. Nowadays, the growth strategies of banks
revolve around customer satisfaction. Improved customer relationship management can
only lead to fulfilment of long-term, as well as, short-term objectives of the bankers. This
requires, efficient and accurate customer database management and development of well-
trained sales force to develop and sustain long-term profitable customer relationship.

The banking system in India is significantly different from that of the other Asian
nations, because of the country’s unique geographic, social, and economic characteristics.
Though the sector opened up quite late in India compared to other developed nations, like
the US and the UK, the profitability of Indian banking sector is at par with that of the

4
developed countries and at times even better on some parameters. For instance, return on
equity and assets of the Indian banks are on par with Asian banks, and higher when
compared to that of the US and the UK.

Banks in India are mainly classified into Scheduled Banks and Non-Scheduled Banks.
Scheduled Banks are the ones, which are included in the second schedule of the RBI Act
1934 and they comply with the minimum statutory requirements. Non-Scheduled Banks
are joint stock banks, which are not included in the second Schedule of the RBI Act 134,
on account of the failure to comply with the minimum requirements for being scheduled.

American express is the world’s most respected service brand. Its goal is to make its
customers feel respected & special through unsurpassed service, expertise & integrity. It
has developed relationships that make a positive difference in its customers’ lives. It
provides outstanding products and unsurpassed service.It deals with business cards and
services, propriety cards, traveler’s cheque.

5
6
 CHAPTER 2
RESEARCH MRTHODOLOGY

2.1 STATEMENT OF THE PROBLEM

To analyse the services provided by a company belonging to the service industry

2.2 OBJECTIVES OF THE STUDY

i. Understanding the service industry which was done by studying the banking
industry.

ii. Evaluating the company American Express.

iii. Find out the services provided by the company.

2.3 RESEARCH TYPE

i. ANALYTICAL RESEARCH: In analytical research, the researcher has to use

facts or information already available, and analyse these to make a critical
evaluation of the material. The informations about the banking industry and
American Express were already available. These were evaluated to understand the
various services provided by the company. Therefore, it constitutes an analytical
research.

7
 ii. QUALITATIVE RESEARCH: Qualitative research is concerned with qualitative
phenomenon relating to or involving the quality or kind. The study involves the
kind of services of American Express. Therefore, it is a qualitative research.

2.4 SCOPE OF THE STUDY

This paper is a part of the subject “Marketing of Services”, a part of the curriculum in the
MBA program of Amity Global Business School. Through this paper, an attempt is made
to understand the service industry. This is done through the study of the banking industry
and the company American Express of the said industry. This study encompasses the
various services provided by the company as in customer service, credit facility, etc.

8
9
 CHAPTER 3
INDUSTRY PROFILE

3.1 BANKING INDUSTRY

This banking industry profile would help to obtain an insight into the evolution of the
industry and competitive dynamics prevalent in the market. It mentions the significant
developments in the industry and studies the key trends and issues. The profile contains
inputs in strategic business planning of industry professionals.

A bank is a financial intermediary that, both directly or through capital markets, accepts
deposits and channels those deposits into lending activities. It provides a connection
between the customers with capital deficits to the customers with capital surpluses.

Banking is generally a highly regulated one, and there have been various government
restrictions on the financial activities of banks time and again in different locations. Basel
II is the current set of global bank capital standards. Germany and some other countries
have allowed banks to own major stakes in industrial corporations while in others like the
United States banks cannot own non-financial companies. The banks of Japan are usually
the center of a cross-share holding entity known as the keiretsu. Prior to the 2008
collapse, the Iceland banks had very light regulation.

3.2 HISTORY OF BANKING INDUSTRY

The modern sense of the word banking can be traces to medieval and early Renaissance
Italy, to the rich cities in the north like Florence, Venice and Genoa. The banking families
dominating 14th century Florence were the Bardi and Peruzzi who establishes branches in

10
many other parts of Europe. The most famous Italian bank was perhaps the Medici bank
which was set up by Giovanni Medici in 1397. Banco di San Giorgio (Bank of St.
George), founded in 1407 at Genoa, Italy, was the earliest known deposit bank.

The religious temples of the ancient world which were established in the third
millennium B.C. were probably the first banks. Banks may have predated the invention of
money. The initial deposits consisted of grain which later included other goods like
cattle, agricultural implements, and eventually precious metals like gold, in the forn of
easy-to-carry compressed plates. The safest places to store gold were temples and places
because they were constantly attended and well built. Since temples were sacred places,
that presented an extra discouragement to would-be thieves. There are still existing
records of loans from the 18th century BC in Babylon that were made by temple
priests/monks to merchants.

Banks in Persia and other territories in Persian Sassanid Empire issue letters of credit
during the 3rd century AD which were known as Sakks. The cheque or Sakk system were
used by the Muslim traders since the time of Harun al-Rashid (9th century) of the Abbasid
Caliphate. A 9th century Muslim businessman could cash an early form of the cheque in
China drawn on sources in Baghdad. This tradition was strengthened during the Mongal
Empire in the 13th and 14th centuries. The 12th century cheques were remarkably similar to
our own, only smaller to save the cost on the paper. This was indicated by the fragments
found in the Cairo Geniza. A sum to be paid and then the order “May so and so pay the
bearer such and such an amount” were included. The name of the issuer and date of the
issue were also apparent.

The word ‘bank’ originated in the Middle English from Middle French ‘banque’, from
Old Italian ‘banca’, from Old High German ‘banc’, bank “bench,counter”. During the
Renaissance, the Florentine bankers used benches as desks or exchange counters. They
made their transactions atop desks covered by green tablecloths.

11
An ancient Greek drachma coin from ancient Hellenic colony Trapezus on the Black Sea,
modern Trabzon, c. 350-25 BC, presented in the British Museum in London was the
earliest evidence of money-changing activity. A banker’s table (trapeze) laden with coins
are shown on the coin with a pun on the name of the city. In modern Greek the word
Trapeza, even today means a table and a bank.

3.3 STANDARD ACTIVITIES

By conducting checking or current accounts for customers, paying cheques drawn by

customers on the bank, and collecting cheques deposited to customers’ current accounts,
bank act as payment agents. Other payment activities include telegraphic transfer,
EFTPOS, and ATM.

Money are borrowed by banks through funds deposited on current accounts, through term
deposits and through debt securities such as banknotes and bonds. Money were lend by
the bank by making advances to customers on current accounts, by making installment
loans, and by investing in marketable debt securities and other forms of money lending.

Almost all payment services are provided by banks, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that provide
payment services such as remittance companies are not normally considered an adequate
substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses, and lend most
funds to households and non-financial businesses, but non-bank lenders provide a
significant and in many cases adequate substitute for bank loans, and money market
funds, cash management trusts and other non-bank financial institutions in many cases
provide an adequate substitute to banks for lending savings to.

12
3.4 CHANNELS

Banks offer many different channels to access their banking and other services:

i. ATM is a machine that dispenses cash and sometimes takes deposits without
the need for a human bank teller. Some ATMs provide additional services.
ii. A brnch is a retail location
iii. Call center
iv. Mail: Most banks accept check deposits via mail and use mail to
communicate to their customers, e.g. by sending out statements
v. Mobile banking is a mothod of using one’s mobile phone to conduct banking
transactions
vi. Online banking is a term used for performing transactions, payments etc. over
the internet
vii. Relationship Managers, mostly for private banking or business banking, often
visiting customers at their homes or businesses
viii.Telephone banking is a service which allows its customers to perform
transaction over the telephone without speaking to a human
ix. Video banking is a term used for performing banking transactions or
professional banking consultations via a remote video and audio connection.
Video banking can be performed via purpose built banking transaction
machines (similar to an ATM), or via a videoconference enabled bank branch

13
3.5 BUSINESS MODEL

A bank can generate revenue in a variety of different ways including interest, transaction
fees and financial advice. The main method is via charging interest on the capital it lends
out to customers. The differential between the level of interest it pays for deposits and
other sources of funds, and the level of interest it charges in its lending activities are from
where the bank derives profit.

Spread is this difference between the cost of funds and the loan interest rate. Profitability
from lending activities has been historically cyclical and dependent on the needs and
strengths of loan customers and the stage of the economic cycle. A more stable revenue
stream and banks are constituted by fees and financial advice and banks have therefore
placed more emphasis on these revenue lines to smooth their financial performance.

American banks have taken measures in the past 20 years to ensure that they remain
profitable while responding to increasingly changing market conditions. The measures
are as follows:

i. Gramm-Leach-Bliley Act allows banks again to merge with investment and

insurance houses. Merging banking, investment, and insurance functions allows
traditional banks to respond to increasing consumer demands for “one-stop
shopping” by enabling cross-selling of products (which the bank hopes will also
increase profitability)
ii. The use of risk-based pricing have been expanded from business lending to
consumer lending, which means that customers that are considered to be a higher
credit risk are charged higher interest rates and thus increased chances of defaults
on loans. This helps to offset the losses from bad loans, lowers the price of loans to
those who have better credit histories, and offers credit products to high risk
customers who would otherwise be denied credit.
iii. The methods of payment processing available to the general public and business
clients are sought to increase. Theses products are debit cards, prepaid cards, smart

14
 cards, and credit cards, which make it easier for customers to conveniently make
transactions and smooth their consumption over time (in some countries with
underdeveloped financial systems, it is still common to deal strictly in cash,
including carrying suitcases filled with cash to purchase a home).
However, there is also increased risk that consumers will mismanage their financial
resources and accumulate excessive debts even with the convenience of easy credit.
Money from card products are made by the bank through interest payments and fees
charged to consumers and transaction fees to companies that accept the cards.
Making profit and economic development as a whole are helped by this.

