Banking Digest

Reducing the risk of staff fraud
China payments unwelcoming to foreign investment

Rise of Asia-Pacifc payments hub App to the future for wealthy clients
Is the industry ready for mobile banking?
India under scrutiny
Alleged fraud at Citi highlights
regulatory loopholes
February 2011 Issue 24 www.vrl-financial-news.com
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February 2011 y 1
comment Banking & Payments Asia
news
www.vrl-fnancial-news.com
contents
02-03 coverstory
citiscamhighlights
regulatoryloopholes
Citibank Indias alleged
$86 million fraud throws
a spotlight on the gaps in
regulations around investment
advisory services in the worlds
second-fastest growing wealth
market. The industry is left
wondering whether the fraud
will tarnish Citis and Indias
reputation or if the damage
will be short-lived
06-07 herebedragons
China is a payments
market with
vast untapped
potential.
But, after
a period of
welcoming
cooperation
with western banks
and processors,
the market is
proving difficult to
penetrate. Chinese banks
and China UnionPay have
been unwelcoming to foreign
investment. Janecooper asks
whether this could damage the
market
14-16 Foreigninsurersmarket
sharewoes
When it comes to gaining
market share, foreign insurers
in China have come to terms
with the reality that, for
now at least, this is unlikely
to happen. But despite this
and other challenges in the
regulation and bancassurance
spaces, there is a general air of
optimism that premium growth
will remain robust
18 voiceidentiFicationcomes
oFage
For call centre operators,
precise identification of
customers is a key priority
and one that, in an era of
rampant identity theft, is
becoming ever-more onerous.
BPA examines a user-friendly
solution, voice identification,
and the significant benefits
two Australian insurers
are enjoying from its
implementation
22-24 micropayments:istherea
silverbullet?
The payments industry is
awaiting a silver bullet
universal solution to capitalise
on the growing interest in
micropayments. Who would
have thought 1 transactions
would generate so much
interest? louisenaughton
looks at a new report that
analyses the different
approaches to low-value
payment processing
trends
Google replaces financial advisers
editorsletter
When the going gets tough
Google has overtaken branch-based financial
advisers as the primary source for UK-con-
sumers to seek advice on retail banking serv-
ices, according to a report from Greenlight.
The survey from the UK-based digital
media agency reported an increase of 59 per-
cent in the UK for searches relating to retail
banking products between July and October
on Google.
Greenlight classified 750 of the most popu-
lar search terms that are typed into Google
and then profiled consumer search behaviour
for retail banking-related terms such as bank
accounts, credit cards, debit cards, mortgages,
ISAs, online banking and loans (see charts).
Greenlight also identified the banks, and
related service providers, who were best posi-
tioned on page one of Google and thus more
visible online. In addition, Greenlight moni-
tored paid searches, analysing the advertise-
ments appearing in sponsored links for the
top 120 of the 750 terms, retrieving data daily
throughout October.
Based on the volumes for each keyword and
their ranking on Google, Halifax, part of the
Lloyds Banking Group, was the brand with
the most visibility. It scored 27 percent and
ranked third overall behind price comparison
websites moneysupermarket.com and money-
savingsexpert.com.
In November, the Digital Economy and
Structural Change survey by Deutsche Bank
market researchers GfK and Google reported
that the internet played a much bigger role as
a source of information than transaction or
sales channels.
More than 90 percent of all online searches
are typed into Google. <
n onlinevisibility
ukmostvisibleretailbankingwebsitesin
naturalandpaidsearch,october2010(%)
website natural
search
paid
search
overall
ranking
halifax.co.uk 27 13 2
hsbc.co.uk 9 23 4
natwest 6 23 6
firstdirect.com 0 24 9
lloydstsb.com 17 7 10
barclays.co.uk 17 6 11
rbs.co.uk 4 15 14
nationwide.co.uk 13 5 15
santander.co.uk 12 3 20
santander-products.
co.uk
0 14 22
barclaycard.co.uk 3 10 23
ingdirect.co.uk 0 11 26
co-operativebank.
co.uk
2 7 33
Note: % of natural search taken from two million searches;
paid search taken from 120 searches. Source: Greenlight
Just when you thought it was safe to venture
into Asias high-growth markets, the story
of staff fraud in Citibank India broke (pages
2-3). Looking further east into China, foreign
entrants are already feeling hot under the col-
lar from aggressive domestic players.
Adding even more salt to wound, domestic
counterparts both in the payments (pages 6-7)
and the insurance (pages 14-16) markets are
imbued with renewed vigour after seeing the
big brand-name banks in Europe and North
America topple like dominoes during the
recent global financial crisis.
It is not safe to stay at home either. As
Douglas Blakey from our London office
reports (page 8), the worst-performing mar-
kets for bank shares in 2010 are in Europe,
with the North American banks not perform-
ing much better.
What is an up-and-coming banker to do?
From what we hear in the headhunting circles,
a lot of executives are crossing borders to hunt
for the next big wave. American bankers are
looking to move to Europe, European bank-
ers to Asia, Indian bankers to Singapore and
Malaysian bankers to the Middle East.
That does not mean the core issues will go
away. Dodgy deal-making, a blatant disregard
for rules, inscrutable locals, constantly mov-
ing goalposts and rubber time are part of
everyday business in parts of Asia.
Banking in Asia is still a work-in-progress
in many respects. But given the grim outlook
for Western economies for the next couple
of years, this regions potential upside and
burgeoning consumer market may still prove
attractive to many. <
Titien Ahmad
2 y February 2011 www.vrl-fnancial-news.com
Citibank India Banking & Payments Asia
fraud
A
n alleged scam at a Citibank branch
in the Indian city of Gurgaon has
brought Indias wealth management
industry under the microscope.
As the legal process to prosecute former
Citi relationship manager (RM) Shivraj
Puri begins, the talk in the market is not
only around Citibanks Indian operations
but also possible repercussions to one of
the fastest growing wealth markets in the
world.
A spokesperson for Citibank told BPA:
We recently initiated an investigation
into a certain set of suspicious transactions
based on documents forged by an employee
involving a few accounts in our Gurgaon
branch.
We immediately reported the matter to
all the relevant regulatory and law enforce-
ment authorities. Identified suspicious
transactions have been isolated and we are
providing full assistance to the authorities in
their investigations.
This issue does not impact other
accounts, transactions or customers of the
bank.
Subsequent to our complaint naming the
involved employee and other external indi-
viduals who appear to be perpetrators in
these suspicious transactions, the Gurgaon
police has registered a First Information
Report.
The bank has promised to compensate
investors that were caught in the fraud
scheme.
We have since been in contact with our
impacted customers and are committed
to safeguarding our customers legitimate
interests.
During this interim period, we have been
reconciling amounts involved with impact-
ed customers and are now commencing the
process of working towards a fair compen-
sation for them, added the banks spokes-
person.
The circumstances of the scam have been
well-documented in both local and foreign
media but questions remain over the impact
from the scandal fall-out. How will this
impact Citibanks reputation in India and
its operations?
What will be the larger repercussions on
the wealth management industry in a mar-
ket with the second highest growth rate in
the world?
asystematicissue
Sam Luft, chief executive officer of Glo-
bal Economic Investments, a consultancy
focused on the private banking and wealth
management sector, believes that this issue is
systemic and needs to be addressed urgently.
The Citibank India investment debacle is
not unique to any one financial institution
or country, but is something that unfortu-
nately has been increasing in severity glo-
bally over the years, Luft said.
Luft outlined the major players that will
need to take an active role in addressing
potential fraud.
A major step needed to correct these
type of fraudulent activities will be greater
education and training of personnel at all
levels of the financial institution, Luft con-
tinued.
As trading vehicles become more compli-
cated and complex, both external regulators
and internal compliance must be trained and
given the tools to detect unusual activities in
clients portfolios.
I believe it will be prudent on the Indian
regulators to ensure that all financial insti-
tutions dealing with clients' assets have the
necessary technical and operational exper-
tise in house and training is an on-going
process.
Unless this type of activity is coordinat-
ed between external regulators and internal
management as the complexity of global
asset management increases, the risk of
fraudulent activity increases, he added.
According to a seasoned industry observ-
er who has been with the private banking
industry in Asia for more than 20 years.
This is not the last chapter in the book
and most likely just the beginning, the
observer said.
We cant compare the compliance in
New York versus Dubai versus Mumbai.
Offshore regulations are more stringent but
it is a different story onshore.
This will catch a lot of press from now
until June but thats the price of doing busi-
ness in India.
likelytoaffectrevenueinnear-term
While Citibanks solid brand and financial
strength will be able to see it through the
ongoing investigations and relentless media
spotlight, the short-term impact on its India
operations should not be discounted.
In a statement to the media, ratings agency
Fitch said: The fraud in the wealth man-
agement business of Citibank Indias Gur-
gaon branch will not have any impact on the
branchs national short-term rating. The rat-
ing continues to factor in the financial profile
of the parent of which the branch is a part,
supported by the well-established funding
franchise of the banks operations in India.
However, the impact from adverse media
coverage can affect the banks reputation
and consequently revenue in a business
where trust and confidence is paramount.
Fee income accounted for up to eight per-
cent of Citibank Indias net income in the
financial year to March 2010 while funding
costs may be affected if investors were to
withdraw their funds.
Citi scam highlights regulatory loopholes
Citibank Indias alleged $86 million fraud throws a spotlight on the gaps in the regulations around
investment advisory services in the worlds second-fastest growing wealth market. The industry is left
wondering whether the fraud will tarnish Citis and Indias reputation or if the damage will be short-lived
n citiFraudvictims
Puris prey
The 40 clients whose funds were diverted
by Puri into the account of his relatives
included:
client amount($m)
Hero Exports 21.2
Munab Braej 15.5
Spaid 13.5
Aero Infratec 5.4
Satyam Auto 5.4
Mayar Infratech 5.2
Hero Corporate Services 3
Karopat Pad 1.7
Rekha Munjal 1
Source: BPA
February 2011 y 3 www.vrl-fnancial-news.com
Citibank India Banking & Payments Asia
fraud
Any erosion of investors confidence
could slow down growth or even reduce
profits in this business, particularly if some
of the existing clients choose to exit, the
Fitch spokesperson highlighted.
Investments in improved surveillance
and processes would also affect profitabil-
ity.
Increased costs either due to investment
in risk mitigation or compliance will have
an impact possibly not just on Citibank but
also other financial institutions in India.
According to a market observer: Finan-
cial stocks or investor confidence has not
been affected but I would expect to see more
regulations around wealth management.
The increased cost of compliance will affect
the short-term profitability of the sector.
regulationssorelyneeded
Presently, there are no specific regulations
for wealth management for high net worth
individuals (HNWIs).
These come under general standards for
portfolio management services that and
are within oversight of the Securities and
Exchange Board of India (SEBI), a capital
markets regulator.
Deepak Parekh, chairman of Indias sec-
ond-largest private bank, was reported to
have blamed the lack of guidelines in an
industry that services one of the fastest-
growing HNWI segments in the world.
Wealth managers and companies man-
aging wealth for other people have mush-
roomed and there are no guidelines for
that, Parekh told reporters at the sidelines
of a conference.
I think the government will come out
with guidelines for the industry. The coun-
try should have a good system and audits
in place to prevent the recurrence of such
frauds.
The scam has prompted Indias banking
regulator, the Reserve Bank of India (RBI) to
review existing procedures for the portfolio
management services of banks.
The present standards do not clearly dis-
tinguish between investment advisory and
non-discretionary portfolio management
services an issue that will be addressed
with the revised guidelines.
Now that the RBIs inspection report on
the Citibank fraud is ready, RBI is planning
to put together a comprehensive report on
the loopholes found in current guidelines.
The board for financial supervision will
then discuss the report and revise guidelines
based on feedback.
Guidelines are to be expected for relation-
ship managers even though there are none
currently.
The lengthy process of revising and form-
ing guidelines may affect some government-
owned banks that were planning to offer
portfolio management services as they
would now have to wait for revised regula-
tory policies before starting operations.
Given that the high growth rates of Indias
wealth market is likely to continue, proper
legislation is a necessary foundation to pro-
vide a sound structure and support future
growth. <
Armed with a fake circular from the
Securities and Exchange Board of India
(SEBI), Shivraj Puri, a relationship
manager with Citibank India, approached
investors claiming he operated a custodian
account. He lured them with promises of
high interest rates, of up to 36 percent.
The duped investors agreed to park their
funds in a scheme recommended by Puri,
which he diverted into trading accounts
held by his relatives in brokerage firms
Normans Martin Brokers Private Limited
(firm owned by his father, Raghuraj Puri),
Religare and Bonanza. His grandparents
Prem Nath, Sheila Nath and his mother
Deeksha Puri are also alleged to have been
involved.
In December 2010, Puri was exposed after
the Citibank Gurgaon branch received
several queries from customers about the
SEBI-sanctioned high-interest schemes.
Citibank began probing high-value
transactions from some accounts.
The head of the Gurgaon branch, Amit
Zarpuri, and investment counsellor Nitin
Chawla allegedly received kickbacks from
Puri totalling $67,900. Sanjay Gupta, an
assistant vice president of the Hero Group,
along with Ganpat Singh and Gaurav Jain
who worked in the accounts department,
are named as major suspects.
SEBI is investigating whether stockbrokers
collected Puris income proof documents,
a mandatory requirement for trade in
the derivatives market. In its preliminary
probe, SEBI found lapses on part of the
brokerage firms in collecting all the
required financial documents from Puri
and others through whose accounts he
invested in stock market.
The Reserve Bank of India (RBI) is
questioning whether Citibank allowed
these accounts to be opened after
following the mandatory KYC (Know Your
Customer) procedures. These make the
verification of customer details such as
valid identity and residence proof with
documents like passports and utility
bills mandatory. Banks are required to
physically verify the identity and address
of customers.
RBI is also probing whether Citibank
followed Indias STR (suspicious
transaction reporting) procedures, which
require banks to immediately inform the
regulatory and enforcement agencies
about high-value and unusual transactions
in any of its accounts. <
n keydevelopments
How the fraud unfolded
Indian Wealth Management:
Strategies, Products and Players
A new industry report for the wealth management sector
For more information, please contact asiapacic@vrlnancialnews.com.sg
checks & balances Banking & Payments Asia
opinion
sanjaysingh,
vice-president,
business&
Financialservices,
Frost&sullivan
The recent fraud discovered
at Citibank in New Delhi
appears to be more of a one-
off case rather than some-
thing systemic nor raising
any doubts on the Indian
Banking structure.
Nonetheless, I think it
highlights two key issues
flexibility and importance
given to high performers in
areas like private banking
AND adherence to the risk
management processes with-
in an organisation.
Private sector banks in
India have very good risk
management processes. The
recent fraud may have been
avoided if the processes were
strictly implemented.
For example, many banks
have a mandatory vacation
time for all their employees.
While an employee is on his
two week break, he is not
supposed to work.
However with technology
tools like Blackberrys and
remote access, this hardly
happens.
Ideally such issues can be
unearthed during the audit
carried out within the man-
datory vacation time.
High performers in pri-
vate banks do have certain
privileges extended to them
including awards and huge
bonuses.
While it is only fair that the
high performers be rewarded,
it is also important for these
high performers as well as
their supervisors to drive the
message of integrity/ethics in
the way they do business.
There are currently limited
guidelines for wealth man-
agement in India.
Stricter regulations and
stronger internal checks and
balances will not only reduce
operational risks, but also cli-
ent risks as well for the banks
(and I understand banks are
following the Know Your
Customer norms very care-
fully).
The cl i ents/ customers,
especially high net worth
individuals, too need to do
their due diligence before
investing in schemes that
appear too good to be
true. <
Reducing the risk of staff fraud
Two senior industry players Frost & Sullivans Sanjay Singh and Himansho Kohli of Client Associates
give their opinions on the alleged Citibank India fraud by a member of staff and how private banks can
reduce their exposure to this risk. shubhreetk reports
himanshukohli,
Founderpartner,
clientassociates
The Citibank episode has taken
everyone by a surprise as the
element of trust has been dilut-
ed and also shows a systematic
failure at the institutions level.
