Product Customisation Is the Key to Acquiring New Retail Deposits

Transcription

1 Asian Banker Research 17 August 2011 Research Report Product Customisation Is the Key to Acquiring New Retail Deposits Product Customisation, Improved Data Analytics, And Rewards Are Key Deposit Growth Drivers Table of Contents 1. Key trends in deposit collection 2. The gap between deposit and loan growth is widening in Asia 3. Large banks dominate the competition for retail deposits 4. Changes in how banks run their deposit business 5. Operational initiatives focus on automation and analytics 6. Evaluation criteria and scorecard for Deposit and Liabilities Management 7. Market succeeding retail deposit products from 2004 to 2010 Page 1 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

2 Product Customisation, Improved Data Analytics, And Rewards Are Key Deposit Growth Drivers With the global financial crisis (GFC) drying up liquidity in the interbank market, low policy rates and raising capital requirements, banks were forced to rethink their funding strategy. Contracting margins and increasing competition in many emerging markets have caused banks to expand the share of deposit funding, particularly for low cost accounts such as CASA. We saw a slight increase of the proportion of CASA, resulting in an average of 6 of total retail deposits in 2010, up from 57% in As yield cannot serve as a differentiator for low cost deposits, banks need to build their deposit proposition around new initiatives to win market share at affordable costs. Some key trends we noticed include the customisation of deposit products to the needs of specific customer segments, product bundling with other fee-based products such as debit and credit cards, insurance and even asset products, as well as the use of rewards and loyalty programmes around deposit products or the overall customer relationship. Fierce competition and contracting margins have intensified the need for a more thorough cost management approach driven mainly by the pursuit of higher operational efficiency. This has not only translated into faster and more automated account opening, but also into the spread/distribution of RDC via ATM, internet, and mobile. Mindsets in Asian retail banks have shifted from regarding deposits as only a liability to seeing it as an asset creating revenues. Improved deposit analytics and models allow a more efficient asset and liabilities management and needs-based product development to eliminate funding mismatches and optimise margin management. With customers demanding for more flexibility in deposit and lending products and high volatility in the money market, banks need to manage their portfolio more actively. Survey profile Survey methodology This research report, prepared by Asian Banker Research, is based on findings from the regional Excellence in Retail Financial Services, consisting of an evaluation of more than 180 commercial banks in Asia Pacific, the Middle East and Africa. The programme covers mature markets such as Australia, Singapore, Hong Kong, Korea, Japan as well as emerging markets such as China, India, Philippines, Indonesia, Thailand, Malaysia and South Africa. Our survey on deposit and liabilities management includes 13 financial institutions which were the nominees for the respective awards in the Excellence Regional survey of five mature and eight emerging market players across Asia Pacific, the Middle East and Africa. Survey period: January February In-depth discussions with key executives of first tier local and international banks. Discussions were combined with a quantitative questionnaire to standardise response sets. Page 2 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

3 executive summary Initiatives to attract low cost current and savings accounts (CASA) have intensified in the last ten years. Retail deposit growth in Asia Pacific has slowed, driven by high inflation in emerging markets such as India, Indonesia and Vietnam, and also in mature markets like Taiwan and Singapore. Nonetheless aggregated retail deposits in the region s tier 1 banks grew with 7.8% year-on-year (YoY) in 2010 at a faster pace than the aggregated retail assets with 5.5% YoY growth (excluding China). Loan growth outpaced deposit growth in China, Singapore, the Philippines, India, Vietnam and Indonesia, while banks in Korea, Australia and Thailand focused on improving liquidity instead. Renminbi (RMB) deposits are a key driver of deposit growth in Hong Kong, with SMEs as the main source. Retail investors are also seeking to participate in the expected RMB appreciation. This trend also applies to Forex accounts in Southeast Asian markets where currencies have appreciated against the dollar and euro. Key market share winners in deposits are ANZ (Australia), Bank of China (Hong Kong), State Bank of India (India), Postal and Savings Bank of China (China), as well as the large banks in Malaysia, the Philippines and Thailand. Philippine and Malaysian banks benefited from falling cost of funding and increasing net interest margins (NIM). Malaysian NIM expanded by 1.4 percentage points (pp) and the Philippines by 0.77pp, while Thai and Taiwanese banks also saw minor margin expansion. Nonetheless margins in the rest of the region contracted, with Indonesia (-0.43pp) India (-0.21pp), Australia (-0.18pp), Hong Kong (-0.14pp) and were flat in Singapore, Japan, and Taiwan. Product differentiation is achieved by product customisation and relationship-based loyalty programmes rather than product bundling. Yield and convenience remain the key success factors in deposit collection. On the other hand marginal price differences did little to sway customers in terms of CASA deposits. Security, flexibility and advisory have become important needs for customers today. Improved pricing mechanisms based on deposit analytics and models help banks to improve margin management. While the improvement of account opening processes remains predominant in current operational initiatives, the future trend is leaning towards improved customer onboarding, including customer information collection and segmentation, integrated management of multiple accounts and internationalisation. Mobile remote deposit capture (RDC) is picking up in the US, but not in Asia, nor is it expected to pick up in Asia. Page 3 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