3.6 PRODUCTS

i. Retail

• Business loan
• Cheque account
• Credit card
• Home loan
• Insurance advisor
• Mutual fund
• Personal loan
• Savings account
ii. Wholesale
• Capital raising (Equity / Debt / Hybrids)
• Mezzanine finance
• Project finance
• Revolving credit
• Risk management (FX, interest rates, commodities, derivatives)
• Term loan

3.7 TYPES OF BANKS

15
Banks' activities can be divided into retail banking, dealing directly with individuals and
small businesses; business banking, providing services to mid-market business; corporate
banking, directed at large business entities; private banking, providing wealth
management services to high net worth individuals and families; and investment banking,
relating to activities on the financial markets. Most banks are profit-making, private
enterprises. However, some are owned by government, or are non-profit organizations.

i. Types of retail banks:

• Commercial bank: The term used for a normal bank to distinguish it from an
investment bank. After the Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas investment banks were limited
to capital market activities. Since the two no longer have to be under separate
ownership, some use the term "commercial bank" to refer to a bank or a division
of a bank that mostly deals with deposits and loans from corporations or large
businesses.
• Community banks: Locally operated financial institutions that empower
employees to make local decisions to serve their customers and the partners.
• Community development banks: Regulated banks that provide financial
services and credit to under-served markets or populations.
• Postal savings banks: Savings banks associated with national postal systems.
• Private banks: Banks that manage the assets of high net worth individuals.
Historically a minimum of USD 1 million was required to open an account,
however, over the last years many private banks have lowered their entry hurdles
to USD 250,000 for private investors.
• Offshore banks: Banks located in jurisdictions with low taxation and
regulation. Many offshore banks are essentially private banks.
• Savings bank: In Europe, savings banks take their roots in the 19th or
sometimes even 18th century. Their original objective was to provide easily
accessible savings products to all strata of the population. In some countries,
savings banks were created on public initiative; in others, socially committed
individuals created foundations to put in place the necessary infrastructure.

16
 Nowadays, European savings banks have kept their focus on retail banking:
payments, savings products, credits and insurances for individuals or small and
medium-sized enterprises. Apart from this retail focus, they also differ from
commercial banks by their broadly decentralised distribution network, providing
local and regional outreach—and by their socially responsible approach to
business and society.
• Building societies and Landesbanks: Institutions that conduct retail banking.
• Ethical banks: Banks that prioritize the transparency of all operations and make
only what they consider to be socially-responsible investments.
• A Direct or Internet-Only bank is a banking operation without any physical bank
branches, conceived and implemented wholly with networked computers.

ii. Types of investment banks:

• Investment banks "underwrite" (guarantee the sale of) stock and bond issues,
trade for their own accounts, make markets, and advise corporations on capital
market activities such as mergers and acquisitions.
• Merchant banks were traditionally banks which engaged in trade finance. The
modern definition, however, refers to banks which provide capital to firms in the
form of shares rather than loans. Unlike venture capital firms, they tend not to
invest in new companies.

iii. Both combined:

• Universal banks, more commonly known as financial services companies, engage

in several of these activities. These big banks are very diversified groups that,
among other services, also distribute insurance— hence the term bancassurance, a
portmanteau word combining "banque or bank" and "assurance", signifying that
both banking and insurance are provided by the same corporate entity.

17
iv. Other types of banks:

• Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash
interest rate. They generally provide liquidity to the banking system and act as the
lender of last resort in event of a crisis.
• Islamic banks adhere to the concepts of Islamic law. This form of banking
revolves around several well-established principles based on Islamic canons. All
banking activities must avoid interest, a concept that is forbidden in Islam.
Instead, the bank earns profit (markup) and fees on the financing facilities that it
extends to customers.

3.8 REVIEW OF LITERATURE

Influenced by the global financial turmoil and repercussion of the subprime crisis, the
global banking sector has been witness to some of the largest and best known names
succumb to multi-billion dollar write-offs and face near bankruptcy. However, the Indian
banking sector has been well shielded by the central bank and has managed to sail
through most of the crisis with relative ease. Further with the economic buoyancy the
world over showing signs of cooling off, the investment cycle has also been wavering.
Having said that, the latent demand for credit (both from the food and non food
segments) and structural reforms have paved the way for a change in the dynamics of the
sector itself. Besides gearing up for the compliance with Basel II accord, the sector is also
looking forward to consolidation and investments on the FDI front.

Public sector banks have been very proactive in their restructuring initiatives be it in
technology implementation or pruning their loss assets. While the likes of SBI have made

18
already attempts towards consolidation, others are keen to take off in that direction.
Incremental provisioning made for asset slippages have safeguarded the banks from
witnessing a sudden impact on their bottom lines.

Retail lending (especially mortgage financing) that formed a significant portion of the
portfolio for most banks in the last two years lost some weightage on the banks' portfolios
due to their risk weight age. However, on the liabilities side, with better penetration in the
semi urban and rural areas the banks garnered a higher proportion of low cost deposits
thereby economizing on the cost of funds.

Apart from streamlining their processes through technology initiatives such as ATMs,
telephone banking, online banking and web based products, banks also resorted to cross
selling of financial products such as credit cards, mutual funds and insurance policies to
augment their fee based income.

The liquidity crisis that swept the heavyweights of global financial sector off their feet in
FY09 did affect the entities in Indian banking sector as well, albeit marginally. Other than
the temporary crunch after bankruptcy of Lehman Brothers, the global financial
meltdown was weathered by banks in India with relative ease. The monetary stimuli
(reduction in repo rate, cash reserve ratio (CRR) and statutory liquidity ratio (SLR))
offered to the banks by the RBI made things easier. Despite the severe liquidity pressure
and poor credit appetite at the retail and corporate levels, Indian banks managed to grow
their advances and deposits by 24% YoY and 22% YoY respectively in FY09. The
growth was mainly driven by a sharp expansion in term deposits and growth in
agricultural and large corporate credit. Having said that, higher delinquency levels in
retail credit and debt restructuring took its toll on the sector.

Indian Banks : Marginal signs of stress

FY08 FY09 Change

19
 No. of banks (nos.) 79 78 -1.3%
Branches (nos.) 776 825 6.3%
Employees (nos.) 11,588 12,039 3.9%
Networth (Rs m) 39,940 47,080 17.9%
Deposits (Rs m) 420,260 519,700 23.7%
Advances (Rs m) 313,540 383,890 22.4%
NIM (%) 4.1 4.4 7.3%
RoA (%) 1.1 1.1 0.0%
CAR (%) 13.0 14.0 7.7%
Net NPA / advances (%) 1.0 1.1 5.0%
Bus. / employee (Rs m) 63.3 75.0 18.5%
Profit /employee (Rs m) 0.5 0.6 20.0%

Indian banks also enjoyed higher levels of money supply, credit and deposits as a
percentage of GDP in FY09 as compared to that in FY08 showing improved maturity in
the financial sector.

Despite poor pricing power lower cost of funds helped Indian banks grow their net
interest margins in FY09. While few like ICICI Bank chose to reduce their balance sheet
size, most entities chose to reasonably grow their franchise as well as assets. Public sector
banks outdid their private sector counterparts in terms of growth and franchise expansion
in the last fiscal. Improved capital adequacy also helped banks to comfortably comply
with Basel II. The higher efficiency levels were the hallmarks of better performance of
Indian banks last year.

20
Most banks had to restructure some loans in their portfolio during FY09 which deferred
their interest income. Further the PSU banks had also to provide for the loss of interest on
the agri-loans waived by the government. With lesser avenues of credit disbursal, banks
had to park most of the liquidity available with them with the RBI. At the end of FY09,
banks' investment in SLR securities increased to 28.1% of total deposits from 27.8% in
FY08 and higher than the RBI prescribed level of 24%. Feeble credit off take coupled
with the fear of bad loans going up in the scenario of economic slowdown prompted
banks to park their surplus funds with the RBI.

In FY09, as per the RBI mandate, all foreign banks operating in India and Indian banks
having operational presence outside India migrated to the Basel II norms. All other
commercial banks have been encouraged to migrate to these approaches not later than
FY10.

Prospects

With banks having complied with Basel II and having sufficient capital in their books; it
will be a challenge to deploy the same safely and profitably in the event of persistence of
economic slowdown. Banks are likely to concentrate more on non funded income in this
scenario Banks, especially the private sector ones, are likely to face penetration concerns.
The lack of credit penetration and the geographic concentration of bank credit is evident
from the fact that 5 states having the highest proportion of per capita credit enjoy 55% of
the total credit disbursals in the country. RBI's roadmap for the entry of foreign banks
and the acquisition of stake by the foreign entities in Indian private banks has been
deferred for the time being. However, the tussle for higher market share in the already
fragmented sector is only set to aggravate.

The proposal for Cabinet's approval to allow PSU banks to bring down the government's
stake in them below the stipulated 51%, which is yet to be tabled, can help the bank raise
substantial capital without borrowing at high rates and give the entities an opportunity to
enhance their capital adequacy ratios besides competing with their private sector peers.

21
3.9 GROWTH CHART

As regards the impact on banking system’s ability to lend, it may be mentioned that there
had been high credit growth with credit deployment by the Indian banking sector growing
rapidly at an average rate of around 30 per cent per year during three years before the
international crisis surfaced. The Reserve Bank had initiated a conscious and judicious
combination of monetary and countercyclical prudential measures to moderate the bank
credit growth and build-up of asset bubbles in certain segments. The Indian banking
system has been relatively in good health. Balance sheets of the banks appear healthy and
little affected by the unsettled conditions in financial markets. The asset quality and
soundness parameters of the Indian banking sector have improved significantly in the
recent period.

This notwithstanding, according to CFSA (2009), financial position of commercial banks

shows that the global financial meltdown has led to a crisis of confidence in the global
markets and is not without its echo in the Indian financial system. In contrast to the trend
observed till 2007-08, there has been a reversal in capital flows to India during 2008-09.
This has led to some disturbance in the Indian financial markets, particularly in the equity
and foreign exchange markets. Against this background, the CFSA assessed the financial
soundness of commercial banks and found that the banking sector has withstood the
shocks of the global meltdown well and none of the key financial parameters in
September 2008, namely capital ratio, asset quality, earning and profitability pointed to
any discernable vulnerability.