To reduce the operational,
reputation and client risk pri-
vate banks should take the fol-
lowing steps:
Always have a four-eye
principle (two-member
team) of working on a rela-
tionship! Ensure that this
two-member team is not
the family members.
There should be an audit
report generated client wise
at a regular frequency which
compares the updated cli-
ent report with the back-up
data on investments.
No relationship manager
should be allowed to get
any blank forms/papers/
cheques signed from a cli-
ent. The Power of Attorney
if required from a client
should be very specific and
allows the bank to invest in
the schemes approved by
the Bank.
Most important is to build
the DNA which should be
more of advisory & client
centric. Besides this the
banker should look at this
profession as a long term
career option and not as a
sales job (where advisory
takes a back seat). The
way banks look at Know
Your Client, similarly they
should also follow a prac-
tice of Know their own
Relationship Manager who
advises the clients and see if
the RM is actually follow-
ing an advisory process or
just selling the products to
increase their incentive.
The whole focus should be
on quality where training
private bankers would play
a very critical role, advi-
sory process on selection of
products is very critical and
also the process/audit to
ensure if the advisory proc-
ess is followed is extremely
important.
I am sure these are the points
in the pitching book of all
private bankers but the most
important element is to build
check and balances and see if
they are actually followed. <
digest Banking & Payments Asia
news
payments
Gemalto launches new
NFC trial in Japan
Digital security software pro-
vider Gemalto has joined forces
with Japanese mobile opera-
tor Softbank Mobile to launch
a mobile contactless pilot in
Japan, which allows customers
the choice to pay via different
credit card accounts.
Softbank Mobile customers
will be able to use their mobile
phones to pay for goods and serv-
ices in convenience stores, fast-
food restaurants and theatres.
The programme allows users the
option to choose between two
Japanese credit card issuers
Orient Corporation and Credit
Saison.
The advent of NFC in Japan
will enable us to deploy mobile
contactless services in payments
and other domains, said Tan
Teck-Lee, president of Gemalto
Asia.
payments
MasterCard acquires
Travelex prepaid
programme
Travelex has sold its prepaid
card programme management
(CPM) to MasterCard for 290
million ($458 million) to accel-
erate investment in Asian and
Latin American regions.
Under the terms of the trans-
action, which is expected to
close in the second half of 2011,
MasterCard has agreed to pro-
vide programme management
services for the Travelex Cash
Passport prepaid card, which
is sold throughout Travelexs
stores and online channels.
Travelex CEO Peter Jackson
said: The sale of the CPM
will allow us to accelerate our
investment plans, particularly
in higher growth regions such as
Asia and South America, and in
the growing e-commerce chan-
nel.
Along with the agreed sum
MasterCard will pay for Trave-
lexs CPM, a further 35 million
has been promised by the card
association if certain perform-
ance targets are met.
payments
Maybank introduces
2-for-1 credit card
Malaysia-based Maybank is
aiming to attract half a mil-
lion new credit card customers
by the end of 2011 with a new,
two-for-one product: Maybank-
ard 2 Cards.
Maybank is offering two
credit cards one issued by
American Express, the other
by MasterCard with a single
application.
The offer is part of the banks
strategy to grow credit cards
issuance by 20 percent by the
end of June, although it did not
disclose how many cardholders
were signed up with the bank
already.
The two-for-one credit card
deal offers a rewards pro-
gramme, a 5 percent cashback
at weekends and an interest rate
of 8.88 percent per year on out-
standing balances.
Customers will have a choice
of gold and platinum cards and
be able to use the banks online
banking channel. Maybank will
launch an advertising campaign
in 2011 to promote the cards
launch.
strategy
OCBC seeks retail
growth in Malaysia
Singapore-based OCBC Bank is
looking to grow its retail bank-
ing business in Malaysia and
generate 40 percent of country
revenue from its retail unit by
2014.
Retail banking currently
accounts for 27 percent of
Malaysian revenue. But the
director and chief executive of
OCBC Bank Malaysia, Jeffrey
Chew, told local media that the
bank saw tremendous opportu-
nity to grow the consumer busi-
ness.
Chew said that the bank had
invested heavily in customer
relationship management tools,
product deployment and deliv-
ery, and driving down costs in
2010.
He added that the bank aims
to gain a greater market share
both in the retail and in Islamic
banking segment; the bank cur-
rently has a market share of 5
percent in each segment.
In Islamic banking, OCBC
aims to grow the segments con-
tribution to Malaysian by three
percentage points to 10 percent.
OCBC will expand its Malay-
sian-based Islamic subsidiary,
OCBC Al-Amin, by opening
new branches and rolling out
new products.
Malaysia accounts for one-
fifth of OCBC group turnover
and is the lenders biggest market
outside Singapore.
strategy
Korean banks bid for
troubled Samwha
Three South Korean banks are
eyeing up troubled Samwha
Mutual Savings Bank (Samwha),
which was suspended from
operating because it did not
meet regulatory capital require-
ment levels.
Woori Financial Group, Hana
Financial Group and Shinhan
Bank have all reportedly sub-
mitted their letters of intention
to bid for Samwha, according
to the Korea Deposit Insurance
Corporation (KDIC).
The KDIC suspended Samwha
Mutual Savings Banks opera-
tions for six months on 14 Janu-
ary, after the bank failed to meet
regulatory capital requirement
levels.
The suspension comes as part
of the government initiative to
strengthen the countrys bank-
ing industry, as Koreas savings
banks continue to suffer from
toxic loan books following
excessive financing in the real
estate market during the pre-
2008 property boom.
The official bidding is set to
commence in mid-February and
the government is looking to
select a buyer by the middle of
March.
strategy
Citi rolls smart banking
branches in Hangzhou
Citibank continues to roll out
more smart banking branches
in its key markets and has added
the Chinese city of Hangzhou to
its list of cities with the state-of-
the-art branches.
The launch of the branch fol-
lows those in New York, Tokyo,
Bucharest, Hong Kong and Sin-
gapore.
The chief executive of Citis
China business, Andrew Au, said
that business in China was per-
forming strongly and that the
bank would continue to expand
in the country.
We will continue to execute
on our growth plans in support
of our wide cross section of cus-
tomers in China, he said.
Citi said that Hangzhou was
one of the countrys most flour-
ishing cities.
The smart banking branch
features Wi-Fi, interactive touch
screens, the Citi work bench,
Citi Assist (a video conferenc-
ing service customers can use to
communicate with Citibank spe-
cialists at another location on a
real-time basis via video phones)
and an internet kiosk, which has
state-of-the-art computers to
access external websites.
strategy
Vijaya Bank remittance
service for NRIs
Indias Vijaya Bank has partnered
with digital payment software
provider TimesofMoney in a
bid to offer an online remittance
platform to its migrant workers
around the world.
The deal is part of Vijaya
Banks strategy to strengthen its
relationships with its customers
who are non-residents of India
(NRIs).
Using the banks website, the
NRIs will be able to transfer
money online from 22 countries
using TimesofMoneys branded
remittance service.
The two parties have also
joined forces to introduce Vijaya
Banks customers to a new online
payment gateway solution.
The service, provided by
TimesofMoney, will allow Indian
consumers to use their internet
banking facility to shop while
online in a safe and seamless
manner, claims the bank. <
payments processing Banking & Payments Asia
China
W
ith its vast population, massive
cash economy and untapped cred-
it cards potential, China has long
been heralded as the biggest pay-
ment cards market of the future.
Its recent growth has been phenomenal,
especially as some observers only a decade
ago did not think that China would be able
to develop a healthy cards market. Debit card
usage has been booming, along with the devel-
opment of the domestic payments network
China UnionPay (CUP).
For foreign players looking to get a piece of
the pie, however, the excitement has waned.
The buzz about Chinas boom has passed
and foreign executives who have been trying
to break into the rapidly developing market
are now beginning to sound jaded and almost
defeated.
Conditions are becoming increasingly dif-
ficult for foreign players, particularly in the
processing market, and almost impossible
for those who are attempting to go it alone
without the aid of a Chinese partner or co-
operating with CUP.
Executives of international companies argue
that there is not a level playing field in China,
and the dominance of CUP also known as
UnionPay means that the market is closed to
foreign entrants. The environment is becom-
ing much tougher, comments Huainan Zhao,
an associate professor of finance, and China
expert, at Nottingham University.
changingattitude
In the past, Zhao tells Banking & Payments
Asia, Chinese companies welcomed their
Western counterparts because they wanted
to gain their know-how. However, since the
financial crisis, the view of the international
landscape has changed.
Prior to the financial crisis, many US firms
did not focus on expanding outside their
domestic market because they thought that
they were the largest market in the world and
being successful in their domestic market was
everything, he says. The same is happen-
ing with China now they do not want to do
business with the outside, and they will not
invite the foreign competitors to come in.
Observers comment that as China grows in
its self-esteem, it has even less reason to allow
foreign competition into its borders. One
payments executive says that if companies
do want to do business in China, they could
be asked to hand over their technology and
expertise to their Chinese partners first.
While the door is closed on the process-
ing market in China, and CUP maintains its
monopoly, the Chinese network has been able
to expand its international acceptance beyond
Chinas borders.
International payments executives feel
aggrieved that CUP has been able to compete
in the international marketplace and develop
its business, yet there has been no reciprocity
when it comes to foreign companies entering
China.
When China joined the World Trade
Organisation in 2001, it signed an agreement
to open up its borders to foreign competition
and pledged to allow players in the payments
world, as well as other industries, to enter the
Chinese market. So far this has not happened
and CUP remains the only processor of pay-
ments within China. These concerns prompted
the US trade representative to file a trade com-
plaint with the WTO in September 2010. The
companies reported in the press to have initiat-
ed the complaint were Visa, American Express,
MasterCard, Discover Financial Services and
First Data. There is a high degree of sensitiv-
ity around the issue and for this reason many
industry executives did not want to be quoted
when commenting on the current state of the
market.
CUP is Chinas only domestic payment
network and foreign players are not allowed
to issue, or process, cards in Renminbi. This
leaves few opportunities for foreign compa-
nies hoping to issue, accept or process under
their own brands.
The only option for the international net-
works such as Visa, MasterCard, Ameri-
can Express and Discover has been to
enter into partnerships whereby the cards
are co-branded. The major banks in China
have issued a number of dual cards that carry
both the UnionPay logo alongside that of the
international acceptance brand, such as Visa.
The card is processed on the CUP network
for transactions within China, but once the
cardholder travels overseas the payments are
processed on the Visa network, for example.
However, as CUPs international acceptance
network has grown, this arrangement has been
the cause of disputes. There were reports that
these co-branded cards were being processed
on CUPs international network for transac-
tions outside China. Visa, to protect the trans-
actions that should have occurred on its inter-
national network, reportedly placed a ban on
this practice. News outlets reported that Visa
threatened to fine any bank that processed the
international transactions of these co-branded
cards on the CUP network instead of Visas
network.
Despite these difficulties, however, and the
fact that the international networks are unable
to process transactions domestically in China,
the co-brand partnerships are still a profitable
venture.
The increasing number of Chinese travellers
overseas means that the co-brand deals have
added a large volume of transactions onto the
Visa, MasterCard and American Express net-
works.
Signing such agreements with CUP has been
the main way for networks to take a slice of
the growing market share of the growing Chi-
nese payments industry.
Likewise, PayPal entered into a co-opera-
tion agreement with CUP, which means that
CUP cardholders are able to use their cards
where PayPal is accepted.
This opens up the payments market to
international merchants who trade on eBay,
for example, and would not be able to accept
CUP transactions themselves. Through the
agreement between CUP and PayPal, those
merchants are now able to accept payments
Here be dragons
China is a payments market with vast untapped potential. But, after a period of welcoming co-operation with
western banks and processors, the market is proving diffcult to penetrate. Chinese banks and China UnionPay
have been unwelcoming to foreign investment. Janecooper asks whether this could damage the market
n china
shapeofthecardsmarket(2009)
bankcardsinissue:1.89 billion
debitcards: 1.74 billion
creditcards: 150.5 million (8%)
POS terminals: 1.84 million
atms: 167,500
issuingbanks: 196 (2008)
Source: Peoples Bank of China
payments processing Banking & Payments Asia
China
from CUP cardholders through the US-based
network.
Such agreements are common for the inter-
national networks. In November 2010, Amer-
ican Express announced that it is expanding
its agreement with CUP and signed a memo-
randum of understanding that would allow
the companies to explore the expansion of
their current cooperative activities.
Exactly what this will entail, and what busi-
ness opportunities would hopefully emerge
from such an agreement, was not revealed.
Some industry observers, however, remain pes-
simistic about the ability of any foreign com-
pany to operate freely on its own terms in the
Chinese market. What the agreement could
mean for Amex is an increase in transaction
volumes on its network outside of China.
When asked to comment on American
Express challenges in operating in China, a
spokeswoman for the company responded:
American Express operates a partnership
model in China we have been able to grow
our card and prepaid business through part-
nering with local banks. Our business has
grown in line with our expectations.
MasterCard signed a memorandum of
understanding with CUP in September 2010,
with a similarly vague intention of establish-
ing a mutually beneficial relationship.
Ling Hai, MasterCard Worldwides divi-
sion president for Greater China, elaborated
on MasterCards business in the market.
China is an emerging market. For many
businesses in China, market entry can be
challenging. MasterCard established itself
in China over 20 years ago and we were the
first to launch a payment card in China. Since
then, MasterCard has been building its brand
and reach in China. MasterCards business
advantage is innovation. The penetration of
electronic payment is still relatively low and
cash is widely used, says Hai.
In a broader context, the biggest battle for
us is actually against cash. The opportunity
ahead is to demonstrate the benefits of using
a card the speed, the convenience and the
security. Consumers are increasingly recognis-
ing the value, both locally and overseas, hence
the payment card market is growing rapidly,
he adds.
These comments reflect the potential of the
Chinese market and how even the debit card
market has not yet fully developed, let alone
the credit card market.
For this reason, foreign companies are keen
to get into the market and grow their share,
but for now they are hindered from competing
on a level playing field because of the domi-
nance of CUP. For now, the only way com-
panies can compete in the Chinese market is
by entering into cooperation agreements with
CUP.
theprocessorsposition
The international networks are able to oper-
ate in the market because cards are issued
on their network albeit only for interna-
tional transactions through the existing
issuing banks in China. For compa-
nies, such as processors hoping to
enter the market without such
partnerships, it is much harder
to break into and compete in
the payments space.
Gaining a licence to operate
has been an uphill struggle for
processors, and industry experts
comment that it is almost impossible for a
processor to do it alone without the support
of a Chinese company.
Entry into the Chinese market has been very
much based on building relationships over a
number of years with local payments execu-
tives, and many expats are left frustrated by
their years of effort and the lack of progress
they have made in advancing in the Chinese
domestic market.
CUP is the only processor in the market,
despite a number of discussions of how the
market could be opened up to allow foreign
processors to compete freely and process
domestic payments in China.
CUP was established in 2002 by the Chi-
nese central bank as a means to establish a
unified interbank network. With this, heritage
has effectively been state-sponsored which has
thus made it difficult for international compa-
nies to compete.
technologytrouble
While the domestic processing market remains
closed to outsiders, the cards market in China
is in danger of becoming stagnant in terms of
the development of its technology.
One executive says the infrastructure is
lacking in sophistication and there is not the
established internet protocol (IP) processing
infrastructure that would be found in other
markets. One large international retailer, for
example, had to build its own processing net-
work before it was able to accept payments in
China, whereas in other markets it would plug
into an existing infrastructure.
The processing technology is in danger of
not being developed if there is no pressure
from competitors to make things better. The
same executive adds that the systems that
have been built are not necessarily the best
and most effective, but rather the cheapest and
the quickest to put in place.