4 1. Key Trends In Deposit Collection Asia Pacific banks have traditionally been built on a capital foundation more solid than that of their Western counterparts. While this limits pressure to improve their liquidity position in a dramatic fashion, higher capital requirements from new regulations such as Basel III nonetheless drive the need for banks to grow their retail deposits, particularly low cost CASA. Figure 1 Quantity and direction of deposit initiatives in Asia Pacific Number of received submissions Investment products mostly structured 20 Other (bundled product, educational accounts, travel cards/accounts, etc) 10 Foreign exchange products Time deposit products CASA products Source: Asian Banker Research Maintaining low policy rates to support economic growth due to the GFC has damaged deposit spreads in the region, putting enormous pressure on margins. This has resulted in strong competition for deposits, often going beyond offering healthy rates to grow their deposit base. Narrow margins leave little room for competition in pricing, pushing banks to become more active in developing other differentiation criteria. This often means targeting new customer segments and customising products to fit specific customer needs. New segments include the unbanked, such as the young (Gen Y) and mass segments in markets like India, Philippines and Vietnam, as well as specialised segments such as families, special occupations, retires, the young affluent and wealthy mainland Chinese. A number of banks are trying to differentiate themselves through improved customer education and advisory, such as campaigns to increase financial literacy and to provide wealth building advice to lower-income segments. Page 4 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

5 There has also been an increase, though to a much lesser degree, of loyalty and rewards programmes, traditionally the domain of credit cards and debit cards. Today, we see initiatives to introduce rewards programmes to enhance customer retention and to incentivise preferred customer behaviour such as the use of online banking, in markets such as Malaysia and Australia, which are exposed to intense competition for deposits. Initiatives to launch rewards programmes for deposits have also taken place in Indian banks, where savings interest rates are regulated by the central bank. Renminbi deposits have taken off with the continuing liberalisation of the currency. This applies not only to Hong Kong, where major banks have already switched to a dual currency deposit strategy to build their RMB deposits on large scale, but also to markets such as Japan and Malaysia, and, since 2011, Singapore, where banks have begun to offer RMB products. Renminbi deposits have proved attractive to SME customers after all, the appreciation of the RMB is not a unique feature in the region and several freely traded Asian currencies have appreciated against the dollar and euro consumers in the last year. According to the HSBC Small Business Confidence Monitor, about 37% of SMEs in Hong Kong settled cross-border trade in RMB as at December The figure is expected to grow to 5 within the next 12 months. The HSBC Small Business Confidence Monitor also found that more than 7 of SMEs in Hong Kong have or intend to have RMB deposits. Operationally, banks remain active in automating and streamlining their account opening and deposit-in processes. More sophisticated banks have sought to exploit the potential of proper onboarding through a better after-sales process. The deposit process has not fundamentally changed in the past few years and the majority of funds are still collected through branch and increasingly the self service network. Alternative channels were fine-tuned to enhance the customer experience, for example, through the establishment of a single account view across multiple accounts, personal financial tools to enable customers to analyse and manage their spending patterns and real time balancing for intrabank funds transfers, as well as improved bill payment services. Page 5 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