Despite not being part of the financial sector problem, India has been affected by the
crisis through the feedback loops between external shocks and domestic vulnerabilities
by way of the financial, real and confidence channels. In evaluating the response to the
crisis, it is important to remember that although the origins of the crisis are common
around the world, the crisis has impacted different economies differently. Importantly, in
advanced economies where it originated, the crisis spread from the financial sector to the
real sector. In emerging economies, the transmission of external shocks to domestic

22
vulnerabilities has typically been from the real sector to the financial sector. Countries
have accordingly responded to the crisis depending on their specific country
circumstances. The measures put in place since mid- September 2008 have ensured that
the Indian financial markets continue to function in an orderly manner. This sizeable
easing has ensured a comfortable liquidity position starting mid-November 2008 as
evidenced by a number of indicators including the weighted-average call money rate, and
the yield on the 10-year benchmark Government securities and effective lending rates of
commercial banks.

In retrospect, the key success of financial sector reforms in India since they were
instituted in the early 1990s has been the maintenance of financial stability through a
period marked by repeated financial crises across the world. The need of the hour is to
have financial sector reforms in a recalibrated manner in light of the crisis. The fact that
India has not gone through any financial crisis as a result of financial deregulation is not
only remarkable, but a testimony to the appropriateness of the judgment that reforms to
global standards need to be adjusted to local conditions.

23
3.10 CHALLENGES

The banking industry in India is undergoing a major transformation due to changes in

economic conditions and continuous deregulation. These multiple changes happening one
after other has a ripple effect on a bank trying to graduate from completely regulated
seller market to completed deregulated customers market.

o Deregulation: This continuous deregulation has made the Banking market

extremely competitive with greater autonomy, operational flexibility and
decontrolled interest rate and liberalized norms for foreign exchange. The

24
deregulation of the industry coupled with decontrol in interest rates has led to
entry of a number of players in the banking industry. At the same time reduced
corporate credit off take thanks to sluggish economy has resulted in large number
of competitors batting for the same pie.
o New rules: As a result, the market place has been redefined with new
rules of the game. Banks are transforming to universal banking, adding new
channels with lucrative pricing and freebees to offer. Natural fall out of this has
led to a series of innovative product offerings catering to various customer
segments, specifically retail credit.

o Efficiency: This in turn has made it necessary to look for efficiencies in

the business. Banks need to access low cost funds and simultaneously improve the
efficiency. The banks are facing pricing pressure, squeeze on spread and have to
give thrust on retail assets.
o Diffused Customer loyalty: This will definitely impact Customer
preferences, as they are bound to react to the value added offerings. Customers
have become demanding and the loyalties are diffused. There are multiple
choices, the wallet share is reduced per bank with demand on flexibility and
customization. Given the relatively low switching costs; customer retention calls
for customized service and hassle free, flawless service delivery.
o Misaligned mindset: These changes are creating challenges, as
employees are made to adapt to changing conditions. There is resistance to
change from employees and the Seller market mindset is yet to be changed
coupled with Fear of uncertainty and Control orientation. Acceptance of
technology is slowly creeping in but the utilization is not maximized.
o Competency Gap: Placing the right skill at the right place will determine
success. The competency gap needs to be addressed simultaneously otherwise
there will be missed opportunities. The focus of people will be on doing work but
not providing solutions, on escalating problems rather than solving them and on
disposing customers instead of using the opportunity to cross sell.

25
26
3.11 SWOT ANALYSIS

STRENGTH
• Indian banks have compared favourably on growth, asset quality and profitability
with other regional banks over the last few years. The banking index has grown at
a compounded annual rate of over 51 per cent since April 2001 as compared to a
27 per cent growth in the market index for the same period.

• Policy makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms,
enhancing the payments system and integrating regulations between commercial
and co-operative banks.

• Bank lending has been a significant driver of GDP growth and employment.

• Extensive reach: the vast networking & growing number of branches & ATMs.
Indian banking system has reached even to the remote corners of the country.

• The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalisation of 14 major private banks of India.

• In terms of quality of assets and capital adequacy, Indian banks are considered to
have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region.

• India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake)after merger of New Bank of India
in Punjab National Bank in 1993, 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign
banks. They have a combined network of over 53,000 branches and 17,000
ATMs. According to a report by ICRA Limited, a rating agency, the public sector
banks hold over 75 percent of total assets of the banking industry, with the private
and foreign banks holding 18.2% and 6.5% respectively.

27
 • Foreign banks will have the opportunity to own up to 74 per cent of Indian private
sector banks and 20 per cent of government owned banks.

WEAKNESS
• PSBs need to fundamentally strengthen institutional skill levels especially in sales
and marketing, service operations, risk management and the overall organisational
performance ethic & strengthen human capital.
• Old private sector banks also have the need to fundamentally strengthen skill
levels.
• The cost of intermediation remains high and bank penetration is limited to only a
few customer segments and geographies.
• Structural weaknesses such as a fragmented industry structure, restrictions on
capital availability and deployment, lack of institutional support infrastructure,
restrictive labour laws, weak corporate governance and ineffective regulations
beyond Scheduled Commercial Banks (SCBs), unless industry utilities and
service bureaus.
• Refusal to dilute stake in PSU banks: The government has refused to dilute its
stake in PSU banks below 51% thus choking the headroom available to these
banks for raining equity capital.
• Impediments in sectoral reforms: Opposition from Left and resultant cautious
approach from the North Block in terms of approving merger of PSU banks may
hamper their growth prospects in the medium term.

OPPORTUNITY
• The market is seeing discontinuous growth driven by new products and services
that include opportunities in credit cards, consumer finance and wealth
management on the retail side, and in fee-based income and investment banking
on the wholesale banking side. These require new skills in sales & marketing,
credit and operations.

28
• Banks will no longer enjoy windfall treasury gains that the decade-long secular
decline in interest rates provided. This will expose the weaker banks.

• With increased interest in India, competition from foreign banks will only
intensify.
• Given the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities
and service levels from banks.
• New private banks could reach the next level of their growth in the Indian
banking sector by continuing to innovate and develop differentiated business
models to profitably serve segments like the rural/low income and affluent/HNI
segments; actively adopting acquisitions as a means to grow and reaching the next
level of performance in their service platforms. Attracting, developing and
retaining more leadership capacity
• Foreign banks committed to making a play in India will need to adopt alternative
approaches to win the “race for the customer” and build a value-creating customer
franchise in advance of regulations potentially opening up post 2009. At the same
time, they should stay in the game for potential acquisition opportunities as and
when they appear in the near term. Maintaining a fundamentally long-term value-
creation mindset.
• reach in rural India for the private sector and foreign banks.
• With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong.
• the Reserve Bank of India (RBI) has approved a proposal from the government to
amend the Banking Regulation Act to permit banks to trade in commodities and
commodity derivatives.
• Liberalisation of ECB norms: The government also liberalised the ECB norms to
permit financial sector entities engaged in infrastructure funding to raise ECBs.
This enabled banks and financial institutions, which were earlier not permitted to

29
 raise such funds, explore this route for raising cheaper funds in the overseas
markets.
• Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has
allowed them to raise perpetual bonds and other hybrid capital securities to shore
up their capital. If the new instruments find takers, it would help PSU banks, left
with little headroom for raising equity. Significantly, FII and NRI investment
limits in these securities have been fixed at 49%, compared to 20% foreign equity
holding allowed in PSU banks.

THREATS
• Threat of stability of the system: failure of some weak banks has often threatened
the stability of the system.
• Rise in inflation figures which would lead to increase in interest rates.
• Increase in the number of foreign players would pose a threat to the PSB as well
as the private players.

30
31
 CHAPTER 4
COMPANY PROFILE

4.1 AMERICAN EXPRESS COMPANY

American Express Company (NYSE: AXP), sometimes known as "AmEx", is a

diversified global financial services company that is headquartered in New York City.
Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average.
The company is best known for its credit card, charge card, and traveler's cheque
businesses. Amex cards account for approximately 24 percent of the total dollar volume
of credit card transactions in the US, the highest of any card issuer.

BusinessWeek and Interbrand ranked American Express as the 15th most valuable brand
in the world, estimating the brand to be worth US$21.94 billion. Fortune listed Amex as
one of the top 30 Most Admired Companies in the World.

On November 10, 2008, during the financial crisis of 2008, the company won Federal
Reserve System approval to convert to a bank holding company, making it eligible for
government help under the Troubled Assets Relief Program. At that time, American
Express had total consolidated assets of about $127 billion. In June 2009 the $3.39 billion
in TARP funds was repaid to the tax payers plus an additional $74.4 million of dividend
payments, and in July 2009 they ended their obligations under TARP by buying back the
$340 million in Treasury warrants.

Public (NYSE: AXP)

Type Dow Jones Industrial Average Component
S&P 500 Component
Banking
Industry
Financial services
Founded 1850
Henry Wells
Founder(s) William Fargo
John Warren Butterfield

32
Headquarters New York City, New York, U.S.
Area served Worldwide
Kenneth Chenault
Key people
(Chairman & CEO)
Financial
Products Travel services
Insurance
Revenue ▲ US$26.7 Billion (FY 2009)
Net income ▲ US$2.13 Billion (FY 2009)
Total assets ▼ US$124 Billion (FY 2009)
Total equity ▲ US$14.4 Billion (FY 2009)
Employees 67,701 (2008)
Website AmericanExpress.com

4.2 HISTORY

The story of American Express is a fascinating one, filled with interesting and sometimes
quirky characters who -- through a combination of brains, perseverance and luck --
shaped the company's development during the past century and a half.

The express company that forwarded freight and valuables evolved into a company that
created and sold financial products like money orders and travelers cheques. Following
an era of international expansion, the company became an entity perhaps best known for
its charge card. Today, American Express is a global payments company.

The attributes that today are the hallmarks of the American Express brand -- trust,
integrity, security, quality, customer service -- all have their roots in this compelling
story. In this history, as well, are the genesis and development of the company's
aspiration to become the world's most respected service brand

EXPRESSMEN JOIN FORCES

Established in 1850 in New York, American Express Company was among the first and
most successful express delivery businesses to arise during the rapid westward expansion

33
of the United States. The U.S. Postal Service at the time was slow, expensive and
nonexistent in many areas. Nothing larger than a letter-sized envelope could be sent by
mail, and certainly nothing valuable, as a fair number of deliveries were lost or stolen
enroute.

