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Banking 2.0: Response to challenges of the financial crisis? Low-cost banking!

In mid-November 2011, a rather high-profile event took place in Kyiv – the 6th Ukrainian Banking Forum organized by the Adam Smith Institute. Its high-profile nature was manifested most notably in that the cream of Ukrainian banking society coordinated positions. And the coordination appeared to upset the event participants.

Counting money

It’s been a long time that I have seen such pessimism in executives at many Ukrainian top banks, including foreign capital banks. Problems are the same: recession in the European industrial economy worsened by problems at largest banking institutions that charge to loss previous investments to bonds (it’s clear to which bonds). Another problem is an ongoing recession in other countries worldwide (so, a major challenge is availability of external low-cost funding). There’re also some local problems: a continuing discussion on the level of reserve by banks in Ukraine, problems with a distorted currency structure in bank balances (a new trend) and a pressing on the national currency by a growing import.

And above all, the most forward-looking executives at some banks who keep on taking care of the future and such who have nowhere to go brought up a dramatic issue – on operating revenue at an ordinary Ukrainian banking institution (before reserves accounting), i.e. a model of current payback at a level of a branch, subsidiary and an outlet, including a model of payback at a level of the sales network and a bank’s headquarter combined. Each bank should carefully study this indicator w/o considering reserves.

Many people talk about running at a loss because of loan payment defaults. This is really an enormous challenge. But do they often calculate the pay-off period of their institutions in new conditions before (or w/o) reserves?

I’m sure it’ll be a hit for many. Taking into account a near-collapsed market, sometimes insensible competition in rates and transaction and interest-based services, many high-flying operators would see that the model is absolutely loss-making even without reserves, so before implementing them. Really, where income may come from? May it come from posh street retail offices? Some banks dare rent area at boutique areas at shopping and leisure centers paying for one square meter more than fashionable clothes boutiques, jewelry shops and drugstores do. I saw a price for one square meter to be $300 a month in Pozniaky (a Kyiv residential area with a medium-price real estate), and it was offered for banking outlets. As an example, 1 sqm for street retailers costs 40 Euros in the center of Rome.

From the other hand, some banks offer credit rates that are sometimes lower than a market average cost of a deposit per annum. Besides, the cost of transaction services equals to near zero. Moreover, operational processes can make a cheat from the most honest manager (especially when influenced by colleagues), etc.

Will the recovering market help get over the specified challenges? The market is far not the same as it was before 2008. It is recovering, but very slowly. So, reserves turn out to be a luxury and not everyone can form them.

So, it’s the way challenges arise that should be tackled and adapted to. Here, the following quotation is applicable: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change” (Charles Darwin).

Crisis challenges and new market challenges

All services should become more accessible and reliable, simpler and cheaper. Pompousness is sough-after by a handful of VIP-customers who can still enjoy their ivory tower – affluent banking and private banking that nobody has cancelled (5% or 10% at best of Ukraine’s population). What can one offer to the market where 80% of people have average or above-average income (a Ukrainian standard)?

Solutions for challenges are:

Streamlining, standardization, a severe centralization with respective IT-support, analysis of efficiency and disposal of unnecessary expenses, services and chains.

It is appropriate to pay attention at post-crisis (and other) trends in air transport service. There’s a noteworthy case study on low-cost companies. At present, their popularity grows exponentially. Besides, this segment begins to be used by consumers who prefer average or above-average segments and who have never thought of using low-cost airlines. The following question arises: how can that experience be applied to banking?


It’s the way a 2012-2015 bank will look like: a powerful centralized bank-office with standardized decision-making schemes, online scanning and identification systems, centralized document flow, centralized risk management with outsourcing of assets evaluation and physical inspection, a light, but extensive network of cheap (but not badly looking) front-offices, online bank, mobile bank, bank’s call center, bank in partner networks, cross-functional partnership in products distribution, focus on key competency products, turn away from an aggressive in-house versatility, transfer of non-key competencies to partners, and cross sales of products to partners.

Why will it work? New technologies that will make it possible do exist. They have been tested and are used even in our country. In this case another quotation is applicable: “Competition… takes place not between products or companies, but between business models…” Gary Hamel.