Professor Zhao says that CUP has no incen-
tive to innovate if there is no competition.
Many in the industry comment that competi-
tion would only improve the market by bring-
ing better payments infrastructure, new invest-
ment in technologies, and giving merchants and
consumers in Chi na
a choice.
For companies still
trying to crack the Chi-
nese market, their atten-
tions have focused on other ways
to build a profitable business in the region.
Acquiring processors, for example, may find
more opportunities in focusing on regional
retailers who have large outlets through-
out Asia, as well as China. This way the
processor has access to the Chinese mar-
ket, and is able to monitor developments
in the country, without relying on that
market for all of its revenue and future
business.
Even for those who are able to enter
the processing market in China, there
are some doubts about how successful
such players would be in building a profit-
able business.
At the moment, the vast majority of trans-
actions are made on debit cards, but the mar-
gins on these payments are likely to decrease,
comment observers. If interchange rates on the
cards continue to come down, it will become
difficult for those players to compete in the
market, even if they are able to gain access
to the Chinese payments industry.
The international networks continue
to see revenue come from their existing
co-brand agreements, allowing them
to get a share of transactions from
Chinese travellers making payments
overseas. However, those transactions
could be threatened as CUP continues
to build its international acceptance net-
work, which could outpace the growth of
its US-based rivals.
While the disputes and disagreements
about the status of CUP rage on, there are
varying degrees of optimism and cynicism
about whether the situation will improve for
the international players in China. Many are
hopeful about the opportunities that could
be developed, while others are more negative
and jaded about the opportunities for them in
the rapidly developing market. <
bank shares Banking & Payments Asia
performance
Another poor year, with few exceptions
Banking sector shares again performed poorly in 2010, underperforming global equities by a double digit
rate. With a few exceptions in the emerging markets, it was another year to forget. Looking ahead to 2011,
it is banks in these markets that are likely to offer superior growth prospects. douglasblakeyreports
n sharepriceperFormance
worldwideselectedbanksandtheirshare
priceperformance,31dec09-31dec10
name priceindex(%change)
Citigroup 42.90
Royal Bank of Scotland 33.80
Lloyds Banking Group 29.61
State Bank of India 23.86
JPMorgan Chase 1.79
Barclays -5.20
Royal Bank of Canada -7.23
HSBC -8.14
Deutsche Postbank -8.77
Bank of America -11.42
BNP Paribas -14.83
Crdit Agricole -23.10
Banco Santander -30.48
UniCredit -30.79
Bank of Communication -41.39
BBVA -43.63
Source: BPA
n marketsentiment
worldwidestockmarketperformanceofbankingindustriesin30selectedcountriesyearto31december2010
Source: BPA

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T
he worst-performing four markets
for bank shares in 2010 Portugal,
Ireland, Greece and Spain will raise
few eyebrows.
Macro economic storms are likely to
harm sector prospects in the short term in
the four markets, with bank sector perform-
ance likely to remain depressed.
The top four markets Sri Lanka, Argen-
tina, Taiwan and the Philippines are more
noteworthy.
Asia is expected to remain the fastest-
growing region in the world in 2011, with
GDP growth of 7.2 percent in 2011 help-
ing the majority of banks there to continue
experiencing top-line growth.
Banking sectors forecast to perform
strongly in 2011 include Indonesia and the
Philippines.
Low credit penetration, favourable
demographics and strong balance sheets
will all help to boost banking sector per-
formance in the emerging markets.
In the more developed markets, depressed
credit demand will remain a key issue in
2011.
Margin pressure is also expected to per-
sist while gloomy market expectations over
a return to dividend payments will all serve
to bear down on share prices.
In 2010, banking sector shares in the
UK and US recovered only modestly up
by 3.45 percent and 11.39 percent respec-
tively.
While US banks appear to be well fund-
ed and credit trends are improving, mar-
gin pressure and increased regulations are
expected to deter investors.
littletocheerinvestors
In particular, the impact of bearing down on
overdraft fees and a slower rate of mortgage
refinancing will adversely affect non-interest
income and provide hardly any cheer for
investors.
Mature markets which may offer better
prospects in 2011 include Canada the
sector is well capitalised and has a strong
record of capital distribution; higher divi-
dend payments are expected for 2011.
In 2010, BBVA, UniCredit and Santander
were among the worst-performing shares
out of a selected group of the worlds larg-
est bank stocks (see table, right).
With increasing concerns over Spains
sovereign debt, exposure to local govern-
ment banks and margin pressure, it is dif-
ficult to be positive about share price pros-
pects at Santander or peers Sabadell and
Banco Popular. <
corporate payments Banking & Payments Asia
strategy
S
trong balance sheets have given lead-
ing domestic banks the opportunity
to acquire other institutions, achieve
scale and invest in new services, and
payments are at the heart of these activities.
In the past, many of Asias emerging region-
al banks operated with semi-autonomous, in-
country frameworks that primarily serviced
local companies. Now, as banks and their
customers expand into different markets,
regional banks have recognised the need to
provide a more unified treasury management
solution.
Asian regional banks are no strangers to
competition from larger global players keen
to grow transaction banking business in the
region. However, these regional banks see
their core strengths in local relationships
and willingness to lend as major advantages.
Another benefit is that the foreign multina-
tional corporations that would previously
work with one lead bank from their home
market and use an Asian bank for local needs
are now diversifying.
The Asian corporate market is often
described as unsophisticated in comparison
to North American and Europe due to a
greater reliance on paper- and fax-based pay-
ment processes. The need to avoid time delays
in paper processing and payment authorisa-
tion between subsidiaries has significantly
increased the appetite for electronic payments.
Corporates are expecting the same level of
integration with their banks and online serv-
ices as global multinationals in the region.
Corporates are also demanding that their
banks help them achieve a greater understand-
ing of cash flow. For payments, particularly in
the SME market, the most pressing require-
ment is for notification of incoming payments
or receipt of payment by counterparty via
SMS and email alerts.
lowvaluepaymentsandremittances
South-East Asia and the Pacific are home to an
incredibly mobile workforce. The Philippines
and Indonesia are two of the largest sources
of migrant workers. The World Bank and the
G8 have been promoting programmes to help
reduce the cost of remittances for migrant
workers. But cost is also an issue for banks
wanting to get into this remittance market,
which has traditionally been dominated by
money transfer operators (MTOs) and infor-
mal channels.
Options for banks delivering remittance
services have traditionally included establish-
ing a proprietary network, building a bilat-
eral service with a correspondent or using
open correspondent banking arrangements.
But these are costly to maintain and scale. In
some countries banks have partnered with
MTOs in order to scale this part of their busi-
ness. But Asias regional banks have acquired
or grown operations in many of the countries
that make up key remittance corridors. Many
are therefore looking to use their regional
infrastructure instead of the MTOs to deliver
competitive services.
The potential reward for banks succeeding
in this strategy goes beyond the remittance
fees to encompass opportunities for gaining
both new worker accounts and employer
accounts.
alessfragmentedinfrastructure
South-East Asian countries are significantly
improving interoperability between their capi-
tal markets and Real Time Gross Settlement
(RTGS) system linkages. Hong Kong is the
major hub for RTGS and multi-currency set-
tlement. But for many banks, the use of CLS
Bank, SWIFT and traditional correspondent
banking relationships meets their cross-border
high-value payment needs.
Numerous developments are also underway
to increase the interoperability of low-value
payment systems across the region. Many
linkages between national ATM networks
have been put in place to make life easier for
tourists and migrant workers.
These are now being strengthened with the
potential for cross-border POS and low-value
funds transfers. Interestingly, the Asian Pay-
ment Network Forum says it will soon offer
cross-border funds transfer and e-POS serv-
ices, in addition to the existing cross-border
ATM cash withdrawals.
Another driver of interoperability of low
value infrastructures is the adoption of
SWIFTs low value clearing solution and pos-
sible use of the ISO 20022 message standard.
Work being carried out in Australia and New
Zealand will demonstrate how well this works
in practice.
movingtowardsthehub
Faced with growth pressures, customer
demands and new opportunities, banks
are increasingly looking to modernise and
improve their infrastructures. It is a complex
task when so many parts of the banks opera-
tions are running on legacy systems, making
investment prioritisation essential.
Many are now considering the payments
hub model for high value payments to support
their transaction banking business because
this promises a centralised infrastructure to
handle payment flows. It also offers genuine
flexibility and business functionality.
Low value payments, which are easier to
process by nature, are typically managed dif-
ferently in each country. Regional banks are
therefore increasingly interested in the con-
vergence of these onto a single hub. However,
the difficulties in managing processes, connec-
tions and rules for each market often mean
this is not an immediate priority. This is likely
to change as volumes grow and infrastructures
achieve more interoperability.
Whether banks begin the payments hub
journey with low-value or high-value pay-
ments, they must work with partners that
understand the intricacies of both and the
business process change required.
Banks in the Asia-Pacific must look at the
big picture for payments. Faced with growing
customer demands and business opportuni-
ties, creating a payments hub represents the
best strategy to overcome domestic and cross-
border payments challenges.
Its paramount that a payments hub is intro-
duced in conjunction with a fully coordinated
payments strategy. Without this, the hub
cant be fully exploited, further fuelling the
disjointed banking environment. By taking an
integrated approach to modernise operations,
banks in the region can realise a faster return
on investment and ultimately gain market
share from the larger global players. <
Richard Davies is director of APAC at Logi-
cas Global Products Business
Interoperability in Asia-Pacifc
The global fnancial crisis that rocked the US and Europe has left banks in Asia-Pacifc relatively
unscathed. When it comes to transaction banking for corporates, they are now well positioned to
battle global players for market share, writes richarddavies
analysis Banking & Payments Asia
news
Great Eastern Life Assurance Company
(GEL), Singapores largest and oldest life
insurer, made a significant move into Malay-
sias Islamic, Sharia law-compliant takaful
market with the launch of Great Eastern
Takaful in December 2010.
Great Eastern Takaful is a joint venture with
Koperasi Angkatan Malaysia Berhad, a finan-
cial services company serving the 140,000
regular, voluntary and civilian members of
Malaysias armed forces.
The launch followed the granting of Fam-
ily Takaful (life insurance) licences in Sep-
tember 2010 to GEL, Dutch insurer ING
Groep, Malaysian financial service company
AMMB Holdings and American International
Groups Asian unit American International
Assurance. American International Assur-
ance listed on the Hong Kong Stock Exchange
in October 2010.
Great Eastern Holdings chairperson Fang
Ai Lian said: Malaysia is a key and signifi-
cant market for the Great Eastern Group.
This makes it the perfect platform for us
to launch our takaful business. The market
penetration rate for the takaful business in
Malaysia remains relatively low.
She added that, as part of the GEL, Great
Eastern Takaful will be able to leverage on the
17,000 agents from GELs Malaysia distribu-
tion channel. GEL, which holds a market share
of over 20 percent in Malaysias conventional
life market, is targeting premium income
of MYR180 million ($57 million) from
Great Eastern Takaful in its first full year of
operation. <
companies
Great Eastern eyes Malaysias takaful market
Sweeping reforms to Australias A$1.3 trillion
($1.3 trillion) superannuation (super) market
are on the way, following the governments
acceptance in large measure of recommenda-
tions made by a committee chaired by a former
deputy chairman of the Australian Securities
and Investments Commission (ASIC) Jeremy
Cooper. Reforms are due to come into effect
in July 2013.
The government is acting to reduce the
unnecessary fees and charges on working Aus-
tralians retirement savings, and to remove
barriers to a low cost and efficient superannu-
ation system, commented Federal assistant
treasurer and minister for financial services
and superannuation Bill Shorten.
As an example of reform benefits, a worker
aged 30 can expect up to A$40,000 more in
retirement, according to the government.
The reforms, dubbed Stronger Super
reforms by the government, include the intro-
duction of a low-cost workplace default super
product called MySuper. Through the pro-
posed SuperStream package of measures, it
is also intended to slash costs of processing of
super transactions.
The superannuation industry processes an
estimated 100 million transactions a year at a
total cost of A$3.5 billion, said Shorten. He
added: Contributing to this inefficiency, each
working Australian has, on average, three
superannuation accounts.
Another key feature of proposed reform
is the banning of fees charged to super fund
members for compulsory financial advice
which a large proportion of members never
use.
Supporting its aim to cut super fund mem-
bers costs, the government proposes to
increase surveillance of trustees with addi-
tional powers, in this respect, to be given to
the ASIC, the Australian Prudential Regula-
tory Authority and the Australian Taxation
Office.
The government estimates that efficiency
improvements will eventually save super mem-
bers A$2.7 billion a year in fees, while overall,
it predicts that supers will have total assets of
A$6.2 trillion by 2036, of which A$550 bil-
lion will result directly from reforms.
Commenting on reforms, the Institute of
Chartered Accountants head of superannua-
tion Liz Westover said changes to the super
system over the last 20 years have unsettled
fund members and eroded confidence in the
super system.
What we have now is a firm commitment
to superannuation reform in the best interests
of Australians saving for their retirement, she
said.
Also enthusiastic was super industry
body Industry Super Network CEO David
Whiteley.
He commented: MySuper prohibits some
of the most inappropriate practices in our
compulsory system, such as payment of com-
missions to financial planners where no advice
is provided, flipping, and the payment of
commissions by members for financial advice
given to employers.
Flipping refers to a practice by corporates of
shifting people into personal super accounts
with higher fees when they leave their jobs.
However, Westover stressed that while super
reforms are a good start, serious tax issues
must be resolved. The government acknowl-
edged this in its reform proposal report, not-
ing that more than 3 million low- and middle-
income earners obtain no tax concession on
their mandatory super contributions, with
some of the lowest income earners paying
more tax on their contributions than on their
ordinary income.
The report added that under the existing
regime, the largest tax concessions typically
accrue to the highest income earners.
However, reform is just one aspect of the
super system that is attracting attention in
Australia. Also under the spotlight is the use
to which super members, particularly the less
affluent, are putting funds obtained from their
super investments. Regrettably, the picture is
bleak, according to a study by Industry Super
Network.
Specifically, Super Network found that
only about 12 percent of households with less
than A$100,000 in super-derived retirement
savings make any allocation to pension prod-
ucts, and in this savings range the allocation
represented around 5 percent of savings on
average. <
pensions
Australia embarks on reforms to superannuation market
Source: Australian Prudential Regulation Authority; Australian
government
n superannuationmarket
totalassets(30June)
0
300
600
900
1,200
1,500

A$n
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
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0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
news
eXpansion
HSBC continues Asia
expansion in Vietnam
HSBC continues to expand
in Asia and has opened two
branches in southern Vietnam.
The banking giant now has 17
branches in the country.
The bank said that one of the
branches, based in the city of
Dong Nai, was the first branch
in the city to be operated com-
pletely by a foreign lender.
The bank also said that the
branch will offer business prod-
ucts and services as well as cater
for retail banking customers with
personal financial services.
Another branch, based in Phan
Dang Luu, will run as HSBC-
HCM City Branch. Earlier this
month, HSBC announced that
it would target a growth in its
retail banking business in Thai-
land following the local govern-
ments easing of its restrictive
banking rules.
eXpansion
Korean bank Hana
to increase China
presence
South Koreas fourth largest
lender by assets, Hana Financial
Group (Hana), has announced it
is collaborating with China Mer-
chant Bank (CMB) to strengthen
its business in China.
A statement issued by Hana
said that the co-operation agree-
ment was part of the banks strat-
egy to grow global sales.
The partnership with Chinas
sixth largest bank by assets will
cover all areas, including retail
banking, with a particular focus
on growing Hanas credit cards
business in China.
Hanas credit card unit, Hana
SK Card, will eventually form a
synergy with CMB, which has a
23 percent market share in the
sector in China.
Although both lenders agreed
to invest in each other, CMB will
not participate in Hanas financ-
ing of a 51.02 percent stake in
the Korea Exchange Bank, esti-
mated to be around KRW4.69
trillion ($4.2 billion).