The express companies served as a lifeline to the growing nation. Intrepid expressmen,
typically on horseback or driving stagecoaches, traversed from the eastern cities to the
western frontier, transporting correspondence, parcels, freight, gold and currency, among
countless other goods. American Express quickly earned a reputation as the best in the
fledgling industry – the company that delivered, literally.

Although in its early years American Express was not itself a financial services company,
its largest and most consistent clients were banks. Delivering the banks’ typically small
parcels – stock certificates, notes, currency and other financial instruments – was
considerably more profitable than transporting larger freight. Soon the company would
scale down its parcel and freight delivery business in favor of creating and selling its own
financial products.

INNOVATION AND EXPANSION

In 1882, American Express launched the money order business, which proved an almost
instant success. The company introduced the world’s first travelers cheque in 1891 and
within ten years was selling more than $6 million in cheques annually.

In the course of building the money order and travelers cheque businesses, the company
established correspondent banking relationships with a number of European banks that
accepted and encashed the products. As a result, the American Express name became
increasingly visible throughout Europe. In 1895, the company established its first
European office, in Paris, at 6, rue Halévy, followed by the 1896 opening of an office at 3
Waterloo Place in London. By 1910, American Express had expanded to Southampton,
Liverpool, Hamburg, Berlin, Bremen, Antwerp, Rotterdam, Copenhagen, Naples and
Genoa.

34
Although foreign exchange transactions were conducted as early as 1895 by the Paris
office, the official initiation of the company’s overseas banking operations took place in
1904, when the Rotterdam office opened in Netherlands and began conducting
commercial banking services.

Meanwhile, back in New York, millions of immigrants were entering the United States
through Ellis Island. After uncovering several examples of flagrant swindling among the
independent moneychangers on the premises, the U.S. Immigration Department awarded
a contract to American Express in 1905 to provide official currency exchange services.
Over the years, countless newcomers completed their first business transactions in the
United States at the American Express teller’s window on Ellis Island.

A singular historic event – the outbreak of World War I in Europe – brought about the
next dramatic transformation of American Express and more fully shaped it, willingly or
unwillingly, into a travel services company.

WAR AND THE AGE OF TRAVEL

During the summer of 1914, approximately 150,000 American tourists were stranded
when war engulfed Europe, many without access to funds. Banks had ceased to pay
against foreign letters of credit or any other form of foreign paper. Panic-stricken
travelers lined up inside and outside the offices of American Express in whatever city
they happened to be visiting. American Express was able to cash all travelers cheques
and money orders in full, enabling quick passage home for thousands. Many of those
remaining were able to book passage home soon after a decision by American Express
and a consortium of nine U.S. banks to ship $10 million in gold to Europe so that local
banks could once again honor foreign drafts.

Throughout the war, American Express provided other services as well. The company
was appointed official agent of the British government to deliver relief parcels, letters and
money to British prisoners of war in Germany. Eventually, American Express was
delivering 150 tons of packages a day to British prisoners in Bulgaria, Germany, Holland,

35
Norway, Switzerland and Turkey. Employees also went into the prisoner of war camps to
cash drafts for British and French prisoners, and made arrangements whereby they could
receive money from home.

American Express officially entered the travel business in 1915. As one executive wrote
to the company’s president earlier that year, “Already, we supply travelers with the
tickets for their European tours; we receive and forward their mail; we provide reading
and writing rooms for their convenience; we store and forward their baggage and
packages; we engage their return steamship accommodations. In fact, we are doing
already for travelers practically everything except that which is most remunerative to
ourselves, namely, furnishing eastbound steamship tickets to Europe; providing hotel
accommodations and conducting small parties desiring such a service.”

Within the decade, American Express was undertaking tours to Europe, South America,
the Far East, the West Indies and other destinations around the globe. The company
became synonymous with luxury travel after its successful charter in 1922 of the first
around-the-world cruise, a four-month, 30,000-mile voyage of the Cunard liner, Laconia,
with stops in Cuba, Panama, Honolulu, Japan, China, Java, Singapore, India, Cairo and
the Mediterranean. (The Laconia went on to carry passengers around the world for
another 20 years, before being torpedoed and sunk during World War II.)

American Express’ focus on travel continued through the next several decades. The sale
of travelers cheques and money orders – and, more specifically, the float on them and the
prudent and profitable investment of that float – generated the revenue that supported this
phase of the company’s travel endeavors.

THE CARD ERA

American Express issued its first charge card in 1958. Within five years, more than 1
million cards were in use at approximately 85,000 establishments within and outside the
United States. Soon, the company began introducing local currency cards in markets
outside the United States, adding programs that made it possible for cardmembers to

36
extend payment on large travel expenditures, and launching additional products, such as
the American Express Gold Card in 1966. Within ten years, the card business was
growing steadily and generating a healthy profit. And, to the surprise of many, so was the
company’s travelers cheque business.

In the late 1970s, American Express – like many other large companies of the era – was
intent on becoming a global conglomerate, with huge, multifaceted businesses and
diversified income streams that could protect the company in the event of hard times in
one of its core businesses. During the next several years the company acquired several
large acquisitions toward that end, including Shearson Loeb Rhoades, First Data
Resources, Trade Development Bank, Lehman Brothers Kuhn Loeb, and Investors
Diversified Services (rebranded American Express Financial Advisors in 1995 and spun
off as Ameriprise, Inc. in 2005).

The synergies between the subsidiaries that American Express’ leaders had envisioned
didn’t come to pass, however. By 1985, following the string of expensive acquisitions,
American Express embarked on a somewhat different strategy – to continue to build the
company’s core businesses from within and shed the noncore activities.

A few investments were unloaded, and it appeared as though the plan was working.
American Express had a banner year in 1986, with earnings exceeding $1 billion for the
first time in its history. Each of the company’s operating units posted record-breaking
profits. Reflecting the triumphant mood was the cover of the 1986 annual report, which
showed the new American Express Tower amid the fireworks of the nearby Statue of
Liberty’s centenary celebration.

TRYING TIMES
In 1987, American Express Bank added $950 million to its reserves against outstanding
loans in Latin America. Later the same year, the U.S. stock market experienced its largest
drop since the Great Depression; and in the aftermath, Shearson was rocked by a series of
serious missteps and setbacks. The situation ultimately became so dire that in 1990,

37
American Express repurchased all of Shearson’s remaining publicly traded stock for
more than $1 billion and provided a critically necessary capital infusion.

Continuing problems at Shearson masked an ultimately more disturbing development.

Serious problems were developing in the core American Express Card business. Despite
the introduction in 1987 of a new revolving credit product in the United States, the
company’s share of the U.S. card market fell during the late 1980s and early 1990s.
Trouble was also brewing on the merchant front. In Boston in 1991, a group of
restaurateurs, upset about what they felt were American Express’ unfairly high rates,
staged a revolt that came to be known as the Boston Fee Party. Outside the United States,
card suppression – when merchants try to dissuade customers from using the American
Express Card – began to rise.

Years later, the company’s chief executive would say, in retrospect, “If not for the
strength of our brand name, American Express would have collapsed by the late 1980s.

TURNAROUND AND GROWTH

American Express divested several businesses to strengthen the company’s balance sheet
and concentrated on shoring up its core payment, travel and financial planning
businesses. The 1984 acquisition of IDS (Investors Diversified Services) – which had
initiated American Express’ transformation from what had become known as a card and
travel company into a true financial services power – proved to be a valuable investment,
particularly as other parts of the enterprise underwent major reengineering efforts to
overhaul business processes and slash operating costs. The company eventually lopped
$3 billion from its cost base, freeing up money to invest in a number of new products and
services.

Rebuilding relationships with merchants became a top priority, as did significantly

increasing American Express Card acceptance across a wide range of industries and
geographical markets. The company also began forming a number of strategic
partnerships with selected airlines, banks, retailers and other key businesses around the

38
world. Proving highly successful, these alliances have enabled American Express and its
partners to efficiently leverage their brands and business strengths while providing
premium products and services to their mutual customers.

Within the decade, American Express was again operating from a position of strength. As
the company celebrated its 150th anniversary in 2000, its earnings, market share, core
businesses and share price were strong. Even so, the company began taking steps to
counter several external economic issues on the horizon.

No one could have predicted the magnitude of the challenges to come.

4.3 VISION OF THE COMPANY

Since its founding in 1850, American Express has conducted business according to
several guiding principles that over the years have become inextricably linked with the
company’s brand, products, services and – perhaps most notably – its people.
Generations before the phrase “company values” entered the corporate lexicon, American
Express employees across the organization were demonstrating the same core principles
upheld by the company today:

Customer Commitment: To develop relationships that make a positive difference in

our customers’ lives.
Quality: To provide outstanding products and unsurpassed service that, together,
deliver premium value to the customers.
Integrity: To uphold the highest standards of integrity in all of the actions.
Teamwork: To work together, across boundaries, to meet the needs of our customers
and to help the company win.
Respect for People: To value people, encourage their development and reward their
performance.
Good Citizenship: To be good citizens in the communities in which we live and work.

39
A Will to Win: To exhibit a strong will to win in the marketplace and in every aspect of
our business.
Personal Accountability: To be personally accountable for delivering on our
commitments

4.4 VERTICAL OF BUSINESS

Consumer cards: Centurion Card, American Express Red, and ExpressPay

American Express is best known for its iconic Green, Gold, and Platinum charge cards,
and offers credit cards of similar color levels in most countries.

In 1999, American Express introduced the Centurion Card, often referred to as the "black
card," catering to an even more affluent and elite customer segment. The card initially
charged a $1,000 annual fee at the time of its introduction (today, it is $2,500 with an

40
additional one-time initiation fee of $5,000). The Centurion product offers a variety of
exclusive benefits. There have always been rumors of a super-exclusive card that gives
American Express' richest and most powerful customers special perks. It was this rumor
that caused Amex to profit from the word-of-mouth and sparked the launch of Centurion.

As of 2005, the US Centurion card has a $2,500 annual fee, while other American
Express cards range between no annual fee (for Blue and many other consumer and
business cards) and a $450 annual fee (for the Platinum Card). Annual fees for the Green
card start at $55 (without Membership Rewards), while Gold card annual fees start at
$150.

