Consumer Banking
Wednesday, March 7, 2007 12:53by: Umair Naeem
Once upon a time, banking used to be all about saving and interests. No more, no less… in the current age of cutthroat competition, it becomes a prerequisite to success to have a large and successful portfolio of products and services with which the banks can woo and then wow their customers. Here in come offerings such as loans, credit cards, easy installments and what not. If you want a BMW in a draw, get a credit card, they say… or if you want to go to
But it wasn’t always like this. Not every bank could offer a credit card and not all of the banks could offer the services so consistently that do now. There were but a few multinational banks that attempted to offer anything remotely resembling consumer banking. It was at this point that the State Bank introduced certain reforms, and many national banks were privatized. At the same time, there was a paradigm shift with respect to the approach of many a bank with a huge base of customers in the urban sector. These banks began to take an increasingly market oriented approach and became the forerunners for more than 5 years of growth of consumer banking in
As it stands, multinational banks, such as ABN AMRO, Citibank and Standard Chartered, use their massive knowledge base and funding from their foreign principals which made them first to introduce products, services and innovative technologies to their consumer base. Hot on the heels are the former national banks, UBL, HBL and MCB that have embarked in consumer financing activities in not just big cities but smaller ones too, by virtue of their huge branch network. In doing so, they have generated huge volumes of business while at the same time driving down the prices of the products they offer. For instance, in 2002, HBL’s consumer banking portfolio was worth less than a billion rupees. By the end of 2004, it was worth Rs.17 billion. Similarly, since 2003 when it was privatized, UBL has launched more than 12 to 14 new products and has generally been able to enjoy a good amount of success. Meanwhile, other banks such as Union Bank have come through a mire of technology deficiency to become a huge player in the competitive market place of consumer banking.
As we mentioned earlier, credit card services have become a hot must-have for any bank that seriously wants to compete. This has come about from a drastic reduction in the qualification benchmarks for premium products such as credit cards. For instance, back in the early to mid 90s, when consumer banking was still in its undeveloped phase, only three banks were offering credit cards and they were all multinational concerns. That was the time when the size of the total portfolio was a mere 200,000 cards. The scene all of a sudden changed when Bank Al Falah launched a no fee credit card and its consumer base ballooned to 100,000 new consumers. The success of no fee credit card was followed by low interest packages on automobile loans and home loans. As we witnessed, the landscape changed, never to be the same again.
In the present, technology, advertising and marketing have become a huge part of banks’ budgets. New departments such as Product Development have become a priority, and their smooth working is paramount to the continued growth and success of the bank. By investing prodigiously on advertising and sales promotion efforts, banks have created awareness about their product menus in a huge way. Now personal loans have longer tenures and possess easy payment options, along with many other inducements. But when all banks are offering the same offerings, what makes one bank stand out?
The answer is two fold. The two areas through which banks create their own respective niche is through Customer Relationship Management and through differentiation through constant innovation. By being aware of the change occurring in the market, and having a good knowledge of customer preferences and requirements, and by innovating the services offered, segmentation can be a highly successful option. The other area is Customer Relationship Management, which hasn’t exactly been the strong point of banks. Many consumers constantly complaining about a dozen or so hidden costs behind each offer by a bank, or the lack of honesty in the advertising of their services. The successful banks have ensured that their relationships with their most important external stakeholders’, i.e. their customers, has been conducive to long term trust and loyalty from the consumers. The thing the bank executives constantly remind themselves, and us, is that banks are no more about only financing. They have to look at their products and services from a marketing perspective as well.
When all is said and done, and in spite of everything, banks still have to concentrate on continuous product development to retain their customers through the quality offered in their services. The logic is simple: While advertising helps to build the image, it is the product that sustains that particular image. Banks also need to remember that while advertising works big time to attract both old and new customers, word-of-mouth remains the most effective way of communication for their products and offerings. So while big names continue to spend their huge advertising budget to promote their products, they also face competition from smaller banks (with less advertising budget) whose terms and conditions may turn out to be more attractive especially for consumers with less money. At the end of the day, however, it is the quality of service and quick turnaround time that will make the consumer an ardent customer of any bank’s products and services.
But there has been a rather pressing problem that has risen simultaneous to the rise of consumer banking. At its core, consumer banking targets people who do not have a lot of cash, but who have acquired needs. The problem is that many of the consumers cannot really afford to have brand new cars through loans, or similar offers. A rising middle class attempts to utilize these services for improving their lifestyles, but is it really conducive to their long-term success? This is in many ways similar to the government-induced ban on wedding foods, where the government says that a person if forced to provide expensive food even if that person cannot afford it. Similarly, in many instances, consumer banking causes the consumer to opt for services or products that the consumer would not normally opt for. The previously mentioned false advertising and false claims play a huge part in this.
From the bank’s point of view, all they would care about is the default rate. As it stands, default rate is low. For instance, in the auto-financing sector, the recovery rate is around 97% and even if the customer is unable to pay up, with a mortgage the bank can always foreclose one’s property. Some industry experts, however, say that the real test of default will come once the products started ageing and people will start getting tired of long loan repayments. We could trace the default back to the proposition we just mentioned: in many cases the bank has created a need for the consumer that he buys, even if the consumer can’t afford it.
In spite of such nay saying, consumer banking is a huge industry with great profits and a massive potential for improving economic conditions. But the banking sector has to care more for its subscribers, rather than solely about itself. It needs to offer better services, at better terms; and needs to inform the consumer completely and fully about its services. The quality of its advertising needs to be good, and false and misleading advertising needs to be cut out. Technology, innovation and customer relationship needs to improve massively, and mergers are likely that could see smaller banks become part of larger banks in an effort to cut down costs; increase profits and offer better services. These could usher in a better era for banking and consumers, where a mutually beneficial relationship based on quality of service, honesty and trust can exist.