Hana has already financed
KRW3.49 trillion of the deal and
is looking to raise the remaining
capital by issuing common and
preferred shares to complete the
takeover in February.
eXpansion
ICBC bids for US-based
Bank of East Asia
Industrial and Commercial Bank
of China (ICBC), the worlds
largest lender by market cap, has
become the first Chinese bank to
acquire a US-based retail bank,
Bank of East Asia.
ICBC will pay about $140
million for an 80 percent stake
in Hong Kong-headquartered
Bank of East Asias US subsidi-
ary, and acquire 13 branches in
New York and California. ICBC
already owns 70 percent of Bank
of East Asias Canadian subsidi-
ary, which has six branches.
This will not be the first
attempt by a Chinese bank to
acquire a US-based lender.
In 2008, China Minsheng
Banking Corporation (Minsh-
eng) made a bid to increase its
9.9 percent stake in United Com-
mercial Bank (UCB), based in
California, to become a majority
shareholder, but US regulators
rejected the deal.
eXpansion
French lender BPCE
Asia and Africa move
Frances BPCE, created by the
merger of Banques Populaires
and Caisse dEspargne in 2009,
is to expand in Africa and East
Asia through organic and inor-
ganic growth.
The bank is shifting its retail
banking business focus on emerg-
ing markets as higher capital and
liquidity reserves required under
Basel III are straining its domes-
tic retail banking operations.
The chief executive Francois
Perol said that the banking sec-
tors in Western and Central Afri-
ca and East-Asia provided more
business potential with faster
and stronger growth.
The bank has 8,200 branches
and 37 million customers in
France.
BPCE already has operations
in Cameroon, the Congo, Tuni-
sia, Morocco, Mauritius and
Madagascar.
BPCE said that it has a budget
of 1 billion for acquisition, but
might raise this if needed.
eXpansion
ICBC makes push into
Singapore
Industrial and Commercial Bank
of China (ICBC), the biggest
bank by market capitalisation
worldwide, has applied for a full
banking licence in Singapore.
If ICBC gets the approval from
the Monetary Authority of Sin-
gapore, it could set up branches
and ATMs across 25 locations
across the country and become
the first Chinese bank with a full
banking licence in the country.
ICBCs Singapore unit said it
plans to introduce a credit card
and accept more retail deposits
in the Chinese currency yuan.
Its push into the Singapore
market comes after China Con-
struction Bank (CCB), the second
biggest bank by market capitali-
sation in the world, upgraded its
banking licence in Singapore to
wholesale in 2010.
But unlike ICBC, CCB is not
planning to expand into the
retail segment in Singapore for
now, instead pushing into private
banking.
regulation
RBI backs local
incorporation for
foreign banks
A discussion paper from the
Reserve Bank of India has con-
cluded that local incorporation
for international banks provides
more effective control in any
future banking crisis.
To encourage lenders to oper-
ate wholly owned subsidiaries
instead of operating India-based
branches of a foreign bank the
government proposes to exempt
conversions to a local subsidiary
from capital gains tax.
There are currently 34 foreign
banks with branch networks in
India. Combined, the 34 interna-
tional lenders assets accounted
for about 7.65 percent of total
sector assets as at 31 March
2010, down from 9.03 percent
the prior year.
Current Indian regulations do
not permit an international lend-
er to own in excess of 5 percent
of a local bank.
strategy
ANZ set to upgrade
website
Australia and New Zealand
Banking Group (ANZ) has
announced that it will be spend-
ing $100 million to improve the
functionality of its online plat-
form.
The revamp of the banks
online offering is an aggressive
initiative to create and generate
more online sales, the bank said.
ANZs chief executive Mike
Smith has mentioned upgrad-
ing the online platform since he
came into the office in 2007.
The revamp is expected to
begin this year and may last up
to three years, the bank said.
ANZ also announced that it
will target growth in the high net
worth client segment.
insurance
CIMB Thai agrees
Thai Life Insurance
bancassurance deal
CIMB Thai bank (CIMBT) has
agreed a ten-year bancassurance
deal with Thai Life Insurance to
offer insurance policies via the
banks multi-channel banking
services.
CIMBT will offer Thai Life
Insurances services and policies
in the banks branches, ATMs,
online banking and mobile bank-
ing channels.
The deal is an opportunity
for CIMBT, a subsidiary of
CIMB Group, to expand its
bancassurance business, the
bank said.
CIMBT said it is targeting
income from the bancassurance
business to contribute 20 per-
cent to the banks fee income in
2011.
On a separate topic, the bank
announced that it will roll out
credit cards that feature a full-
range of financial offerings. <
mergers & acquisitions Banking & Payments Asia
strategy
T
he pursuit towards global growth
for Asian banks is the basic rationale
behind most cross border M&A activ-
ity. With increased competition, it has
more or less become a necessity for banks to
have a solid set up across geographies. But
starting a new set up from scratch in an unfa-
miliar territory is tough due to changing regu-
lations, difficulty in obtaining licences and
high costs. Hence, a merger or acquisition is a
viable solution in such cases.
According to Li-May Chew, associate
research director at IDC Financial Insights
Asia-Pacific: There is a strong push factor for
outbound cross-border geographic expansion,
especially for Asian institutions attempting to
venture into neighbouring.
These markets may be exhibiting expo-
nential growth, but unfortunately, still present
difficulties for new players to get business
licences and a foot into the door in terms of
an entrenched branding.
As such, acquisition of already established
local peers would provide for a quicker point
of market entry in these instances whereby
organic growth is not financially viable, or
too painstakingly long.
acquiringcapabilities
It would be much easier for a bank to gain
expertise and enhance their skill-set via an
overseas M&A rather than develop it organi-
cally.
According to PwC report, What Lies on the
Horizon? New Players New Rules New
Opportunities, financial institutions across
Asia-Pacific face some prevailing growth
inhibitors including shortage of employees
with the appropriate skill-sets and limitations
stemming from a lack of investments and
efficiencies in technology platforms to support
evolving business requirements.
Asian banks are either buying in order to
become a main stream bank in a market they
consider critical or they are buying to augment
a needed but lacking expertise, explains
Johnson Chng, Bain and Companys leader
for Greater China.
The right acquisition can enable a bank to
offer a wider array of products and services to
its customers.
In some cases, an Asian bank may embark
on an adventurous M&A because a good
opportunity has presented itself. Given the
devaluations of some Western banks during
the financial crisis, such opportunities came
to light.
A good example would be Nomuras acqui-
sition of Lehman Brothers in Europe.
On one hand, it showed the need of Asian
banks to step up their expertise and take
advantage of a good opportunity; and on the
other hand, it also exposed the challenges in
integration between the Asian and Western
cultures, says Chng.
Chew expects more such opportunistic tac-
tics to come into play going ahead.
There are several Asian players that are
highly capitalised and cash-rich, and foreign
institutions exiting from this region would
provide these Asian behemoths with potential
acquisition opportunities, says Chew.
However, building a strong case for a well
planned investment is not as easy as it seems.
M&A deals are notorious for falling short
of value creation expectations. Cross border
M&A deals tend to pose greater challenges
than domestic deals.
challenges
Changing regulations is an on-going challenge
for many banks. With governments across the
region looking to protect the interests of the
domestic corporate sector, the guidelines for
M&A are becoming increasingly stringent.
The bigger the deal, the tougher it may be to
pull off. Sizeable deals lately have started rais-
ing eyebrows and end up coming under the
regulators microscope.
According to Chew: Cross-border acquisi-
tions for sizeable deals could raise concerns
from local regulators regarding issues such
as loss of price competition and consequen-
tial job losses. This could result in regulators
imposing specific measures [such as permissi-
ble limits to job cuts] or a veto of the proposed
merger.
Operational issues include lack of reli-
able and sufficient information to conduct
a fair valuation, difficulty in extracting cost
synergies and smoothly integrating opera-
tions. Chng states the ability to integrate and
retain talent as the biggest challenge that a
bank faces during a cross border acquisition.
According to the PwC report, once a tar-
get is marked for acquisition, danger during
execution lies in oversimplifying the valuation
process when acquirers, in their enthusiasm
to seal a deal, push aside doubts, or sacri-
fice steps within the due diligence process. A
good deal can sometimes turn into an ordeal
if acquiring companies get caught up in the
need to close the deal at all costs, and not heed
warning indicators.
The report also states the dangers of mis-
alignment between the perceived values of
buyers and price expectations of sellers -when
this chasm is too wide to bridge, arriving at
a consensus, fair pricing, and determining
what each party gets out of the consolidation,
becomes a challenge.
Complex cultural challenges are always
expected by both parties during overseas
deals.
Cultural differences, clash or resistance
can definitely throw a spanner in the works
the cultural factor may be seen more as a
soft issue but could turn out to be the most
challenging to resolve, says Chew.
A collision of corporate cultures could
mean staff not fitting into the new corporate
culture and result in an exodus of talent. This
in turn, could lead to disruptions in produc-
tivity during the transitional period, higher
than intended expenses from having to pay
for severance packages and new recruitment,
and shake shareholder and consumer confi-
dence.
m&aactivityexpectedtogainpace
The pros of an overseas M&A for Asian banks
will far outweigh the cons and the region is
expected to see an increase in such activities by
Asian banks. With the return of consumer and
business confidence, banks are placing more
importance on new avenues of growth instead
of just focusing on business-as-usual.
Most industry experts expect M&A activity
in the region to grow in the next 12 months.
The formation of super-regional institutions
and aggressive market share battles will
encourage banks to actively step up their
acquisitive ventures. <
Asian banks go bigger and bolder
The outlook for the mergers and acquisitions landscape among Asia-Pacifc banks looks a lot busier once
again. With many institutions looking for global expansion following the fnancial crisis, expectations of
increased cross-border activity in the next 12-24 months are high. shubhreetk reports
Financialservicesprofessionalsacrossthe
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China Banking & Payments Asia
country
review
W
hile no one expects entering a
market dominated by established
players to be easy, foreign insur-
ers in China appear to be finding
the going tougher than they had imagined.
This comes through strongly in a survey by
PricewaterhouseCoopers (PwC), Foreign
Insurers in China.
Significantly, PwC found that all 21 for-
eign life insurers and 10 foreign general
insurers that participated in its survey have
dramatically lowered their expectations
of any increase in market share for 2010
and for the next three years.
Life companies expect their total market
share to continue to hover at the current
level of 5 percent in 2013, while general
insurers expect their total market share to
remain at around 1 percent in 2013.
PwC noted that this is a dramatic
reduction in expectations compared with a
survey it undertook in 2009, which found
that private life insurers expect their com-
bined share of Chinas life market to reach
8 percent in 2012.
A PwC survey conducted in 2008 found
that foreign life insurers were looking to
achieve a combined market share of 10 per-
cent in 2011.
Foreign life insurers enjoyed their highest
market share in 2005 when their combined
premium income stood at some CNY32 bil-
lion ($4.8 billion), 8.9 percent of the total.
stiffdomesticcompetition
Foreign insurance companies operating in
China have tried in vain to gain traction and
increase their market share, commented
PwC insurance industry leader for Hong
Kong, Peter Whalley.
He added: Established domestic insurers
and the aggressive geographic expansion of
the smaller insurers are giving the foreign
players a run for their money. Because of
the stiff competition, some foreign partners
are considering diluting their shareholdings,
and looking towards domesticating their
operations.
Indicative of the gulf between foreign and
domestic life insurers, the largest market
share held by a foreign player in the first
half of 2010 was 0.69 percent by Generali
China Life. By comparison, domestic indus-
try giant China Life held almost a 38 per-
cent market share, second runner Ping An
held an 18.3 percent share, and third in line
New China Life held a 10.3 percent share.
Generali China Lifes market share ranked
it joint 12th among all 55 life insurers in
China.
PwC actuarial practice leader for China
Shu-Yen Liu said: In the post-financial cri-
sis era, many European insurers have been
forced to re-examine their China positions.
Other foreign players that have been in the
market long enough and have failed to gen-
erate satisfactory profits are also taking a
long, hard look at the future feasibility of
their relationships with the local partners.
A number of moves in this respect have
already been seen by foreign players. In July
2009, Canadian insurer Sun Life Financial
and state-owned conglomerate China Ever-
bright Group announced a restructuring of
their Chinese joint venture (JV) Sun Life
Everbright Life. This entailed the introduc-
tion of new strategic investors to Sun Life
Everbright, a move aimed at more than dou-
bling its registered capital to about CNY3
billion and reducing Sun Lifes equity stake
in Sun Life Everbright from 50 percent to
20 percent.
In December 2009, ING Group followed
with an agreement to sell its 50 percent stake
in Pacific Antai Life, a JV with China Pacific
Insurance to China Construction Bank, for
an undisclosed sum. The deal is still subject
to regulation approval and is part of the
Dutch groups restructuring under which all
its insurance operations are being sold.
Notabl y, Chi na Paci fi c Insurance
announced in December 2010 that it intends
on selling its 50 percent stake in Pacific
Antai Life. China Pacific is seeking about
CNY940 million for its stake.
In another reshuffling of stakeholders
involving ING, its original JV partner in
ING Capital Life, Beijing Capital Group,
sold its 50 percent stake in the insurer to
Bank of Beijing for CNY682 million in Feb-
Foreign insurers market share woes
When it comes to gaining market share, foreign insurers in China have come to terms with the reality that,
for now at least, this is unlikely to happen. But despite this, and other challenges in the regulation and
bancassurance spaces, there is a general air of optimism that premium growth will remain robust
country
review
ruary 2010. ING Capital Life was subse-
quently renamed ING-BoB Life.
But restructuring in China is not always
straightforward. In September 2009, Stand-
ard Life announced it was in the final stages
of talks with Chinese regulators for state-
owned Bank of China to take a major-
ity stake in its 50:50 JV with state-owned
investment agency Tianjin TEDA Interna-
tional, Heng An Standard Life.
15 months later, Standard Life issued a
statement noting: It has not proved pos-
sible for the parties to reach agreement.
Standard Life will continue to develop Heng
An Standard Life in partnership with its
existing joint venture partner.
At the time the proposed deal with Bank
of China was announced, Standard Life said
the rationale was to gain the benefit of Bank
of Chinas extensive distribution capability.
In the first half of 2010, Heng An Standard
Life was one of only two foreign life insur-
ers to experience a fall in premium income
compared with the same period in 2009.
It reported a 9.6 percent fall in premium
income and Pacific Antai Life a 3 percent
decline.
Views among foreign life insurers on fur-
ther consolidation or otherwise are mixed.
PwC found that 15 of the 31 companies sur-
veyed expect the number of foreign life and
general insurers to stand at between 50 and
59 in 2013. A further six companies antici-
pate a more significant increase in numbers
to between 60 and 69.
Taking an opposite view, 10 respondents
anticipate that consolidation will reduce
numbers. There are currently 46 foreign
insurers in China 28 in the life insurance
sector and 18 in the general insurance sec-
tor.
Among potential new entrants cited by
respondents are Japanese insurer Sony Life,
Korean insurer Korean Life and US insurer
Prudential Financial. A more definite future
entrant is the US largest health insurer Well-
Point, which announced in January 2010
that it is seeking a JV partner in Chinas
health insurance market.
WellPoint clearly has its eye on the poten-
tial of Chinas under-developed private
health insurance market. In a recent study,
rating agency Standard & Poors noted that
Chinas government plays a modest role
in health care with its spending stable at
about a quarter of total costs over the past
three decades. However, with an increasing
number of people not enjoying employer
sponsored health insurance, the proportion
of total health expenses covered by individ-
uals has risen from 30 percent in 1980 to
about 40 percent at present.
bancassurance
Foreign insurers participating in PwCs sur-
vey also expressed concern over the direc-
tion of bancassurance as more banks enter
the insurance space as direct competitors.