American Express has several co-branded credit cards, with most falling into one of two
categories:

Airlines and hotels: e.g. Delta, British Airways, Singapore Airlines, Qantas, JetBlue,
Starwood, Hilton, and others

Retailers: e.g. Costco, David Jones, Holt Renfrew, and others

Their card aimed at young adults is called Blue from American Express. A television
media campaign for Blue adopted the 1979 UK Synthpop hit "Cars" by Gary Numan as
its theme song. Based on a successful product for the European market, Blue had no
annual fee, a rewards program, and a multi-functional onboard chip. A cashback version,
"Blue Cash", quickly followed. Amex also targeted young adults with City Reward Cards
that earn INSIDE Rewards points to eat, drink, and play at New York, Chicago and LA
hot spots. American Express began phasing out the INSIDE cards in mid-2008, with no
new applications being taken as of July 2008.

In 2005, American Express introduced ExpressPay, similar to MasterCard PayPass, based

on a wireless RFID payment method, that requires a card to simply be waved in front of a
special reader and not swiped. This technology replaced the smart chip on the Blue card.
Many U.S. merchant and restaurant partners including 7-Eleven, CVS/pharmacy,

41
McDonald's, Regal Entertainment Group, and Ritz Camera, now offer ExpressPay at
most or all of their locations.

In 2005, American Express introduced Clear, advertised as the first credit card with no
fees of any kind. Also in 2005, American Express introduced One, a credit card with a
"Savings Accelerator Plan" that contributes 1% of eligible purchases into an FDIC-
insured High-Yield Savings Account. Other cards introduced in 2005 included "The
Knot" and "The Nest" Credit Cards from American Express, co-branded cards developed
with the wedding planning website theknot.com.

In 2006, the UK division of American Express joined the Product Red coalition and
began to issue a Red Card. With each card member purchase the company contributes to
good causes through The Global Fund to help African women and children suffering
from HIV/AIDS, malaria, and other diseases.

Business cards and services

American Express offers various types of charge cards for small businesses to manage
their expenses, and the company is also the largest provider of corporate cards.

In late 2007, the company announced the new Plum Card as the latest addition to their
card line for small business owners. The card provides a 2% early pay discount or up to
two months to defer payment on purchases. The 2% discount is available for billing
periods where the card member spends at least $5,000. The first 10,000 cards were issued
to members on December 16, 2007.[22]

In 2008, American Express made a decision to close all Business Line of Credit accounts.
This decision was reached in tandem with the Federal Reserve's approval of American
Express's request to become a Commercial Bank.

Non-proprietary cards

In December 2000, American Express agreed to acquire the credit card portfolio of Bank
of Hawaii, then a division of Pacific Century Financial Corp. In January 2006, American

42
Express sold its Bank of Hawaii card portfolio to Bank of America (MBNA). Bank of
America will issue Visa and American Express cards under the Bank of Hawaii name.

Until 2004, Visa and MasterCard rules prohibited issuers of their cards from issuing
American Express cards in the United States. This meant, as a practical matter, that U.S.
banks could not issue American Express cards. These rules were struck down as a result
of antitrust litigation brought by the U.S. Department of Justice, and are no longer in
effect. In January 2004, American Express reached a deal to have its cards issued by a
U.S. bank, MBNA America. Initially decried by MasterCard executives as nothing but an
"experiment", these cards were released in October 2004. Some said that the relationship
was going to be threatened by MBNA's merger with Bank of America, a major Visa
issuer and original developer of Visa. However, an agreement was reached between
American Express and Bank of America on December 21, 2005. Under the terms of the
agreement, Bank of America will own the customer loans and American Express will
process the transactions.

Traveler's cheques

Amex is the largest provider of traveler's cheques in the world. In 2005, American
Express released the American Express Travelers Cheque Card, a stored-value card that
serves the same purposes as a traveler's cheque, but can be used in stores like a credit
card. The card has since been discontinued as of October 31, 2007, due to "changing
market conditions". All cardholders were issued refund checks for the remaining
balances.

Shearson/American Express

During the 1980s, American Express embarked on its dream to become a financial
services supercompany. In mid-1981 it purchased Sanford I. Weill's Shearson Loeb
Rhoades, the second largest securities firm in the United States to form
Shearson/American Express. Shearson Loeb Rhoades, itself was the culmination of
several mergers in the 1970s as Weill's Hayden Stone, Inc. merged with Shearson,
Hammill & Co. in 1974 to form Shearson Hayden Stone. Shearson Hayden Stone then

43
merged with Loeb, Rhoades, Hornblower & Co. (formerly Loeb, Rhoades & Co. to form
Shearson Loeb Rhoades in 1979. With capital totalling $250 million at the time of its
acquisition, Shearson Loeb Rhoades trailed only Merrill Lynch as the securities
brokerage industry's largest firm. After its acquisition by American Express, the firm was
renamed Shearson/American Express.

In 1984 Shearson/American Express purchased the 90-year old Investors Diversified

Services, bringing with it a fleet of financial advisors and investment products. Also in
1984, American Express acquired the investment banking and trading firm, Lehman
Brothers Kuhn Loeb, and added it to the Shearson family, creating Shearson
Lehman/American Express

Other financial services

On 30 September 2005, American Express spun off its American Express Financial
Advisors unit as a publicly traded company, Ameriprise Financial, Inc.. Due to this,
American Express revenues for 2005 are down around $5 billion, however, like-for-like
they are up 10.5% in 2005. Also, on September 30, 2005, RSM McGladrey acquired
American Express Tax & Business Services (TBS).

On 18 September 2007, it was announced that Standard Chartered Bank agreed to acquire
American Express Bank Ltd, a commercial bank, from American Express Co, for an
estimated $1.1 billion, through a friendly divestiture process. The transaction is currently
subject to regulatory approvals. Lehman Brothers had advised American Express in this
deal

Travel

American Express established a Travel Division in 1915 that tied together all of the
earlier efforts at making travel easier, and soon established its first travel agencies. Today
the focus is on business customers and business travel.

Publishing

44
Amex publishes the Travel + Leisure, Food & Wine, Executive Travel, and Departures
magazines.

Advertising

In 1975, David Ogilvy of Ogilvy & Mather developed the highly successful "Don't Leave
Home Without Them" ad campaign for American Express Traveler's Cheques, featuring
Oscar-award-winning actor Karl Malden. Karl Malden served as the public face of
American Express Travelers Cheques for 25 years. In the UK the spokesman was instead
the television personality Alan Whicker.

4.5 REVIEW OF LITERATURE

American Express is dedicated to support its clients as implement expense management

solutions that help in achieving control, compliance, operational efficiencies, and cost
reduction goals.

Its core business is helping companies manage their corporate expenses. Specifically,
through Commercial Cards (Corporate Cards and/or Corporate Purchasing Cards), it
seeks to find innovative ways to make our clients incredibly successful at achieving their
expense management objectives.

Sarbanes-Oxley is an important topic for many of us today. Appropriately, establishing

controls and achieving compliance is top of mind.

For 40 years, American Express has been a leader in developing Commercial Card
programs that respond to its clients needs. From the first Corporate Card, to a combined
Card and Travel infrastructure, to Purchasing and Meeting solutions, it has always
focused on listening to clients and enhancing its capabilities to meet mission critical
business needs and address current industry issues.

45
As an example, American Express has earned Cybertrust’s Perimeter Certification status,
the de facto standard for e-business. This distinction indicates that American Express
maintains a proactive and comprehensive security program. The accompanying report
highlights the critical components of our

Commercial Card program that can effectively support customers focus on controls and
compliance. Each topic is covered with a general level of detail – along with some
questions for you to consider in the context of customers program and control needs.

SAS 70s and Commercial Cards

American Express Global Commercial Card has worked with a leading auditor to conduct
a Type 1 audit on data that runs through our Accounts Receivable (AR) system. This
report is available to our existing clients and their auditors. The SAS 70 report (Type 1)
focuses on key data file, report, and reconciliation tool controls that support the
Corporate Card and Corporate Purchasing Solutions. The recent SAS 70 report states that
American Express has suitably designed control objectives in place around customers’
T&E and procurement expense data.

American Express is ‘The Most Trusted Company for Privacy in the United States’1 The
SAS 70 review focused on key components of our Commercial Card program, such as
data files. These files feed the broad menu of Corporate Card and Corporate Purchasing
Card reports housed online at American Express @ Work program management site, as
well as other client financial systems, such as expense reporting tools. Among the areas
analyzed in the SAS 70 process, our auditor reviewed the following control objectives
employed by American Express

� Application systems

� Information security

� Computer operations

� Data back-up processes

46
� Data and report file set-up and delivery

� Completeness and accuracy of data

� Client set-up of reconciliation tools

It is important to note that American Express’ SAS 70 on internal controls may or may
not be relevant to your attempts to establish compliance with Sarbanes-Oxley regulations.
Responsibility for evaluating processes and financial controls remains with each
individual company impacted by Sarbanes-Oxley. American Express will share a copy of
our SAS 70 report(s) with existing clients upon formal request and the completion of a
Non- Disclosure Agreement.

4.6 SWOT ANALYSIS

STRENGHTS

1. Diversity: The company has added different products and services over the years.
This diversity has made it able to spread financial risk over different channels.

2. Innovation: The company history is a study in innovation. It has pioneered many of

the financial products we take for granted today, and consistently found ways to improve
delivery of its services.

WEAKNESS

47
1. Credit and financial businesses are at the mercy of the credit market as well as
consumer confidence. If consumer spending is off, as it is right now, and credit is tight,
profits will be down.

2. Size: The credit crunch has caused American Express to take measures to limit their
default rate and minimize losses. As one of the largest credit card companies, they
receive a great deal of attention in the press. This could end up hurting their corporate
image many years after the economic crisis has passed.

OPPORTUNITIES

1. American Express remains a relatively stable financial service company in comparison

to some of its counterparts. This could be a tremendous plus for them when the economy
begins to recover, and customers have fewer choices in the industry.

