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Cannibalism, partnerships, and other relationships between banks and financial institutions

The Open Finance concept, when one financial institution is involved in selling other institutions’ products within its chain, has been very specifically implemented in Ukraine. It’s so special that any lack of attention to the other party’s details may result in disastrous impacts on the customer base.

What is an Open Finance? It’s an interaction of financial institutions with each other so that one of their retail chains can sell standard products of other structures. For example, these are insurance policies in banking networks, credit, card and other products in the insurance chains. Or, for example, these are short unsecured loans from a small aggressive bank in the network of a more conservative and bigger bank. We can mention plenty of cooperation options, there are many of them.

The topic is quite interesting. The Open Finance concept implementation allows increasing commission fees by one party and expanding the customer base by the other party, the financial product provider. But now we would like to focus on the risks and prospects arising from the Open Finance implementation in the Ukrainian conditions.

The peculiarity of developed financial markets is that the banks act within key specific areas. There are monoliners dealing with certain products. For example, they can be car loans, mortgages or consumer credits. There are not so many universal (wide-reaching) banks; as a rule, these are quite large institutions with centuries-long histories. A long history of accumulation of key competences for a particular business ensures that monoliners feel great in certain market niches: they are very competitive due to their deep specialization. At the same time, they don’t fall into temptation (resources, technology, know-how) of going to the related financial areas: there are no reasons for that since they clearly focus on key competences and hold prevailing positions in their niche.

In Ukraine, which is featured by its short financial history, banks are forced to be wide-reaching as much as possible. Ukrainian banks are trying to have the largest amount of universal services which are justified by survival interests at this time.

If comparing the Ukrainian specifics with the western one in terms of the open finance implementation, we would identify a fundamental difference. In the developed market a mortgage bank will hardly ever “cross” customers, i. e. it will never try to sell car loans, credit cards, investment trust shares or internet-banking to customers attracted through another chain. It’s not due to the excessive scrupulosity, though, it’s a rule to adhere to agreements reached in the developed markets. The bank will not get involved in cross-selling just because the main product-related service is not its business area.

However, cross-selling is quite possible in the Ukrainian market. For almost every bank, the way from a temptation to an actual attempt of cross-selling customers attracted through another chain is just the matter of time, as well as toughness of legal statements in agreements and a chance to avoid them.

Moreover, the experience shows that the bank customers’ loyalty to a financial institution is initially close to zero. The following case proves this fact: many banks entered retail chains of household appliances and equipment at various times. They hoped to gain a stable customer base and further cross-sell other products to them by entering those chains and selling zero-crediting programs, even at loss. But the reality turned out awfully wrongful for these financial institutions. Customers, especially the top clients, were actually attracted by “zero” credits since people like getting money for free. Yes, banks have created the first class customer base. And then they tried to sell those customers some credits, even at 10% interest rate, however, it’s a magnificent offer, as you will agree. But these top customers turned their noses away and refused to accept these attractive offers. As a result, their loyalty turned out even less than 5%, mainly 2-3% (repeated requests). It’s a kind of a case illustrating the degree of customers’ loyalty to a bank in the Ukrainian market. One should remember about it.

Certainly, the bank letting another institution into its chain opens an access to its own customer base for a competitor with a hit product. The accepting bank does it for commission fees, in fact, high fees. It means that it benefits from a soft snap right here and now. Such a bank hopes that customers will appreciate its readiness to offer what was absent in its own range before. It means that a customer gets more comfort, i.e. gets the other bank’s consumer credit without leaving the customary bank branch.

That’s the point when the Ukrainian particularity comes out: the “receiving party”, the guest bank, strains after universalization, as a rule, it has plenty of products in its portfolio: transactions (different transfers and settlements), deposits, and cards. It can be easily included in the price war and damping competition for the same customers. Are exceptions possible? Yes, it can be avoided if the partnership is entered by financial institutions having initially and fundamentally different product lines: bank-insurance company, bank-financial company, insurance company-financial company.

In the Ukrainian realties, if the customer’s loyalty does not exceed a zero, it’s likely to assume that the customer base will start to migrate to the “receiving party” within the bank-bank partnership. Why not?

What if an aggressive and nimble bank that entered another chain is ready to offer deposits at attractive interest rates and free utility service bill payment or anything else to the customers gained through this chain? Therefore, sooner or later the receiving universal bank using the open finance concept in the partnership with another universal bank benefitting from the same extensive portfolio will lose a significant share of its customer base.

In early October, the Business newspaper asked two Chairmen of the large Ukrainian banks a question on the chance to work with other banks under agency agreements. Khreschatyk Bank Chairman Dmytro Hrydzhuk answered: “We have clearly decided to use the agency basis for cooperation with non-banking companies as long as banks are our competitors operating within the same market segment.” And that’s the point of Forum Bank Chairman Vadym Berezovyk: “We don’t want to support companies delivering the same services as we do and being our direct competitors.” Thus, we can see that bankers are absolutely aware of the “cannibalism” risk.