This development follows recent relaxation
of regulations limiting banks direct involve-
ment in insurance and vice versa.
Illustrating the blurring of boundaries
between banks and insurers, Chinas larg-
est bank, Industrial and Commercial Bank
of China, announced in November 2010
that it is to acquire a 60 percent stake in life
insurer Axa-Minmetals Assurance Compa-
ny (AMAC) from Axa, Axa Asia-Pacific and
Chinese metals and mineral trading com-
pany Minmetals. The deal is worth about
$180 million.
On completion of the deal, Axas direct
stake in AMAC will fall from 26 percent to
14 percent, Axa Asia-Pacifics from 25 per-
cent to 13.5 percent and China Minmetals
from 49 percent to 12.5 percent.
Also of note was the announcement in
June 2010 by Ping An that it was to increase
its stake in Shenzhen Development Bank
(SDB) to 51 percent, in a deal worth CNY29
billion. Of the total consideration, CNY2.7
billion is in cash with the balance being con-
tributed by the merger of Ping Ans 90.75
percent-owned Ping An Bank with SDB.
Ping An acquired a 30 percent stake in SDB
in September 2009.
In response to developments, PwC found
that while some foreign insurers are re-as-
n chinaliFeinsurancemarket
Foreigninsurers
premiumincome*
(cnym)
marketshare**
(%)
marketshare***
(%)
change****
(%)
Generali China Life 4,052 13.39 0.69 46.1
AIA 3,866 12.78 0.65 3.4
Huntai Life 3,741 12.36 0.63 48.6
Sun Life Everbright Life 2,950 9.75 0.5 480
Aviva-COFCO Life 2,791 9.22 0.47 34.4
CITIC Prudential Life 2,691 8.89 0.46 38.9
CIGNA & CMC Life 1,282 4.24 0.22 278.2
Sino-Us MetLife 1,091 3.61 0.18 29.2
Aegon-CNOOC Life 956 3.16 0.16 9.8
Manulife Sinochem Life 871 2.88 0.15 22.5
Allianz China Life 830 2.74 0.14 18.1
United MetLife 706 2.33 0.12 119.9
Heng An Standard Life 669 2.21 0.11 9.59
ING-BoB Life 614 2.03 0.1 65.9
Axa Minmetals Life 517 1.71 0.09 49
Pacific Antai Life 484 1.6 0.08 3
Skandia-BSAM Life 427 1.41 0.07 63.6
Cathay Life 351 1.16 0.06 19.4
BoComm Life 323 1.07 0.05 822.9
Great Eastern Life 301 0.99 0.04 230.8
Haier New York Life 210 0.69 0.03 7.9
Other seven 538 1.78 0.09 n/a
total 30,261 100 5.09 44.9
Notes: *January to June 2010; **Private insurers only; ***Total market; ****Compared with first half of 2009 Source: PwC
Notes: *First 11 months.
Source: China Insurance Regulation Commission
premiumincome
0
200
400
600
800
1,000
2
0
0
5
2
0
0
6
2
0
0
8
2
0
0
9
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0
1
0
*

2
0
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7
Ch\ bn
10
20
30
40
50
v
Prenun ncone
v change
4
country
review
sessing their distribution channels, others
are hoping to ride the bancassurance wave
by leveraging on their bank partnerships.
PwC found that 11 foreign life insurers
already distribute 50 percent or more of
their products through the bancassurance
channel and that for five the channel was
responsible for between 70 percent and 100
percent of product distribution.
Eight life companies indicated that tied
agents account for 30 percent or more of
their product distribution with one insurer
at 100 percent and another at 70 percent.
Only eight life insurers made use of bro-
kers for distribution with the proportion of
their products distributed through this chan-
nel ranging from 5 percent to 35 percent.
Domestic insurers are also pursuing the
bancassurance channel. Notably, China Life
reported 70 percent of its CNY183.6 billion
premium income in the first half of 2010 had
been generated through bank branches.
At the end of June 2010, China Life had
almost 43,000 employees dedicated to
the bancassurance channel while its bank
branch outlets stood at some 97,000.
Bancassurance is also significant for New
China Life which in the first half of 2010
generated 54 percent of its CNY52.3 billion
premium income through bank branches. By
contrast, Ping Ans strategy has favoured its
agent force with only about 15 percent to
20 percent of its premium income generated
through bank branches.
discrimination
A source of major irritation for foreign
insurers in their quest for market share
is that they compete with their domestic
counterparts on a far from level playing
field. This was highlighted by the American
Chamber of Commerce in China (AmCham)
in April 2010.
AmCham noted: International insurance
companies want to compete fairly in the
China market. Although they are allowed
market entry, their ability to compete fully
is hampered, to the detriment of Chinese
consumers. An overwhelming number of
American and other foreign insurers oper-
ating in China are registered in China and
are therefore Chinese companies; yet, they
still face regulation discrimination.
Expanding on foreign insurers problems,
AmCham said that while establishment of
branches and sub-branches is critical to
market expansion, there is persistent une-
qual treatment of foreign insurers compared
with domestic insurers.
AmCham added that under the new insur-
ance law that came into force in 2009, the
insurance regulation authority must exam-
ine applications to establish a branch and
render a decision within 60 days of receipt
of an application.
AmCham stressed that foreign insurers
experience much longer waits before receiv-
ing approval to establish branches while
domestic insurance companies, even if
newly established, characteristically receive
multiple branch approvals concurrently on
the same day or within days of each other.
In addition, AmCham noted that foreign
insurance companies rarely, if ever, receive
multiple branch approvals concurrently.
determinedtostay
However, despite challenges foreign insurers
are not about to give up on China.
Foreign insurance companies see China
as an underinsured market with huge upside
potential, said Whalley.
He also noted that foreign insurers are
on a hiring spree again as staff turnover is
expected to return to pre-crisis levels.
Specifically, PwC found that among life
insurers, a 60 percent increase in total staff
numbers (from a current 18,799) is antici-
pated by 2013 while the number of agents
is expected to increase by 134 percent, from
107,200 to 250,000.
Despite the growing importance of the
bancassurance channel, tied agents remain
a significant factor in the distribution equa-
tion. This was highlighted by a bank con-
sumer study by Allianz China Life which
revealed that one out of two bank customers
prefer to purchase insurance from an insur-
ance agent, 11 percent through banks and 4
percent through brokers.
Growth in staff numbers on this scale will
be no easy task with finding and retaining
good personnel cited by foreign insurers as
by far their biggest operational challenge.
Foreign insurers also face competition
for agents from major domestic insurers
that have deployed agents in vast numbers.
China Life, for example, reported having
about 777,000 agents at the end of 2009.
Ping An has some 420,000 agents.
Despite an overall stagnant market share,
PwC found that four foreign life insurers are
anticipating that their premium income will
double in 2010, while five anticipate pre-
mium income growth of between 50 percent
and 70 percent. Only two insurers expect
their premium growth to be below 20 per-
cent.
By 2013, 17 of the foreign life compa-
nies surveyed expect their combined gross
premium income to increase by 70 percent,
from CNY62.3 billion in 2010 to CNY106
billion in 2013. <
4
0
2
4
6
8
10
2
0
0
4
2
0
0
5
2
0
0
8
2
0
0
9
2
0
1
0
*

2
0
0
7
2
0
0
6
v
n ForeignliFeinsurancecompanies
combinedmarketshare
Notes: *First half of 2010 Source: PwC

C
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0
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10
15
20
25
30
35
40
Prenun ncone
Harket share
domesticinsurers(firsthalfof2010)
Notes: Total premium income CNY509 billion Source: PwC
James Richards, IE Banking & Payments Asia
comment
J
uniper Research recently predicted
that one in five mobile users will use
some kind of financial service on their
device by 2013. However, this adop-
tion will not be without its challenges and the
risk associated with mobile, as perceived by
many banking customers, is one of the most
significant to overcome.
In order to ensure 2011 delivers on its
promise, it is crucial banks offer mobile appli-
cations that deliver a high-quality customer
experience within a secure environment.
The problem is the necessary security tech-
niques often make a mobile application too
cumbersome which turns away many poten-
tial users and dilutes the value of this interac-
tive channel.
driversimpactingmobileadoption
Proving the business benefits of delivering a
mobile banking service, IE commissioned a
YouGov survey that found that one in four
of Generation Y (aged between 18 and 34)
would improve their opinion of their bank if
it offered mobile phone banking services.
A separate IE poll of the financial services
industry itself demonstrated UK bank execu-
tives are tuned into these customer needs. 36
percent rated increased customer satisfaction
as the primary driver for investing in mobile
services.
However, banks and consumers are wary
about the security challenges that must be
navigated. According to KPMG, 79 percent
of global consumers are concerned about
potential unauthorised access to personally
identifiable information (KPMG, Consumers
& Convergence IV, 2010).
Financial institutions that are develop-
ing their mobile banking strategies must
weigh up the different routes to market.
Two approaches are apps and mobile web
both of which have their own advantages
and drawbacks.
choosingtherightformat
Apps allow organisations to provide a highly
tailored and valuable service to their cus-
tomer base. Apps are viewed by many as the
preferred approach for providing the richest
mobile experience to the end consumer and
one which represents the greatest potential
for innovation.
On the other hand, the major benefit of
mobile web is its wide range of accessibility
any device which can connect to the internet
can access mobile web pages. This means it
is easier to support from an IT perspective
but the trade-off is a less rewarding end user
experience.
When it comes to security, mobile appli-
cations can cryptographically secure your
data which means that all a user needs to do
is prove that they are authorised to use the
app with a simple but secure password. This
delivers a straight-forward and relatively
rapid check for the consumer but one that is
also very secure.
itsnotallabouttheappstore
Mobile security also varies significantly
between different platforms. The most preva-
lent platforms that are driving the adoption
of mobile apps are RIM (Blackberry), iPhone,
Windows Mobile and Android.
Blackberry is more traditionally associ-
ated with the business user and is, therefore,
subjected to the potential of usage restric-
tion by corporate IT departments, whereas
iPhone and Android are rapidly becoming
the defacto choice for the consumer.
There are currently no mobile app security
standards across the industry and as a result,
each platform has its own requirements for
banks seeking to launch financial services
applications.
For example, applications being put for-
ward for the AppStore for Apple undergo
stringent security tests and can be crypto-
graphically signed by both the vendor and
Apple itself, whereas on the Android plat-
form, there currently isnt a trusted distribu-
tor of applications.
It is important to consider the various secu-
rity requirements and factor them into the
mobile development project timeline. Some
financial institutions are opting to roll out
one app at a time to make the process easier,
reflecting the challenge that in-house teams
currently have in terms of the right resource
to deliver their mobile strategy.
However, this approach is not ideal as it
means the service is not available to the wid-
est pool of customers.
balancinguserexperiencewithsecurity
How a bank asks its customers to identify
themselves and then check they are who they
say they are is critical to both security and the
user experience.
There are multiple approaches around cus-
tomers supplying various inputted credentials
but banks need to be careful that the proc-
ess is not too complex as this increases the
likelihood that customers will revert to other
banking channels. Instead, security must be
balanced with the end user experience; for
example, relatively light authentication to
simply check a balance but more additional
layers added for tasks such as paying a bill or
transferring money.
Maintaining customer security in the event
that a customer loses their mobile device is
also an important factor.
thefutureofmobilebanking
It is clear the threat of malicious activities
aimed at mobile consumers will never go
away and that these threats should be tack-
led pro-actively.
However, mobile applications and services
may be more secure than many realise and
in the case of smartphone apps, they offer
a degree of security in advance of the online
world. Spreading this message will be cru-
cial if the anticipated widespread adoption
of mobile financial services in 2011 is to
become a reality.<
James Richards is director of mobile at IE
Is the industry ready for mobile banking?
Numerous analyst reports have recently highlighted what many in the industry already knew: 2011 will
represent a tipping point in the mass adoption of mobile fnancial services. But is the fnancial services
industry truly prepared for this game-changing event?, asks Jamesrichards
n survey
wouldmobilephonebankingservices
improveyouropinionofyourbank?
agerange positiveresponse(%)
18 to 24 27
25 to 34 24
35 to 44 16
45 to 54 10
55+ 3
Source: YouGov/IE
biometrics Banking & Payments Asia
industry
trends
F
or financial services companies, the
essence of security is verification of
customer identities a task that has
become more onerous with increasing
use of remote communications, such as call
centres, in an era when identity theft is rife.
As a simple, highly successful security solu-
tion in the call centre space, a growing number
of financial services companies are turning to
voice biometrics.
Australian financial institutions have been
particularly proactive in adopting voice iden-
tification, including insurer Aviva Australia
which was acquired by National Australia
Bank (NAB) in June 2009.
We began exploring the use of voice bio-
metrics in 2008, Aaron Tunks, Aviva Aus-
tralias manager, operations reengineering and
project delivery, told BPA.
The more we explored voice biometrics,
the more we knew that we could use it effec-
tively, continued Tunks. The end result was
the adoption of a voice recognition solution
supplied by Salmat VeCommerce (SVC), a unit
of Salmat, an Australian company specialising
in customer communications technology.
SVCs solution, which is integrated into Avi-
vas Genesys telecommunications platform,
incorporates voice recognition technology
developed by US speech and imaging technol-
ogy specialist Nuance. By coincidence, NAB
had at the same time as Aviva begun exploring
voice identification using SVCs solution. Both
Aviva and NAB launched their voice recogni-
tion services in June 2009.
To use the voice biometric service, custom-
ers must enrol by speaking a unique identifier
which is converted to a numerical algorithm
and entered into a database. Enrolment takes
about three to four minutes and whenever
an enrolled customer phones the call centre
their voice is compared to those existing in the
database to determine a match, using some
100 specific identifiers.
According to SVC, accuracy rates of more
than 99 percent can be achieved with voice
verification. This compares with accuracy
rates of 92 percent for fingerprints and 75 per-
cent for face recognition technologies. Only
iris scanning verification accuracy exceeds
that of voice.
limitedenrolment
So far, enrolment into Avivas voice identifi-
cation service has been limited to high-fre-
quency callers, especially financial planners,
said Tunks. He explained that in part, limited
enrolment is because a great deal of attention
has been focused on the integration of Aviva
into NAB.
At present, fewer than 5 percent of Avivas
customers are enrolled but it is envisaged that
up to 15 percent will eventually be. Aviva has
about 300,000 customers.
But despite the low enrolment level, benefits
of voice identification are strongly evident,
said Tunks. From a customer perspective, he
explained that voice identification provides
the wow factor in terms of swifter service
compared with wading through a set of iden-
tification questions and enabling call centre
agents to immediately greet customers by
name.
From Avivas perspective, time is money
and faster processing adds up to cost savings.
Tunk said the average time saving using voice
identification is about 20 seconds per call and
given that financial planners often call several
times a day this adds up to a considerable
amount of time saved.
We have already been able to reduce our
call centre headcount by about three, said
Tunks. At annual salaries of around A$40,000
($40,000) each that is already a tidy sum, he
added.
Cost savings run further. For example,
Tunks said voice identification coupled with
an account number enables queries to be
directly routed to the correct department in
a partly processed form. This can cut turna-
round times on queries by up to a few days,
he added.
anotherpioneer
While Aviva and NABs adoption of voice
identification puts them ahead of most com-
petitors, in Australia they are by no means the
only converts to the solution. Among the most
notable pioneers in the field is health insur-
er Australian Health Management (AHM)
which launched a SVC-based voice identifica-
tion service in late-2006.
We knew that verbal identity checking was
no longer as secure as it could be, said AHM
operations manager Melinda Charlesworth.
After all, sometimes the people most likely
to commit identity theft are those closest to
us who are aware of our name, address and
date of birth.
According to Charlesworth, more than
420,000 calls are received through AHMs
main contact number each year. At least 80
percent of these calls require caller verifica-
tion, which using conventional means takes
on average 28 seconds, or 11 percent of the
total average agent talk-time per call.