2. Taking steps to limit risk, and becoming a leaner company could help the company to
become even stronger.

THREATS

1. Tighter regulations and government intervention could make the financial services
industry much less profitable in the future.

2. As the US economy begins to affect the global economy, American Express may find
itself a victim of anger and backlash around the world.

48
49
 CHAPTER 5
CASE STUDY

5.1 PREPARATION BY VIETNAM’S BANKING SECTOR FOR WTO

ACCESSION

I. THE PROBLEM IN CONTEXT:

This paper focuses on showing how Vietnam will meet its trading partners’ expectations
that it will liberalize its economy through commercial legislation and regulatory changes

50
and, more specifically, will liberalize its financial institutions and markets by the time of
the country’s planned accession to the WTO in 2005.

Since 1975 until recently, Vietnam has maintained an almost isolationist economic
policy. It has not, as a result, had much success in improving the efficiency of its
commercial sector in a way that contributes to significant or consistent economic growth.
Viet Nam is now a country clearly wanting closer connections with the rest of the world,
but policies to promote and finance international trade or to attract adequate foreign
investment have lacked direction. As the country progresses towards joining the WTO,
economists are debating how to improve the country’s investment efficiency, especially
through financial market reform.

In this context, the BTA (US-Vietnam Bilateral Trade Agreement) exposed the lack of
competitiveness of the Vietnamese banking sector. Vietnamese enterprises that have tried
to improve their competitiveness in world markets (such as the fishing industry) have
found that the lack of banking competitiveness and competence has held them back. They
fear that this will continue to happen when the Vietnamese market is opened up as a
result of WTO membership.

The Vietnamese banks themselves realize (partly as a result of the BTA) that they have to
reform or lose even more business to foreign banks and financial institutions. They
understand that the WTO or the General Agreement on Trade in Services (GATS) does
not require Viet Nam to open up its banking market (unlike the BTA, for example, which
does have such provisions), but they can see that this is likely to happen in future because
their own customers — who will face competition in their markets after WTO accession
— will be demanding to use foreign banks. Vietnam is considering liberalization of its
banking system for its own purposes, so that its companies and its banks can survive
WTO-enforced trade liberalization.

Some analysts have also expressed concern about the falling proportion of foreign capital
in the country’s private investment proportion of foreign capital in the country’s private
investment structure and the increasing levels of state investment, sometimes considered

51
to be associated with inefficiency or misallocation. This topic is still being debated, but
some economists consider that increasing investment by state-directed or state-owned
companies might be associated with Viet Nam’s import substitution and protectionist
policies which in turn negatively affect resource allocation.

The world economy generally has seen changes in trading practices aimed at reducing
protectionist policies. Lower protection translates into better use of internal resources.
But in Viet Nam, in contrast with more developed economies, the policies needed to
ensure higher levels of economic growth include not only the more efficient use of
internal resources but also financial and banking laws that will attract more external
resources.

For example, there appears to be a need to raise or even remove the 30% ceiling on
foreign investors’ stakes in listed business organizations. When the government first
opened its doors to foreign investment some twenty years ago there were many
restrictions concerning where foreign investors could invest their money. Back then, Viet
Nam wanted to attract foreign capital to areas and activities where capital was needed
most without threatening Viet Nam’s national interests. This policy, to some foreign
investors, protected the capital of state-owned enterprises (SOEs) and locally owned
private enterprises rather than effectively encouraging the development of overseas and
international business. Over time, banking restrictions have also prevented the owners of
local enterprises from realizing the true value of their investments because they were
unable to access global capital markets.

The opportunity for foreign-invested companies to undertake bigger commercial

activities in Viet Nam is now more widely recognized.

The local press claims that this is something which is compulsory under the BTA and
other international commitments Vietnam has made; they also suggest that a government
decision to lift the cap on foreign participation in local business was to be made in 2004.
However, as of the time of writing nothing has happened. Is this the old Vietnamese
comment, ‘maybe tomorrow’? However, liberalization of the restriction on investment

52
will encourage and facilitate a more specialized domestic production schedule which
would flow on to changed international trading patterns, replacing Vietnam’s previous
focus on import substitution.

Warwick Cleine, a senior partner of the international consultancy firm KPMG, is among
those foreign analysts who felt greatly encouraged when they heard that the Ministry of
Finance (MoF) was considering proposing that the government raise or even remove the
investment 30% cap. ‘It doesn’t make sense to restrict foreign capital in the domestic
sector. If they do not remove the cap, private local companies will suffer over time’, he
says.

Since the State Securities Commission (SSC) was transferred to the MoF’s management
earlier this year, the MoF has understood that its task of developing the fledgling stock
market — which has only twenty-four listed firms with a total capitalization of less than
10 billion dong ($US 634 million) — has become more urgent than ever.

Adjustments of the investment cap would, however, require many changes to both the
Foreign Investment Law (FIL) and the Enterprise Law. There is clearly a role for
Vietcombank (the Bank for Foreign Trade of Vietnam) in this area.

According to Tony Foster of the Freshfields law firm, the government has distinguished
between the FIL and the Enterprise Law in order to make sure that foreigners invest
under the control of the FIL: ‘If foreigners could invest more than 30%, the FIL would
lose importance — which may happen when the FIL and Enterprise Law are merged next
year anyway. That is why I assume the government is considering lifting the ceiling now.

In general, foreign analysts believe that the government has slowly been moving towards
a unified legal system for foreign-invested and domestic enterprises. This is a natural part
of Viet Nam’s intended integration into the world economy: the source of the capital is
not important, but rather the use to which it is put. ‘This means government policy will
become more focused on how enterprises invest their money rather than how the
enterprise raises its capital’, says Cleine of KPMG.

53
The most important action for the MoF is to work with industries to adjust its Decree 58.
Once this decree is adjusted, the regulations will define in which business sectors the
state can hold a 100% stake and which can be invested in by foreign companies,
translating into a liberalization of the investment banking system.

These developments indicate slowly changing thinking within the government about their
regulations and their operation of the previously state-controlled financial and banking
system. It also reflects an increasing acknowledgement of a need for Vietnam to join the
‘world economy’.

Financial institutions are now realizing that GATS did not force administrators,
particularly in developing countries, to liberalize their financial system to encourage
further investment. However, if these state institutions cannot update it is unlikely that
they will be able to compete with other private financial companies within Vietnam.

For example, Dong a Bank, a private commercial bank, was established fifteen years ago.
Its capital has increased ten times and, in foreign exchange transactions, accounts for
70% of total foreign currencies in Vietnam; Vietcombank — the largest state-owned bank
— has not achieved this. The BTA agreement with the United States has induced the
government to undertake that, by 2010, US banks will operate without any constraints in
Vietnam. Under competitive pressure for survival, institutions must restructure, adjust
and change operational procedures, and even change their form of ownership to assist in
the country’s economic development. The financial system clearly needs overhauling to
achieve these objectives.

According to the BTA, Vietnam has to liberalize its financial and banking services for
US banks in compliance with the ‘road map’ agreed by the two parties. Vietnam must
comply with the ASEAN Free Trade Area (AFTA) ‘road map’ for tariff removal,
implement the BTA guidelines for banking services, train banking staff, and apply
information technology (IT) and other technologies in banking services so that
Vietnamese banks can compete in the future.

54
Vietnam has to implement its road map in the following terms and in the 2001-10 time
framework, including allowing insurance services to become more effective: US
investors can set up joint services ventures and there will not be any constraints in
penetrating the market by US insurance companies. Other major developments so far
have been that

• All US financial providers (except banks and leasing companies) have been
entitled to set up joint ventures with Vietnamese partners in providing their
financial services in Vietnam;

• From December 2004 US-owned banks will be entitled to expand their

commercial services;

• From 2009, US financial institutions will also be entitled to issue credit card
facilities and enjoy the national treatment policy. They can receive deposits in
Vietnamese dong; and

• From 2010, US banks will be entitled to set up 100% US-owned banks in

Vietnam, and to set up joint venture banks in Viet Nam, but the US capital
contribution shall not be lower than 30% and not exceed 49% of joint venture
registered capital.

Clearly, all these development changes and procedures are progressive and longer term,
but there is a distinct role for and need for the reform of Vietnamese banks in this
process.

II. CHALLENGES FACED BY THE VIETNAMESE BANKING SECTOR

During this integration process, the Vietnam banking system will be heavily influenced
by the international financial market in terms of exchange rates, interest rates and foreign

55
currency reserves, while they must simultaneously carry out international obligations and
commitments. Competition will probably become much stronger when foreign banks
expand their scale and scope of operations in the Vietnamese market. Vietnamese
commercial banks will need to cope with many difficulties in expanding their banking
activities in the world and competing with foreign banks.

As noted earlier, the BTA exposed the lack of competitiveness of the Vietnamese
banking system. The Vietnamese banks came to realize that they had to reform or lose
more business to foreign banks and financial institutions. Liberalization became of
interest to both Vietnam’s commercial and banking sectors to assist in surviving WTO-
enforced trade liberalization (although not specifically liberalization of the banking
sector).

Historically (some fifteen years ago), the Vietnamese government still operated a
centrally planned economy; Vietcombank was one of the three banks entitled to
undertake international payments. With its monopoly in this external financial
relationship, Vietcombank played an important role and obtained a large market share of
international payments, albeit in a relatively small market. In general, its business
operation was advantageous at that time, but not now.

There was also a low development level in technology, organization, management and
professional skills in the Viet Namese banking industry. Hence the speed of opening up
the economy remained low, as was the ability to mobilize internal capital with the
country’s underdeveloped strategies for expanding into the international market. Some of
this bureaucratic ‘overseeing’ remains.

Related to this, Vietnam’s legal system still operates restrictions in quantification, and
there is confusion in relation to finance and credit which is contrary to some requirements
of GATS and the BTA. The State Bank still has not met the operational requirement of a
unified banking system; banking policies remain uniformed and do not create a
competitive business environment.

56
One of the major challenges now facing Vietnamese banks is the role of foreign banks.
The foreign banks’ strength of capital, technology, services and global operational scale
provide them with potential advantages. For example, in Ho Chi Minh City, the biggest
finance centre in Vietnam, the foreign-invested banks have a high growth rate, leading to
a high percentage of the market share in the finance business, while the state commercial
banks’ percentage share has now fallen (see Tables 1 and 2).

Table 1
Share of borrowed capital from banks in Ho Chi Minh City in 2003

Banking system Market share of borrowed capital

2002 2003 Increase or decline
compared with 2002
Amount Percentage Amount PercentageAmount (billion Percentage
(billion (billion dong) dong)
dong)
State commercial 43.163 50.2 57.506 49.4 +14.343 33.2
banks
Joint stock 24.712 28.7 32.707 28.1 +7.995 32.4
commercial banks
Joint venture 3.272 3.8 4.724 4.1 +1.452 44.4
banks
Branches of 14.849 17.3 21.533 18.5 +6.684 45.0
foreign banks
Total 85.996 100.0 116.470 100.0 +30.474 35.4

Source: State Bank of Viet Nam, 2003.

Table 2
Market share of bank loans in Ho Chi Minh City in 2003

Banking system Market share of bank loans

2002 2003 Outstanding increase or fall
compared with 2002
Amount Percentage Amount Percentage Amount (billion Percentage
(billion (billion dong)
dong) dong)
State commercial 38.001 51.2 48.426 48.0 +10.245 27.4
banks
Joint stock 19.814 26.7 29.160 28.9 +9.346 47.2
commercial banks
Joint venture 2.783 3.7 3.946 3.9 +1.163 41.8
banks

57
Branches of 13.645 18.4 19.354 19.2 +5.709 41.8
foreign banks
Total 74.243 100.0 100.886 100.0 +26.643 35.9

Source: State Bank of Viet Nam, 2003.

Table 3 also indicates the fall in the bank loan market share of state commercial banks
while the foreign banks’ share of loans has increased.

A further problem exists with the Vietnamese (in)ability to provide adequate capital for
economic development, and this is also in comparison to other countries in the region.
The registered capital of leading state commercial banks only accounts for 3-4% of the
total capital of all commercial banks; their financial capacity is too low to meet the
country’s economic development requirements. Capital provision is also over too short a
period for the longer-term nature of many commercial projects. This point is summarized
in Table 45.34.

Table 3
Duration of capital mobilization of banks in Ho Chi Minh City, 2002-3

2002 2003
Duration of capital Amount of (billion Percentage Amount of (billion Percentage
mobilization dong) dong)
Over 12 months 17.098 19.88 22.582 19.39
Under 12 months 68.898 80.12 93.888 80.61
Total 85.996 100.00 116.470 100.00

Source: State Bank, Ho Chi Minh City.

There is also an increasing amount of overdue commercial debt, as summarized in Table

4. There are debt problems between commercial business and state-owned banks, often
resulting from inexperience in dealing with secured commercial lending. The Vietnamese

58
banking system must improve commercial practices, including the renunciation of
delinquent claims. The EPCo and Tanimex Companies are two typical cases where the
owners are insolvent and unable to repay loans to Vietnamese banks.

Table 4
Overdue debt of the Viet Namese banking sector, 1995-2000

1995 1996 1997 1998 1999 2000

(billion dong)
Viet Nam banking sector 7.9 9.3 12.4 12.0 13.2 13.1
State commercial bank 9.1 11.0 12.0 11.0 11.1 11.0
Private commercial bank 3.3 4.2 13.5 16.4 23.0 24.0

Source: IMF, Viet Nam: Statistical Appendix and Background Notes, IMF Staff Country Report No 00/116, August 2000,
Table 21.

There are some signs of gradual banking reform. In 1998, the Committee for Banking
Reform was established (Decision No. 337/QD-NHNN) and implemented in 2001. A
major objective is to ensure that the commercial banking system is both effective and
sustainable; for example, the commercial banks must deal effectively with secured
commercial lending from a sound financial management team.

One main objective of any central bank is to maintain the soundness and security of its
country’s financial system as an aid to economic development. This work requires
specialized knowledge of controlling a sound monetary economy devoid of obvious
politics. The Central Bank of Viet Nam has to establish requirements and procedures for
the establishment of improved financial institutions. Their activities should be limited to
fields in which they have certified competence and the central bank must supervise and
monitor financial institutions on an acknowledged financial/accounting basis.

59
In short, the Central Bank of Vietnam must set standards for the establishment of
financial institutions to ensure that applicants have enough resources and adequate
systems in place.

The impact on import-competing industries

In the country’s own interest, Vietnam needs to reform its banking and financial sector so
that its import-competing food and manufacturing sectors will have the support they need
to become globally competitive in the markets being opened to the world by the WTO.
Some examples in support of this point follow.

Nguyen An, director of Seafood Processing Enterprises in Ho Chi Minh City, the largest
economic centre in Viet Nam, mentions his difficulties in borrowing a large amount of
capital from Vietcombank for investment in his company. He says, ‘Access to
Vietcombank for a bank loan was a difficult task. Vietcombank’s monopoly made it
difficult for me to access sources of foreign currencies.’

To Kien Hanh, the owner of a business manufacturing electric fans, cookers and so on,
said, ‘Although my company has the need to borrow money from banks, I have not
borrowed such money since my company’s establishment seven years ago. When I need
capital for production and investment I just mobilize capital from my relatives and my
friends.’

Nguyen Van Tuyen, director of a company providing labour protection devices, said that
he had already approached the bank but had been refused due to his lack of mortgage
property.

Tran Trong Tuong, director of an export company of wooden furniture, is in a more

favourable situation as he has a big house for collateral and could get a bank loan.
However, he complains that the bank’s collateral valuation is only equal to half the

60
market price of the house and the bank loan is only for 70% of their collateral valuation.
This cannot meet his company’s financial needs.

There are many other reasons why small enterprises cannot persuade banks to lend to
them, and for security banks often impose tighter measures to prevent commercial
enterprises from accessing banks.

Duong Phuc Hau, a director of Fosta Enterprises, specializing in anti-absorbent materials,

expresses his objective opinions on (these) bank restrictions and, also, that business
enterprises should provide more binding obligations.

III. FACING THE CHALLENGE OF LIBERISATION

The Vietnamese banking system has so far been partly reformed but is still weak. The
state-owned banks still dominate the banking system; the overdue loan rate is increasing;
Vietnamese commercial banks have limited lending capacity, and so the story continues.

Coupled with this, and sometimes due to inadequate banking and foreign investment
laws, most Vietnamese-owned enterprises are under-capitalized. Once Vietnam
liberalizes its trading economy many industries will have to compete with foreign
entrants to the Vietnam market, maybe for the first time. In such a situation, their
competitive strength in their own market will depend a lot on better access to more
economically competitive banking services.

In April 2004 there were nearly 40, 000 small and medium-sized enterprises in Viet Nam.
According to a recent survey conducted by the Viet Nam Chamber of Commerce and
Industry (2004) these enterprises cannot clearly realize the constraints of the integration
process and the banking industry, although they understand well the problems their
private enterprises can have with current banking services in Viet Nam. Resolving the

61
difficult situation of small and medium-sized enterprises by effectively accessing their
sources of capital and therefore gaining more commercial benefits is a current problem.

With over 90% of Vietnamese enterprises falling into the small or medium-sized
categories and people generally having low incomes, the current capacity for capital
mobilization by banks is limited. If the banking system is permitted to be equitized and to
sell stocks widely to foreign markets, additional foreign capital is likely to increase and
help boost the country’s economy and economic development.

To reform the banking sector and facilitate the liberalization of the commercial process,
the government of Vietnam has announced the Internationally Integrated Programme of
the Banking Industry, and is committed to implement it when Vietnam joins the WTO.
Vu Viet Ngoan, managing director of Vietcombank, has observed that ‘The Programme
of Integration into the international economy initiated by the Vietnamese government has
created opportunities and challenges for Vietcombank.’

This is reflected in other comments. Banking operations will be expanded, especially

with a view to attracting investment capital. Ngoan also said ‘the securitization project of
Vietcombank shall be deployed “favourably” because Ms Le Thi Bang Tam, Vice
Minister of Finance, has submitted to the Viet Nam government “the plan” allowing
Vietcombank to sell its stocks widely to investors in foreign countries. If and when this
happens, then the mobilization of long-term capital for Vietcombank will be easier, and
the funding capacity for big commercial projects can be increased.’

He added that ‘Joining WTO can help Vietcombank, a large foreign trade bank, to have
more opportunities to co-operate in banking fields such as monetary planning and risk
management, and, through this, Vietcombank’s prestige will likely be improved in the
fields of international financial transactions.’

In sum, several things are needed to achieve this.

• The Vietnamese banking industry must mobilize capital, access new technology
and retrain its management and staff to match the development requirements of

62
 other financial markets.

• With tougher competition, Vietcombank must further specialize in professional

banking skills to enhance the efficiency of enterprise capital usage.

• New banking services need to be developed and made more rapidly accessible. In
this way Vietcombank can exploit and more effectively apply its (developing)
banking services to contribute to economic growth and an increased share in both
the international and domestic financial markets.

• Vietcombank can take advantage of its wide network of branches to match the
managerial and business styles of foreign banks.

• Internationally integrated banking operations can help support these reforms and
also increase the transparency of the Vietnamese banking system to meet the
needs of integration and implement the commitment to (other) financial
institutions and the WTO.

• When Vietnam joins the WTO, foreign-invested and private banks will have
better operational conditions there. Vu Viet Ngoan further stated that ‘besides
submitting the plan of the bank’s securitization to mobilize more capital,
Vietcombank must improve its competitiveness by all the measures’ (speech
given at the Viet Nam Banking Conference, April 2004).

• Banking services techniques and technology must be improved and service

charges reduced to attract more customers.

• Staff professional skills must be improved so that Vietcombank (and other banks)
will be both a currency trader and an investor, thus helping commercial
enterprises to develop. The growth of these enterprises should become a
foundation for banking development.

63
IV. LESSONS FROM VIETNAM’S EXPERIENCE

To achieve its successful planned economic/financial integration, Vietnam needs also to

fill the development gap with other countries in the region. Vietnam is carefully opening
its market step by step to maintain some sustainable development.