Charlesworth explained that AHM custom-
ers enrolled in the voice identification service
simply say their membership number to be
identified.
Weve had overwhelmingly positive feed-
back, she said. By November 2010, of AHMs
250,000 customers, 97,288 (39 percent) had
enrolled for its voice identification service.
technologyfortoday
Voice identification is a technology that is
available at a time when consumers are grow-
ing increasingly concerned about the level of
security offered by conventional means such
as passwords, PINs and personal questions.
Growing security concerns were highlighted
by a survey conducted in Australia on SVCs
behalf in 2009 in which 67 percent of respond-
ents expressed fears that conventional iden-
tification processes do not provide adequate
protection of their personal information.
The attraction of voice identification was
found to be significant with the highest pro-
portion of respondents 45 percent selecting
it as the preferred method. In a parallel survey
conducted in New Zealand for SVC, 52 per-
cent of respondents selected voice verification
as the most preferred security measure. <
weknewthatverbalidentity
checkingwasnolongerassecure
asitcouldbe
Melinda Charlesworth, Australian Health
Management
Voice identifcation comes of age
For call centre operators, precise identifcation of customers is a key priority and one that, in an era of
rampant identity theft, is becoming ever-more onerous. BPA examines a user-friendly solution, voice
identifcation, and the signifcant benefts two Australian insurers are enjoying from its implementation
news
regulation
RBI restricts PayPal
services in India
PayPal has been forced to
restrict its services in India as a
result of new transaction guide-
lines set by the Reserve Bank of
India (RBI).
In a bid to comply with the
new rules laid out by the RBI
regarding the processing and
settlement of export-related
transfers via online gateways,
Dickson Seow of PayPals cor-
porate communications team
confirmed in a statement on the
company website that PayPal
will be altering its Indian serv-
ices.
From the beginning of March
2011, Indian merchants will no
longer be able to receive pay-
ments of more than $500 from
countries abroad.
Furthermore, Indian mer-
chants will no longer be able to
make purchases directly from
their PayPal accounts. All funds
must be transferred into Indian
bank accounts within seven days
of the confirmation of receipt
from the buyer.
We hope this 30-day advance
notice period will enable you to
plan your future use of our serv-
ices accordingly, said Seow to
PayPals Indian users in a state-
ment.
We sincerely thank you
for your understanding and
patience as we continue to com-
ply with the RBI guidelines in a
timely manner.
This is not the first time
PayPal and t he RBI have
encountered difficulties with
each other.
PayPal had its payments sus-
pended for a month in February
2010 until they received approv-
al from the RBI.
regulation
South Koreas ailing
savings banks to tap
emergency funds
The South Korean government
is to consolidate individual
emergency funds set up by the
countrys commercial, invest-
ment and savings banks, insur-
ers and brokerages to insure
against potential bankruptcy of
savings banks.
South Koreas banks continue
to suffer from toxic loan books
following excessive financing in
the real estate market during the
property boom pre-2008.
The Financial Services Com-
mission (FSC) announced that
it wants to generate KRW20
trillion ($17.9 billion) for the
consolidated fund to prepare
for potential market instabil-
ity and avoid excessive deposit
withdrawal.
Half of the fund will come
from combining the individual
funds that the financial sectors,
such as commercial banks and
insurers, have set up for emer-
gency bail-outs for companies in
their respective sector.
Another KRW5 trillion will
be generated from the govern-
ment budget set aside for cor-
porate restructuring; KRW2
trillion from the fund set up by
the Korea Federation of Savings
Banks; the savings bank associa-
tion will also contribute KRW2
tri l l i on and the remai ni ng
KRW1 trillion will be paid in by
commercial banking groups and
the Korea Asset Management
Corporation.
strategy
HSBC joins Dubai
Trades Rosoom
HSBC is set to join forces with
the online portal and trade facil-
itator of Dubai World, offering
its direct debit services to Dubai
Trade customers through the
centralised e-payment gateway
Rosoom.
According to Middle Eastern
website ameinfo.com, the agree-
ment will allow Dubais trade
community access to their HSBC
accounts online and give them
the ability to carry out transac-
tions with terminal operators
DP World, Jafza and DMCC.
We are pleased to welcome
HSBC to Dubai Trades expand-
ing family of trade enablers,
said Mahmood Al Bastaki,
director of Dubai Trade.
ameinfo.com reported that
HSBC will work closely with its
customers and Dubai Trade to
roll out this functionality over
the coming months.
The deal was signed in the
presence of Al Bastaki by SVP
and managing director of DP
World UAE region Mohamed
Al Muallem and deputy CEO of
HSBC UAE Marcus Hurry.
payments
DOCOMO and KT unveil
cross-border NFC
Japanese mobile operator NTT
DOCOMO and South Korean
telco KT Corporation have
announced that they are work-
ing together to develop cross-
border near field communica-
tion (NFC) services.
The two companies are look-
ing to incorporate NFC into their
respective devices, networks and
billing platforms to facilitate
payments between Japan and
South Korea.
DOCOMO is also working
with a number of companies
including Visa Inc, electronics
manufacturer Samsung, digital
security company Gemalto and
e-money services provider bit-
Wallet to develop other cross-
border payments capabilities.
Based on our long commer-
cial experience in various finan-
cial convergence services, the
NFC collaboration between KT
and DOCOMO will contribute
to building a sustainable global
ecosystem, said Hyunmi Yang,
executive vice-president of KT.
The mobile operator has been
providing NFC-based Osaifu-
Keitai mobile-wallet services in
Japan since 2004, while KT has
been operating a post-paid mass
transit service in South Korea
since 2002.
strategy
SBI targets unbanked
villages by March 2012
State Bank of India (SBI) is tar-
geting representation in 12,421
unbanked villages by March
2012, as it ramps up implemen-
tation of its financial inclusion
plan.
SBI said that it had provided
basic banking services to 2,012
villages with populations of at
least 2,000 by the end of Janu-
ary and aims to cover more
than 5,000 villages by the end
of March.
SBI said that this would take
its share of branches located in
rural and semi-urban areas to
nearly 67 percent.
In the past four years, SBI
has set up more than 15,000
customer service points of busi-
ness correspondents as well as
13,000 business facilitators, to
increase its outreach.
SBI chairman O P Bhatt said:
The bank has already reached
out to more than 100,000
unbanked villages.
In January, SBI announced
plans to grow its mobile bank-
ing channel a central plank of
its financial inclusion strategy
by teaming up with Indias
largest mobile phone provider,
Bharti.
eXpansion
UBP applies for
Singapore licence
Union Bancaire Prive (UBP) has
applied for a banking licence in
Singapore as part of its strategy
to grow its business in Asia.
The Swiss private bank seeks
approval for a merchant bank-
ing licence to extend its current
advisory presence, allowing it to
book private and institutional
clients across Asia.
UBPs chief executive Michel
Longhini said the merchant
banking licence for the regional
headquarters in Singapore will
ensure a complete presence in
the banks Asia wealth markets.
As part of its growth strat-
egy across Asia, the bank has
appointed Stephan Repkow as
chief executive of Private Bank-
ing in Asia.
Repkow has more than 10
years banking experience in the
Asia-Pacific, having worked for
Deutsche Asset Management,
Citigroup Private Bank and
BNP Paribas.
UBP has shifted its focus on
emerging markets since 2008,
in particular to Asia, Eastern
Europe, Latin America and the
Middle East. <
interchange Banking & Payments Asia
regulation
T
he Federal Reserve Boards new inter-
change rules usher in changes to debit
rewards, current account products and
an era of tighter margins for issuers.
An amendment in the Dodd-Frank Act gives
the Fed the duty of establishing interchange
rates that are reasonable and proportional
to the costs that issuers incur on transactions.
Financial institutions with less than $10 bil-
lion in assets and prepaid cards are exempt
from the provision.
Depending on what the Fed does, the pro-
vision could result in the loss of up to $9.1
billion in yearly revenue for issuers, according
to a recent study by CardHub.com, a website
that tracks card products.
Issuers' debit portfolios already took a
hit from the overdraft rules that took effect
in July, requiring banks to obtain customer
consent before charging fees to cover certain
overdrafts.
That, combined with the debit interchange
provisions of the Dodd-Frank Act signed
into law in July, has issuers considering add-
ing account fees, raising minimum balance
requirements and reducing rewards to recoup
revenue losses.
JPMorgan Chase & Co was the first to dis-
close its plans when an executive said at a con-
ference in December 2010 that it would stop
issuing debit rewards cards in February.
Then, US Bancorp announced it will begin
instituting a combination of ending debit card
rewards, instituting debit card annual fees and
ending free checking in the next six months.
Industry representatives objected loudly to
the plan, warning it would set precedents for
government price controls in other industries
and describing the rules as anticompetitive.
A key question is who will ultimately ben-
efit from the savings? The Federal Reserve's
proposal to cap interchange fees at 12 cents
per transaction would enable retailers to pass
on annual savings of $10 billion to $13 bil-
lion to consumers if they ever get to the
consumers.
Banks and card networks maintain that
retailers will pocket the savings, leaving con-
sumers with little more than higher costs for
banking and reduced rewards programmes.
In releasing its proposal in January, the Fed
said it found the cost to banks for process-
ing is between 7 and 12 cents per transaction.
On the average debit card transaction of $40,
for example, the fee is around 24 cents. Wall
Street and the banking industry were expect-
ing that the proposed cut would call for fee
cuts of no more than 60 percent. The proposal
is close to a 73 percent cut.
whatalternatives?
The proposal left plenty of room for the Fed to
manoeuvre as it works on a final rule but sug-
gested the central bank is seeking to cap such
fees at closer to the 12-cent mark.
The proposal would also seek to limit net-
work exclusivity. Under one alternative, a card
issuer or payment card network would have to
ensure a debit card transaction could be car-
ried on at least two unaffiliated networks.
The Fed said that could include one signa-
ture-based network and one PIN network as
long as those networks were not affiliated.
Under another alternative, an issuer or card
network would have to ensure a debit transac-
tion could be processed on at least two unaf-
filiated signature-based networks and two
unaffiliated PIN-based networks.
Fed staff noted that banks use revenue from
interchange fees to offer reward programmes
and cut costs on deposit accounts, and noted
that they realise that as a result, banks could
trim reward programmes and raise fees on
consumers if the proposal is finalised.
Fed officials indicated they would listen very
carefully to comments on the plan, noting that
this is a new area for the central bank.
Sometimes when we put out a proposed
rule, were pretty convinced that we basically
got it right absent something we didn't expect
getting in, said Fed Governor Dan Tarullo.
The difficulties in implementing this leg-
islation, the subtleties the staff have had to
deploy trying to come up with a proposal both
suggest that we should be more than perhaps
usually open to a variety of comments.
Fed staff also made it clear the impact of
the proposal would depend largely on how
merchants and banks implemented the new
rules. The Fed voted to open the proposal up
to public comment and set a target date of 21
April 2012 by which a new rule must be ham-
mered out; banks will then have another three
months before it goes into effect on 21 July.
Visa declined to comment on the proposal.
MasterCard issued a press release that said the
Fed had failed to follow Congress statutory
directive to consider the full range of costs
incurred by issuers.
Tien-tsin Huang, an analyst who covers the
payments networks for JPMorgan Securities,
said in a research note that the Feds proposal
did little to clear up the potential negative
results that Visa and MasterCard face from a
lower interchange environment.
According to Huang, under the proposal,
the Fed said banks could receive a potential
safe harbour for rates of seven cents or below
but would be allowed to set them up to 12
cents to pay for processing costs of the trans-
action. Under another option, the Fed would
not offer a safe harbour but would still cap
rates at 12 cents.
A rate of 7 to 12 cents per transaction rep-
resents an 80 percent to 90 percent cut in the
blended average for current signature and
PIN rates, Huang said.
All change in the US
The Federal Reserve Boards new interchange rules promise to reshape the US payments landscape.
charlesdavies looks at the wide-ranging impact of the decision, the winners and the losers, and considers
the new restrictions and opportunities that are opening up as a result
n us
interchangeproposals
Interchange fees paid
by merchants to large
banks
$22.8bn
Maximum potential
amount affected by
Durbin Amendment
$18.2bn
Fed drops fees by 20% Interchange fees decrease
by $3.6bn
Decrease per card: $7.30
by $6.4bn
by $9.1bn
by $11.8 billion
by $13.6 billion
Source: CardHub.com
interchange Banking & Payments Asia
regulation
Jaret Seiberg, an analyst for the Washington
Research Group, said in a note to clients that
we have trouble seeing much that is positive
here [for banks].
Issuers will lose more on higher cost pur-
chases and may gain on very small purchases,
Seiberg said.
Retailers, who had successfully pushed
Congress to adopt a provision in the regula-
tory reform bill that required the Fed to set
debit card rates that were reasonable and
proportional were ecstatic.
Todays announcement is a step forward
for the effort to bring relief to merchants
and consumers who for too long have faced
excessive fees and unfair rules imposed by big
banks and credit card companies, said Kath-
erine Lugar, executive vice-president for public
affairs for the Retail Industry Leaders Associa-
tion. Proposed cost reductions will undoubt-
edly result in savings for consumers.
The Fed acknowledged its proposals still
let banks profit from interchange fees, since
the financial reform legislation that led to this
round of rule-making only specifies that fees
have to be reasonable and proportionate,
not that banks cannot still earn profits.
Supporters of lower fees say the loss of
debit rewards won't be too painful. The pro-
grammes are not that widespread. Only about
16 percent of checking accounts have pro-
grammes, and an estimated 30 to 50 percent
of rewards are unused.
As an early mover on debit rewards,
JPMorgan Chase offers a potential blueprint
for how US banks will deal with the reduced
interchange. From February the bank will no
longer issue debit rewards cards to new cus-
tomers, Chase CEO of retail financial services
Charlie Scharf told analysts at the Bancana-
lysts Association of Boston Conference.
Scharf told the analysts the legislation will
likely result in a transfer of value from lower
mass-market consumers to merchants and
will force banks to increase account fees for
most customers in order to compensate for
operational costs that debit interchange fees
help to offset.
Chase is developing several new current
account products, it plans to introduce in
February 2011 that will require customers to
maintain a specific balance and have multiple
accounts in order to avoid fees, Scharf said.
Issuers could also explore explicit fees for
debit cards, maintenance fees on the checking
accounts the cards are linked to and the elimi-
nation of debit rewards programmes, among
other options.
newrewards
Options are emerging, including Bling Nation
FanConnect, Clovr and Cardlytics, among
others.
Bling Nation is using NFC-enabled stickers
that turn cell phones into mobile wallets and
has added social networking capability. With
the help of Merchant360 to supply targeted
rewards and discounts, BlingNation allows
customers to like merchants on Facebook at
the point-of-sale. Merchants, meanwhile, can
use FanConnect to track buying behaviours.
Cardlytics also offers merchant-funded
rewards to debit card users in the form of dis-
counts based on their transaction histories.
Cardlytics uses the data feeds of its bank
partners to analyse the debit card activity of
online banking customers, and then matches
retail merchants up with customers based on
their purchase behaviours. The merchants
then can direct loyalty offers to customers
who spent a preset amount at their stores.
Clovr, a rewards start-up based in Mas-
sachusetts, offers merchant-funded rewards
targeting customers based on their purchase
histories, but by making the card-linked offers
mobile, moves banks and merchants a step
closer to the ultimate in rewards: a location-
aware, POS-targeted solution.
Clovr enables card issuers to send text-
based rewards based on the transactions of
bank customers that opt in to the programme.
Users click on web-based ads, then link the
offer to the credit or debit card they agreed to
use in the system. Card accounts are credited
with discounts after the purchase, with confir-
mation coming via text.
Though many issuers will cut debit rewards
across the board, others may offer the pro-
grammes to premium customers who
maintain high balance levels or use multiple
products. The changes could also usher in a
renewed emphasis on the use of merchant-
funded rewards programmes as a way for
banks to continue offering programmes with-
out having to pay their full cost.
But even with the uncertainties surrounding
future funding of debit rewards programmes,
there can still be a positive business case
for many issuers supporting debit rewards
because of the popularity of debit payments
and the product's central role in customers'
relationships with banks.
To date, US banks have largely failed to
adequately promote their existing debit card
rewards programmes to consumers, accord-
ing to data from Discover Financial Services
2010 Debit Issuer study.
Pulse recently released additional findings
of its 2010 Debit Issuer based on a survey by
Boston-based consulting firm Oliver Wyman
Group conducted among issuers in February
and March last year.
Pulse says 58 percent of issuers in 2009 still
offered some type of rewards programme, up
from 53 percent in 2008. However, only 17
percent of survey participants said they are
considering launching a debit rewards pro-
gramme in 2010, down from 24 percent last
year.
The data shows that, in programmes where
as many as 75 percent of bank customers were
automatically enrolled in a debit rewards pro-
gramme, as few as 9 percent actually registered
on the rewards programme's website. Several
issuers already have rewards tied to bill pay-
ment and other transactions, according to a
recent report from Corporate Insight.
Broadening debit rewards programmes to
cross-promote other bank products could be
a key to success in the future. But the days of
mass-market debit rewards are coming to an
end, and free current account banking could
be close on its heels. <
n us
numberofcardholderstakingadvantageofmonthlymerchant-fundedrewardsatselectedbanks
Source: Aite Group

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micropayments Banking & Payments Asia
analysis
T
he movement to digital content has
been a gradual process and one that
has given way to a strikingly different
business model for many organisa-
tions, especially that of the media.
Dwindling advertising sales has forced
many publications to introduce a paywall
on their online content offerings. In 2009,
Rupert Murdochs News Corporation was
the first to try to monetise their publications
digital content by announcing online content
would no longer be free.
Other big players in the media, such as the
Wall Street Journal and the Financial Times,
soon followed suit and in doing so have cre-
ated a culture in which people now expect
to pay for access to news and features from
well-known national newspapers.
Subscription-based business models rep-
resent the ideal case for digital content pro-
viders as they generate regular and reliable
revenue streams. But there is a fundamental
flaw in their design, since the model does
not attract single-use customers who do not
want to commit to an on-going commercial
relationship.
International consultancy firm Value
Partners has acknowledged this trend and
has released a report, Capturing the Micro-
payments Opportunity, which analyses the
status of the market and examines whether
the expectation placed on the industry is a
realistic one.
Through research and client experience
Value Partners has identified and presented
a number of critical success factors that
any successful micropayments solution will
have to exhibit to successfully compete for a
piece of this growing opportunity, says the
report.
The report was published in partnership
with the Welsh Assembly Government and
Banking & Payments Asias parent company,
VRL. It was launched by Sheriff Fiona Woolf,
on behalf of the Lord Mayor of London, at a
breakfast briefing in January.
Micropayments is one of a number of
areas the industry is keeping a close eye on
but payment providers have not yet brought
a universally viable, cost-effective solution to
the market at least not publicly.
On the one hand, this reluctance to step
out of the shadows and be the first to mar-
ket with a micropayments solution is under-
standable. It is a relatively new phenomenon
and its uncertainty can hinder investment
plans. Value Partners estimates the European
micropayments market is currently worth 6
billion ($8 billion) and is set to grow to over
15 billion by 2015.
According to the report: This [prediction]
corresponds to a 15 percent annual growth
rate over the next four years; a rate that is
unique to micropayments and unparalleled
in most other channels or payment types.
This projection should stir some enthu-
siasm and drive the payments industry to
quicken the creation of a solution.
howlowismicro?
Micropayments are universally known as
low-value transactions but its definition can
vary widely between different organisations.
Alternative payment method PayPal
defines the term as transactions of less than
$12, consultancy firm InnoPay claims a
micropayment is a payment of very low
value, often under a euro and advisory firm
Cartio.com says it is where small sums are
transferred from one person to an organisa-
tion quickly and without fuss.
For the purposes of the report, Value
Partners has defined micropayments as an
online or mobile, real-time or deferred, finan-
cial transaction below 5, which initiates the
instantaneous delivery of digital goods.
In an effort to explain the lack of devel-
opment in the industry, the report claims
online, cost and technology constraints
have so far hampered the development of
economical and convenient solutions to sub-
5 transactions.
While there are a number of payment serv-
ices currently in use for processing micropay-
ments, to-date no emerging micropayment
service has been able to fully address each
stage of the micropayments service experi-
ence. These stages include customer reach,
fast transaction speeds, economic individual
transaction costs and a simple payment user
interface.
The report suggests the clients of a micro-
payments service are collectively crying out
for a universal micropayments solution,
which would introduce a level of consistency
and control over the market.
This would involve a collaborative effort
Is there a silver bullet?
The payments industry is awaiting a silver bullet universal solution to capitalise on the growing interest
in micropayments. Who would have thought 1 transactions would generate so much interest? louise
naughton looks at a new report that analyses the different approaches to low-value payment processing
n micropayments
positioninthepaymentslandscape
Source: Value Partners analysis
realworld
(shops,
restaurant,
transport,
mailorder)
virtual
(internet,
mobile)
under5
cash
cheques
over5
credittransfer/directdebit
cardpaymentschemes
ewallets
telecoms&ispbilling
aggregators
micropayments
analysis
on behalf of the industry a move that tradi-
tionally takes a great deal of time to put into
place due to different agendas that usually,
but not always, send conflicting messages.
Another challenge in the construction of a
universal solution is that there is fragmenta-
tion on both the supply and demand side of
micropayments meaning neither the pay-
ments industry nor the customers of such
solutions have a cohesive, clear view on how
to proceed.
Value Partners claims there is scope to
increase its original prediction that the
micropayments market will grow to 15 bil-
lion by 2015 but only if the market is at its
full potential. For this to occur, all suitable
technologies, including video on demand
(VoD) enabled set-up boxes, fast broadband
connections and smartphone mobile devices,
should become ubiquitous across Europe.
Should this happen, the consultancy firm
says its projection would then double, taking
its estimate to 30 billion.
emergingbusinessmodels
The report classifies the available and emerg-
ing business models serving micropayments
into four distinct categories payment cards
and payment service providers; eWallets;
aggregators, virtual payment interfaces,
online payment transfers and P2P internet
payment service providers; and telcos and
ISP billing systems.
We have researched and interviewed a
number of online payment providers, both as
part of our project work and for this piece of
research, from incumbent domestic and pay-
ment schemes to new entrants, says Franc-
esco Burelli, principal at Value Partners.
We have also looked at the potential
of industry players in related industries to
extend their billing and payments capabili-
ties into the micropayments space.
Our research suggests, in line with the
current market situation, that it is unlikely
any one player will dominate the market.
Rather there will be a number of successful
models each suitable to a specific industry,
audience, platform or type of transaction.
Electronic payment cards, traditionally
Visa and MasterCard, currently serve the
micropayments business but it is difficult to
see how they can continue doing so.
While the networks provide their clients
with a strong payment infrastructure designed
to cope with a high volume of transactions,
the cost of acceptance to merchants arguably
renders the micropayment almost worthless.
Value Partners worked with a major media
producer that collected small payments of
between 1 and 2. It faced fixed and vari-
able charges ranging from 5 percent to 60
percent of the transaction value. Broadly
speaking, the report claims the general cost
of accepting card transaction varies between
acquirers, which has to take into account a
fixed processing cost that can range from
0.04 to 0.35.
Fees of this kind can prohibit a compa-
ny from accepting micropayments and as a
consequence puts pressure on the industry
to come up with a better solution, says the
report.
Undeterred by the fees challenge, the
payment card industry is looking upon the
micropayments opportunity with excite-
ment. One unnamed international card
scheme interviewed for the report said it saw
a significant opportunity associated with
mobile payments as a potential extension of
the person-to-person (P2P)/money transfer
value proposition.
An unnamed top-tier global payment
processor also told Value Partners that it has
recently invested in the growing micropay-
ments processing opportunity.
However, as the report says, the interest in
the micropayments opportunity may be grow-
ing throughout the payment card industry,
but the issue around creating a viable price
competitive offering is not going away.
eWallets store their value in either real or
virtual currencies and is typically funded
through a payment card or automated clear-
ing house (ACH) transaction ie, credit
transfer or direct debit.
It is claimed to represent an effective solu-
tion for those merchants and consumers
willing to engage in a dedicated payment
relationship. This is because merchants
benefit from prepayment and low transac-
tion frequency, as the transaction costs can
be spread over a number of micropayments,
and consumers enjoy a perceived seamless
and instantaneous functionality.
Value Partners warns those eWallet provid-
ers interested in developing a micropayments
opportunity to be conscious of the payment
providers role in the users payment experi-
ence and the ownership of the clients finan-
cial arrangement.
While the offering might be convenient
and well-designed, the merchant must sur-
render the financial relationship to the third
party eWallet as well as access to the most
granular customer data, says the report.
Players in the aggregation, virtual payment
interface, online payment transfer and P2P
internet payment markets often have a similar
business model to those of eWallets. The pay-
ment is initiated by an account and password
authentication, and the transaction funded in
real-time by a card or ACH transaction.
As the funds are not pre-loaded, the cost of
the transaction can be higher than that of a
payment card or ACH transaction as an addi-
tional cost layer is added.
Again, the report says the pitfalls of such
a solution are that digital content providers
lose ownership of the customer as well as a
lack of control over deposited funds. Aggre-
gators are also closed-loop, which forces a
customer to maintain multiple log-in details
with multiple merchants.
A well-known example of an aggregat-
ing business model is Apples iTunes store.
It monetises its low-cost music and app pur-
chases by aggregating up consecutive pay-
ments.
Apple does not process each purchase
separately but delays processing with the
expectation that as customers tend to buy
music in waves, the customer is likely to
make subsequent purchases at the iTMs in
the near future, says the report.
By consolidating a series of purchases,
Apple makes a smaller number of larger
transactions and therefore pays a smaller
amount overall due to processing costs.
If Apple were to incur typical payment
costs in the region of 0.50 per transaction,
given that record companies typically get up
to 70 percent of the sale price as royalties,
this level of payment cost would render the
business unviable.
Telecom companies and Internet Service
Providers (ISPs) have begun to offer mer-
chants third-party billing services, which the
report claims exploits the telcos pre-existing
financial relationships and billing infrastruc-
ture.
In light of developments such as the oppor-
tunity to differentiate and exploitation of
sunk costs whereby proprietary billing
systems can perform billing for the operators
core activity, Value Partners has seen increas-
ing investments being made by telecoms and
ISPs operators.
While there are benefits to this platform,
the report outlines that inherent limitations
exist in the offering made by telcos and ISPs
reselling their billing capabilities.
The merchant must surrender its financial
relationship with its consumer to the billing
telco operator and accept that its reachable
customer base is restricted to that of the tel-
cos own customer base, says the report.
Given that merchants are traditionally
reluctant to give up financial relationships
and that no telco operator can provide uni-
versal reach, there is likely to be some devel-
opment before this can occur.
As the industry grows we will see more
activity and it is probable there will be new
entrants in the medium term. However, as
the overall model of any payments business
is dependent on achieving critical mass, we
believe we are likely to see a wave of con-
solidation taking place in the not too distant 4
analysis
future, says Henry Alty, a consultant at
Value Partners.
However, as the overall model of any
payments business is dependent on achieving
critical mass, we believe we are likely to see a
wave of consolidation taking place in the not
too distant future.
newmedia
According to the report, TV Video-on-
demand (TV VoD) is poised to become the
greatest growth area for micropayments as
it acts as a complement to existing TV sub-
scriptions and as a service allowing those
consumers who choose not to take part in
pay-TV services, access to on-demand shows
and films.
Value Partners forecasts Europe will grow
to approximately 30 percent of the global
TV video-on-demand industry. PC VoD is
expected to remain a relatively small part
of the total micropayments opportunity as
it is likely to be supplanted by TV VoD as
it becomes easier and more convenient for
consumers.
The increasingly widespread penetration of
smartphones, as well as new app-based devic-
es such as tablets, is forecasted to drive the
number of app users and more importantly,
more apps per device will increase the aver-
age revenue per user.
The report claims it remains to be seen
how successful more general news providers
will be in driving revenues. Initial indications
are that The Times paywall has not been
met with immediate success, with a reported
105,000 subscribers and pay-per-use con-
sumers, including those who have paid for
the iPad and Kindle editions. There has also
been a 62 percent fall in monthly unique visi-
tors.
As monthly subscriptions generally exceed
the 5 value of micropayments, Value Part-
ners has only sized one-off payments and has
found them to be a relatively small oppor-
tunity compared to other micropayments
opportunities.
Our research has indicated that there are
a number of critical factors that a success-
ful micropayments solution should fulfil,
says Alty.
It will be necessary to ensure that all the
key constituents are satisfied consumers,
merchants and regulators. This will involve
tailoring the providers business model to suit
the type of product, customer and transac-
tion that is being undertaken, ensuring that
the process is price-competitive and maximis-
ing merchants ability to create a holistic view
of their customers and transactions.
Any micropayments platform that can
meet these challenges will be well placed to
take a share of the growing industry.
The report concludes there is currently no
single answer to the desire for a universal
micropayments solution and the aspiration
for a silver bullet solution is unrealistic.
In order to capture the largest potential
customer base, it is suggested that a digital
content provider offers its customers a wide
range of different payment options driven by
customer payment preferences and its ability
to condition, limit and drive them, says the
report.
The demands placed on micropayments,
both from the consumers and industry in
finding a commercial solution is one that
sits in the early stages of development. Value
Partners expects considerable activity in the
space over the next five years and believes
this will lead to short-term fragmentation of
micropayment offerings that will be tempered
in the long-term by their economic viability
and user preference. <
thegrowthofe-commerceand
broadbandinfrastructure
Western European broadband
penetration has grown from 19% of
households in 2004, to 56% at the
end of 2009, in addition a further 9%
of households have access to mobile
broadband.
Building on this, widespread
consumer adoption of online payments
has fuelled considerable growth in
global e-commerce.
This behavioural shift, supported by
a thriving online payments industry has
increased online spend from 150bn in
2004 to over 350bn in 2009.
Online shopping is so popular
that even in the global recession of
2008-2009, as UK high street retailing
revenues contracted by 2.5%, online
sales rose 17.8%, compared year-on-
year.
Moreover, a survey of UK consumers
showed that more than two-thirds of
the population aged 14 or above buy
goods and services online at least once
a month in 2010.
growthofsocialnetworks,online
gamingandvirtualgoods-related
businesses
The online gaming sector has rapidly
gained popularity among internet users.
2007 2009 saw a proliferation
of online games with built-in virtual
currency systems and virtual goods
stores, currently attracting over 400m
monthly active users. The use of these
online games has been driven by
integration into social networks.
For example, FarmVille, a game
designed by San Francisco-based Zynga,
has more than 63 monthly million active
users who each month spend an average
of 15 minutes a day in the game.
Typically, virtual goods are bought
for small sums of money within online
games and are supported by a range of
micropayment-style payment processes
for example, Facebook introduced their
own virtual currency, called Facebook
Credits, in mid-2010 which can be used
to buy virtual gifts or spent within
applications.
US sales of virtual goods are projected
to reach $2.1bn in 2010.
emergenceofnewonlinepaymentsmodelsanduserinterfaces
In the past decade, Value Partners has seen robust growth in the alternative
online payment solutions space.
Companies like Google, PayPal and Amazon have leveraged their respected
brand names and established trust-based customer relationships to enter the
financial services market, while incumbent payment and banking infrastructures
have increased their reach and new entrants are trying to establish themselves.