Because of the requirements of the BTA, Vietnam is opening its financial and banking
market and therefore making WTO access and further developments more feasible.

Being a WTO member will bring some well-defined obligations requiring more open
markets. But the WTO does not tell individual economies what they need to do to
succeed. They have to adopt some practices and procedures that go beyond WTO
requirements. In Viet Nam, the liberalization of banking and financial services is going
beyond GATS requirements, but this seems to be necessary to make an economic success
of WTO membership.

Development and practical changes as a result of macro thinking are sometimes slow in
Vietnam. However, it is possible that some developing countries can benefit from the
Vietnam experience. Now that guidelines have been set out for joining the WTO, it will
be interesting to watch developments in 2005 and beyond.
5.2 E-BUSINESS STRATEGY IN AN ONLINE BANKING SERVICES

Banks today are aware of both the threat and the opportunity that the Web represents. No
traditional bank would dare face investment analysts without an Internet strategy. But
even a detailed and thoughtful approach to the Web does not guarantee business success.
The main purpose behind the launching of online banking services is to provide the
customers with an alternative, more responsive and with less expensive options. With
options just a click away, customers have more control than ever. They expect real-time
answers and superior usability. They also want personal attention and highly customized
products and services. The focus of e-business must always be on the customer. On the

64
other hand, the technology and the business structure follow on form of the value you
intend to provide to the customer. This paper evaluates the success of the e-business
model and e-business strategy implemented by Citibank in the United Arab Emirates in
offering its retail Internet Banking Service; Citibank Online.

Introduction
E-business relies on the development of new business strategies based on networks. The
world has become increasingly inter-connected via telecommunication networks and
computers. These offer fast, flexible, and cost-effective ways of doing business.
The Internet is driving the new economy by creating unprecedented opportunities for
countries, companies and individuals around the world. CEOs worldwide recognize the
strategic role that the Internet plays in their company’s ability to survive and compete in
the future. To be competitive in the Internet economy, companies need to harness the
power of the Internet successfully.

Citibank UAE – Background Information

Citibank is a subsidiary of Citigroup, a strong financial brand with more than 100 million
customers, 5.9 million online relationships and a global reach spanning 100 countries.
Citibank UAE started its retail business in 1987 in a very highly competitive environment
offering a comprehensive line of high quality financial services targeted to the affluent
and middle income segments. Citibank has been perceived, as at the edge of innovation
leveraging its global expertise, it was the first bank in the UAE to introduce innovative e-
business solutions like:

1) CitiPhone – 24 hour Phone Banking Service

2) ATMs- Automated Teller Machines
3) CitiAlert – GSM notifications service
4) E-Card – Internet Shopping Card
5) CitiDirect – Corporate Internet Banking Service, and
6) Citibank Online – Retail Internet Banking Service.

65
In the year 2000, Citibank had 160,000 retail customers serviced mainly through five
branches, six ATMs and CitiPhone. Given the Central Bank restrictions on opening
additional branches, being a foreign bank, the banks’ e-business strategy was to focus on
remote channels of distribution, mainly Internet Banking solutions.
Ms. Sarah Hussain, Web Administrator at Citibank says, “Given the kind of Internet
explosion which the market is going through, Internet is the channel of the future, it is
critical for Citibank to leverage this channel aggressively and gain an early and dominant
leadership”.
What encouraged Citibank to proceed with its investment in this direction is the
tremendous growth of Internet usage since its introduction in 1996. According to Etisalat,
the only Internet Service Provider in the UAE, in 2003 the number of Internet users was
1,105,000 in a country with a population of 3.7 million, this number is fairly high and
expected to increase even further.
Table 1 shows the number of Internet users in some of the Arab countries for 2003 as
obtained from Etisalat:

Table 1: Number of Internet users in some of the Arab countries (Etisalat, 2003)

Country Population Internet Users Internet Mobile Mobile Phones

Users as Phones users as % of
% of users Population
Population

UAE 3,700,000 1,105,000 30% 2,655,000 72%

Qatar 805,000 75,400 9% 328,000 41%
Bahrain 728,000 174,800 24% 400,000 55%
Oman 2,760,000 167,500 6% 528,600 19%
Lebanon 4,387,000 515,000 12% 840,000 19%

66
 Jordan 5,332,000 345,000 6% 1,260,000 24%
Egypt 71,300,000 2,100,000 3% 5,040,000 7%

Table 1 shows that the UAE has the highest percentage of mobile phone users when
compared to the population. It is an eye opener fact, as mobile phones will serve as a
gateway for Internet access in the future, which will definitely impact the future of e-
commerce in the UAE.
In an industry that has became increasingly serviced through remote channels, Citibank
UAE wanted to leverage on the advanced technology available within Citigroup to stand
out, hence Citibank Online was launched in 2000 offering a comprehensive list of
services/functionalities.

E-business Strategy
Based on Porter (1980) generic strategies, Citibank opted for a differentiation strategy for
its home banking service by offering a superior web banking option with powerful and
relevant functionalities wherein customers can access/operate their banking accounts on
the net with full confidence and ease.
In the year 2000, there were only four local banks offering simple home banking
solutions, Citibank wanted to be the first multinational bank to launch a multifunctional
home banking service and own the category before competition becomes fierce in the
field.
Citibank’s mission was to be a leading e-Financial Services company in the UAE by
becoming trusted, premier e-business enabler for its customers.

The objectives of launching Citibank Online were:

1) Extend its network and overcome the limited branch situation.

2) Achieve savings in CitiPhone/Branches’ operating costs by diverting customers to
the Internet. Citibank Online has one of the lowest “costs per interaction” as
compared to the ATM, phone banking or branch banking. It contributes immensely

67
 as part of the Strategic Cost Management initiatives the bank is implementing
without compromising on the quality of service.

According to an online banking report published by Ernst & Young, the transaction
costs of the various banking channels are as follows:
Branch $1.07
Call Centre (human) $0.85
Automated Response System (AVR) $0.44
Automated Teller Machine $0.27
Dialup PC banking 1.5 Cent
Internet Banking 1 Cent
3) Meet the increased consumer demand for quick and secure banking solutions,
anywhere, any time on any device, this is important in staying ahead of
competition.
4) Enhance the brand imagery and values in the mind of the customers and the
prospects by owning this channel especially that Citibank is seen to be innovative
and ahead of most other banks in terms of technology and product development.

5) Create another arm for deepening customer relationships through cross sell and
acquisitions of new customers.

Updated, Table 2 shows the list of Citibank Online functionalities covering all Citibanks’
products in the UAE.

Table 2: Citibank Online functionalities

Account Information:
Balance Summary
Account details and Activity
Download Account Activity
Transfers & Payment
Funds transfers within the UAE

68
 Funds transfers outside the UAE
Payments
Payee list
Standing Instructions
Demand draft and managers checks
Investments Services
Open a mutual fund account
Complete a personal Investment worksheet

Buy mutual funds

Sell mutual funds
Switch mutual funds
View current mutual funds portfolio
Mutual funds information
Customer Service
Account servicing
Rate information
Apply now
Contact Center
Send messages
Read messages
Read saved messages
Information Center
Link to the portal

In order to encourage trial and conversion, Citibank reduced the charges for many
services if used on Citibank Online as part of its pricing strategy. Citibank addressed the
security issues by using the industry level of encryption of 128 bit Secure Socket Layer
(SSL) encryption. The bank also uses firewalls to prevent unauthorized access and an
automatic 'timeout' feature if no activity was detected for a specific time period. The
online session is launched by using a password selected by the customer.

E-business Model
Citibank Online is considered as a standard Business to Consumer approach, the e-
business model Citibank is using can be classified as “Merchant”. See Table 3.
Without the intervention of the AVR, ATM or CitiPhone Officers, a Citibank customer
can access and operate all his relationships with Citibank at a click of mouse in complete

69
privacy. In doing so, Citibank is balancing between security and accessibility of
information leveraging on a robust e-banking service available within Citigroup.
The three elements of the business model; value stream, revenue stream and logistics
stream are complementing each other in this specific case. Citibank was certainly
focusing on adding value to its customers by offering unmatched level of service and
security. Its internal logistics were aligned towards a single objective; launching a
powerful service to its customers to complement its e-business strategy overall. Revenues
after a period of time started flowing too, making the investment worthwhile.
Table 3: e-business models

Brokerage Market makers bringing together

buyers and sellers and
facilitating transactions.

Advertising A web-advertising model and

extension of the traditional
media broadcasting model
where websites provide content
and services and advertising
messages.

Merchant Retailers selling goods directly

to buyers (Citibank Online)

Infomediary Collecting and disseminating

information

Manufacturer Manufacturers using the web to

reach buyers directly, eliminating
wholesalers and retailers.

Subscription Payment of fees to access

information or services.

Evaluation of E-business strategy and model

There are many ways of evaluating the success of the e-business model and e-business
strategies of Citibank, one of which is looking at the financials for the performance of the

70
service for the past four years. Ms. Sarah Hussain, Web Administrator at Citibank says
“The results of the service represented in the information management system reports
covering the performance of Citibank Online from 2001 to 2004 are very satisfactory and
have met the management’s expectations”

Table 4: Number of active Citibank Online customers

2001 2002 2003 2004

No. of active customers 4000 5000 6000 7500

No. of transactions 72,000 90,000 112,000 150,000

Transactions value $656,000 $820,000 $984,000 $1,230,000

Conclusion
This paper examined the e-business strategy and e-business model that have been used by
Citibank in the UAE in offering its Retail Online Banking Service to its customers. Based
on the evaluation, it is very clear that the e-business strategy is complementing the e-
business model used.
According to Timmers (1998), a business model in itself does not yet provide
understanding of how it will contribute to realize the business mission of the companies
who is an actor within the model. Therefore, it is important to supplement it with the e-
business, marketing and sales strategies.
Through Internet solutions, Citibank has maintained its agility and competitive
advantage, gaining substantial benefits from them. It is important to note that customers
in the Internet economy are well informed and their expectations continue to increase,
therefore the ability to respond rapidly to customer demands and deliver value is
imperative. At the end, it will continue to be that – “The bet is on the NET! Ms. Hussain
said.”

71