Consumers and merchants are driving the alternative payments market as they
look for new ways to pay and get paid.
n micropaymentenablers
themicropaymentsevolutionhasbeenenabledbythree,mutuallyreinforcingtrends
Sources: Value Partners analysis; Screen Digest, Internet Retailing Magazine; eMarketer; AppData; Inside Virtual Goods
4
senior moves Banking & Payments Asia
people
n people
seniormovesinasia-pacific
country name movedfrom movedto oldposition newposition
Asia James R Hicks Global Payments n/a President, Central Europe President, Asia-Pacific
Asia Vanessa Wang Mercer Citi GTS Partner & Asia head, retirement,
risk and finance
Head of pension services, Asia-Pacific global
transaction services
China Charles Li The Royal Bank of
Scotland Plc
ANZ Country Executive and head of
global banking, China
Chief executive China
China Christine Yip ANZ United Overseas Bank Chief executive, China SVP, Greater China
Hong Kong Ronald Chan Pacific Eagle Asset
Management
Manulife Asset
Management
Deputy chief investment officer Senior managing director, head of equities,
Asia
Hong Kong Roger de Basto HSBC Head of transaction management, equity
capital markets of global banking, Asia-Pacific
Hong Kong Chris Bendl AIG Manulife Financial Chief executive Senior vice-president, head of regional wealth
management, Asia
Hong Kong Li Cui Hong Kong Monetary
Authority
The Royal Bank of Scotland Head of external division Chief China economist
Hong Kong Wyn James JP Morgan Private Bank Executive director
Hong Kong Steven Lo Citi Private Bank n/a Global market manager, Hong Kong
Hong Kong
& Singapore
Varun Minocha RBS Coutts n/a Investment advisory Head, Non-Resident Indian business, North-
Asia
Hong Kong
& Singapore
Lavin Mok Edmond de Rothschild
Asset Management
BlackRock Head of Asia sales MD of Retail sales for Hong Kong & Singapore
Hong Kong Jimmy Pang AllianceBernstein Bank of Communications
International Asset
Management
n/a CIO and head of asset management
Hong Kong Rajeev Sahney HSBC (London) HSBC Global head of retail, corporate
sector group, global banking
Head of corporate sector group, global
banking, Asia-Pacific
Hong Kong Richard Straus Citi Private Bank (Taiwan) Citi Private Bank Head of global family office and institutional
business, North-Asia
Hong Kong Ronald Tham HSBC Head of coverage and family office, Hong
Kong, global banking
Hong Kong Paul Thurston HSBC (London) HSBC Hong Kong (to join
March 2011)
Chief executive, consumer and
commercial banking
Chief executive, retail banking and wealth
management
Hong Kong Pying-Huan Wang Deutsche Bank Swiss-Asia financial
services
Head of investment management Managing director, Hong Kong
India Sidharth Punshi Jefferies India JP Morgan Managing director, investment banking
Singapore Jai Arya BNY Mellon n/a Head of client management,
Asia-Pacific
Head of global business, sovereign institutions
group
Singapore Tan Yeu Cheng DBS UBS Executive director & cluster head
Singapore Gary Goh Credit Suisse UBS Executive director & desk head
Singapore Barend Janssens ABN AMRO Royal Bank of Canada CEO, Asia private banking Head of emerging markets wealth management
Singapore Alexander Kwan Socit Gnrale Private
Banking
HSBC Private Bank Director of funds selection Senior director of funds selection
Singapore Yvonne Koh Credit Suisse UBS Vice-president, private banking Director & client adviser
Singapore Edmund Lin Bain & Company n/a Senior partner and head of
Financial services practice, Asia-
Pacific
Co-head of global financial services practice
Singapore Manish Singhai Arjava Capital Aviva Investors Principal portfolio manager for
Asian ex-Japan equities
Chief investment officer, Asia equities
Singapore Loh Swee Sung Credit Suisse UBS Senior assistant relationship
manager
Associate director and client adviser
Singapore Kevin Talbot ANZ Private Bank Aviva Investors Chief investment officer, fixed income
Singapore Wendy Toh DBS Private Bank UBS Associate director Associate director & client adviser
South Korea Woong Park Woori Investment &
Securities
Mirae Asset Global
Investments
Head of equity and head of
overseas business
CEO and international CMO, Asia-Pacific and
EMEA regions
Taiwan John Wang Goldman Sachs Citi Private Bank Head of Taiwan
Source: BPA
iPad apps Banking & Payments Asia
technology
F
or private banks, having
a mobile device applica-
tion has swiftly become a
when not if question.
The dramatic take-up of mobile
banking (m-banking) in Asia is
driving this point home. Now
increased interest in Apples iPad
is springing the creation of bank-
ing apps exclusive to ultra high
net worth (UHNW) and high net
worth (HNW) client sets.
JP Morgan, Citi Private Bank
and Bank of America/Merrill
Lynch (BofA/ML) have recently
released new, free, private bank
iPad-specific apps for client real-
time asset management and access
to bank research content. So
should other banks follow suit?
The case for implementing
apps is compelling when look-
ing at the take-up of m-banking
globally. A study from Juniper
Research (see chart) forecasts that
in 2011 more than 270 million
people worldwide will use mobile
devices to view their bank details.
Another Juniper report forecasts
that mobile banking usage will
grow to reach 400 million people
worldwide by 2013 (see chart on
p27).
Howard Wilcox, author of
Junipers mobile banking strategy report, says
the iPad app trend is similar to that of mobile
banking.
It is all about providing customers with
more flexibility and personalised service,
Wilcox says.
In simple terms, an iPad is somewhere
between a laptop and a smartphone in screen
size. Apps for the iPad attract users who are
perhaps not keen on the small screen form-
factor of the phone, but who maybe do their
banking by laptop already and want an alter-
native in certain circumstances when they are
out and about, he adds.
Wilcox underlines apps as an additional
channel banks are rolling out to increase
mobile banking figures.
Finger-tipbanking
What then do JP Morgan, Citi Private Bank
and Bank of America/Merrill Lynchs iPad
apps offer? At the heart of the JP Morgan
private banking app for US clients, users can
view account balances, transaction history and
keep watch on investment positions. Clients
can transfer funds between accounts, make
payments, send wire transfers and access gen-
eral market data from JP Morgan.
The Citi private bank mobile app, available
to the banks UHNWs, is a research appli-
cation. It feeds private bank thought pieces,
enabling free access to leadership publications
and monthly global economic commentary.
Banking advisory services and global, equity
and fixed income research also underpin
the Citi offering. The BofA/
ML research library app for
institutional clients is similar,
allowing access to the banks
proprietary global research.
App banki ng i s bei ng
adopted quickly by American
and European private banks.
However, Far-East Asia has
shown the heaviest uptake of
mobile banking and is expect-
ed to remain the largest region
to bank on-the-go by 2013.
Interestingly, bank apps have
not yet chosen to specifically
harness this Asian market
opportunity.
newwealth,newstrategy
Part of banks technological
push is aimed at the growing
numbers of younger HNW
individuals. In November
2010, Citi Private Bank unit
head Jane Fraser announced
Citigroups plans to remodel
the bank, partly to tap the
next generation of wealthy
heirs who are expected to
inherit $5 trillion in assets.
Private bank development
around the next generations
burgeoning wealth demo-
graphic is an intelligent push,
says Nordea Bank spokesman Paul Malpas.
If you compare private bank clients in the
past decade to those around today and the
shifting demographics, they are now younger,
savvier and want selective information in an
intelligent way, says Malpas.
iPad users do not want to be inundated
with third party information. The content in
our banking app is designed for the individual,
it is bite-sized and easier to digest, he says.
clientsandbankersdoubleuponappuse
At JP Morgan, bankers have been the test bed
for the new app technology, says client adviso-
ry experience specialist William Karczewski.
We used their feedback for planning the
development of the iPad and the mobile plat-
iPad app quick facts
Bank of America Merrill Lynch
Research Library app
For institutional clients
Equity recommendations on
3,200 companies, credit
recommendations
on 860 corporate bond issuers
Risk assessment feature
Trade insight into 40 currencies and
60 economies
Citi Private Bank Mobile app
For UHNW clients
Global, equity and fixed income
research
Monthly global economic commentary from
chief investment officer
JP Morgan
For US private
bank clients
Account balances, investment positions, and
banking transaction history
E-newsletter from chief investment officer
App to the future
Private bank mobile applications are providing the worlds wealthiest clients with cutting-edge banking
capabilities through their mobile devices. As several private banks launch iPad apps, emanel-shenawi asks
whether this increased demand for client-portfolio transparency can be balanced with high-level security
iPad apps Banking & Payments Asia
technology
form in general. The bankers like the whole
relationship view, he says. They can see
their own accounts together and just because
they are not in a face-to-face client meeting
does not mean clients are not connecting with
the brand, the bank and all our capabilities.
Despite it being too early to analyse usage
numbers since the its release, Karczewski
anticipates that about 50 percent of JP Mor-
gans online banking users will take advantage
of the iPad push.
Citi Private Bank director of internet strat-
egy Alison Szmulewicz explains that the Citi
apps use has also broadened beyond clients.
We have seen a good number of client acti-
vations across the Americas, Europe and Asia,
but even more so we have seen a huge amount
of internal activations.
We want our bankers to embrace this tech-
nology for them to be educated and informed
about it, she says.
transparencydrivestechnology
SunGard, a manufacturer of mobile bank-
ing programmes, has created several apps
specifically for the private banking industry.
Its Ambit Mobile Banking arm, Geneva-
headquartered and launched in 2009, offers
a solution suite for private banks connecting
clients to their portfolios through the financial
institutions core banking application. These
are accessed from mobile devices including the
iPod touch, iPhone and iPad.
SunGards president of Ambit private bank-
ing Daniel Bardini says the increased need for
transparency in private banking has led to
more technological answers.
The financial crisis created the need for
private banks to be more transparent than
before. Pre-crisis, the client demand for their
relationship managers to have a 360-degree
view of their assets was not at the same level
as today, says Bardini.
He explains that international HNW clients
at SunGard-supported Swiss banks rarely used
to travel to Switzerland to connect to their
portfolios.
Now we have moved from a situation
where HNW individuals want to have access
to their position in real time 24-hours-a-day.
The needs of both HNW individuals and
banks have evolved into new possibilities and
we very rapidly add new functions into the
mobile banking application to align to this,
he says.
Geneva-based private bank CIM Banque
was the first customer to go live on the Ambit
mobile banking solution in April 2010.
CIM Banque director and IT manager
Nicolas Dilorio says the cost to implement the
banking app stood at CHF45,000 ($48,117).
heightenedsecuritythreats?
But how safe is confidential client data? Secu-
rity is a joint effort between the mobile suite
manufacturer and bank to ensure safety.
Bardini says SunGards data security chan-
nels ensure that no confidential information
from the service is stored on the application.
When a client logs into the suite, the full
content will be downloaded, then disappear
when logging off no data will be stored on
the device itself, he explains.
The recent Wikileaks-linked cyber attacks
on financial organisations online have brought
risk management to the fore, Bardini adds.
Back at the bank, our customers have an
architecture where they segregate confidential
client information from operational informa-
tion.
theoutlookforappbanking
The key question for banks is whether iPad
and similar tablet technology is a must have.
Speculating on the future of mobile banking,
analyst Howard Wilcox expects that banking
by iPad will grow but does not see it dominat-
ing just yet.
Apps will not affect widespread take-up
of mobile banking globally. They are designed
and remain for a targeted user segment, he
says.
But tapping markets with keen users of
mobile banking devices, like Asia, could be
a key strategic move for banks, particularly
as Asian emerging markets are the centre for
industry expansion when targeting the surge
of Asian UHNW wealth.
The development of app banking could see
banks venturing further into app personalisa-
tion to mould deeper into HNW lifestyles.
Wilcox predicts an increase in tailored con-
tent, such as travel and insurance products,
possibly suited to clients that need to travel to
manage offshore assets and business.
Citi and JP Morgan say the next chapter
sees app capabilities branching out across
Android and Blackberry technologies. JP
Morgan has already received requests for a
Blackberry-specific service.
The development of more tablet devices
such as the new Samsung Galaxy tab, released
at the end of 2010, raises the question of how
private banking apps will adjust to the grow-
ing number of formats.
I dont think it will be sustainable for the
industry to manufacture a special app for
every device released, says JP Morgans Karc-
zewski. It will be interesting to see how the
service may merge [across formats]. <
Source: Juniper Research
n mobilebankinggrowthtrends
globalmobilebankinguserssettodoubleby2013
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0
50
100
150
200
250
Millions
2013 2010
North
America 12 %
Central &
Eastern
Europe 5%
Indian
Sub
Continent
4%
Latin
America
3%
Western
Europe
24%
Far East &
China 38%
Rest of Asia-
Pacific 6%
Africa & Middle East 8%
Source: Juniper Research
n geographicbreakdownoFmobilebanking
usersin2011
highdemandform-bankingservicesintheFar
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survey Banking & Payments Asia
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strategy
The road to retail excellence
Although the nature and impact of current
industry trends vary by country and region,
the majority of retail banks are still recovering
from significant financial stress endured over
the past three years.
Margin pressure, sharp rises in loan loss
provisions, declines in asset volumes, rev-
enues, and profits have taken a toll.
A report by consultants Boston Consulting
Group (BCG), called Global Retail Banking
2010/2011: The Road to Excellence, argues
that retail banks must take bold and forceful
steps to achieve higher levels of both opera-
tional and customer excellence in order to
reverse these trends.
BCG benchmarked 12 of the top 30 retail
banks across North America, Europe and
Asia-Pacific. These 12 banks account for
roughly 450 million customers, 51,000
branches and over $14.5 trillion in assets.
The benchmarking enabled BCG to iden-
tify three key levers that banks must utilise
in order to achieve operational excellence:
streamline the organisation, develop efficient
and effective processes and improve overall
end-to-end performance.
The report said that although none of the
top global retail banks has demonstrated
the ability to excel in all of these areas and
become a true process and productivity lead-
er, the scope of the opportunity is leading
many banks to embark on multiyear efforts
to improve.
We strongly believe that banks should
continue this endeavour, said Andy Maguire,
a BCG senior partner and co-author of the
report.
He continued: Better still, they should
accelerate their efforts and investments in
order to reach a high level of operational
excellence as quickly as possible. Those that
do will not only reap vast benefits but also
create the ability to sustain them.
According to the survey, the most successful
banks have a high number of customer-facing
sales and service employees (see graph, right).
These banks also have a high level of industri-
alisation, characterised by simplified, stand-
ardised processes that maximise the number
of new accounts and loan decisions per opera-
tions full-time equivalent.
Further, they possess a high level of proc-
ess automation that features straight-through
processing (STP), with up to 90 percent of new
account openings and 70 percent of unsecured
credit originations processed with STP.
Banks often hurt themselves, the report
said, with poor customer service and expec-
tations they cannot consistently meet. Thus
they must be more actively supportive of their
customers for example, by warning them
of potential overdraft scenarios and helping
them figure out whether they can afford the
car or house.
The report noted that the primary check-
ing or current account is the anchor of the
customer relationship. Because of the cross-
selling opportunities these accounts present,
customers who hold them are up to 10 times
more profitable than those who do not and
are up to 25 percent less likely to have over-
draft or default difficulties.
Multichannel excellence goes beyond avoid-
ing competition between channels and. It also
means monitoring channel action and using
that information to drive quality interactions
with customers; it means shifting from a pas-
sive approach to proactive, sales and service-
oriented, multichannel management.
Many, if not all, retail banks are afraid of
regulatory intervention. Yet, customer excel-
lence may be the ultimate defence. Banks that
capture and maintain their customers profiles
their demographics, risk attitude, product
history, transaction and channel behaviour,
etc will be less troubled by regulation. They
really do know their customers and act in their
interests, which is what regulators care about
most, concluded Maguire. <
0
20
40
60
80
100

v
8est-to-Worst
spread
Sales and
servce
0peratons
1.5x 3x 4.5x
Hanagenent
Note: Full time equivalents do not include corporate functions,
such as risk, finance, HR and IT Source: BCG
n benchmarking
productivityfull-timeemployees
customerfacing
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