6 2. The Gap Between Deposit And Loan Growth Is Widening In Asia Pacific a. Retail deposit growth in Asia Pacific Retail deposits in top tier retail banks in the region grew on average by 7.7%, marking a slowdown from 9.6% in 2009 and falling below the five- year compound annual growth rate (CAGR) of 8.5%. The slowdown is obvious in a number of emerging markets such as India, Indonesia, the Philippines and Vietnam, as well as mature markets such as Singapore. The slowdown can be attributed to high inflation of more than 4.5% in these markets, naturally affecting customers willingness to deposit their money in deposit accounts. On the other hand, markets like Australia, Korea and Malaysia see considerable positive changes in retail deposit balances. Figure 2 Aggregated retail deposit growth in Asia Pacific Retail core deposit growth Yoy % 4 35% 3 25% 2 High market maturity Medium market maturity Low market maturity % 1 5% Average growth rate in Asia Pacific 2011F Underperforming -5% Japan Philippines Singapore Taiwan Australia India Hong Kong Malaysia China Thailand Korea Indonesia Vietnam Asia Pacific Average Overperforming Source: Asian Banker Research In China, India and Vietnam, controlled interest rates combined with high inflation are the key barriers to deposit growth. While Chinese banks seek to attract funds outside the regulated space in the form of wealth management products such as short term structured products, Indian banks are highly competitive on time deposits where rates fluctuate freely. In Vietnam, banks are offering floating rates deposits and gold investment products due to high volatility of interest rates. In Singapore despite stable prime rates, deposit interest rates have been declining for years while inflation grew by more than 4%. Nonetheless deposit growth remains stable, while the share of CASA deposits has reached an all-time high, due to the combination of low deposit rates and buoyant capital markets. Loan-to-deposit ratios (LDR) in Singapore banks keep due to the fast loan growth and high interbank funding. In early 2011 several Singapore banks offered RMB deposits, which received some interest from domestic investors. Other than that retail banks sought to attract deposits by targeting special segments, such as the elderly or children, or bundle with insurance products, but there have been no changes beyond that lately. Page 6 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

7 Banks in Malaysia and Australia have been pushing aggressively for retail deposits. While Malaysian banks say they are doing so in preparation for Basel III, Australian banks are seeking to reduce their dependence on wholesale funding, particularly their dependency on foreign capital. Though wholesale funding does not pose a problem in itself, it leaves banks vulnerable to market developments. Australian banks are therefore keen to shift their funding back to core deposits. Australia s retail deposits grew 14.1% Y-on-Y in Korean banks are challenged by the regulator to bring down their loan deposit ratios to 10 by 2012 and eventually even lower, compared with LDR of 112% in 2009 and even 124% in As a result deposit growth is almost three times higher than credit growth. Figure 3 Comparism of retail loan and deposit growth in Asia Pacific YoY depsoit and loan growth in % Liquidity focus Balanced growth Asset focus 6 38% 103% % 13% 18% 14% 8% 22% 13% 15% 35% 2% 11% 7% 1 8% 28% 24% 12% 18% 16% 7% 19% 19% 19% 14% 1 9% 13% 11% 2% 9% 11% 5% 4% % 12% 8% 5% 2% -1% 2% Australia Thailand Korea Japan Taiwan Malaysia Hong Kong Indonesia Vietnam 35% India Philippines Singapore 49% China Retail deposit growth Retail loan growth Source: Asian Banker Research In China, retail loan growth outpaced deposit growth by nine times, raising sustainability concerns particularly in the SME segment. Singapore, the Philippines, India, and Vietnam are also gearing for aggressive loan growth, while deposit funding has not kept pace. In the short term we see strategy changes in Hong Kong, where banks are lending more aggressively, and Malaysian and Thai banks, which have slowed loan growth to more balanced levels. Page 7 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

8 b. Margin compression and cost of funding Figure 4 Average net interest margins and average cost of funds of tier 1 banks in Asia Pacific Changes in NIM and cost of funds in in percentage points % % % % 1 8% 6% 4% 2% NIM and cost of funds in % Change in NIM Transactional Services -1.5% Japan Singapore Hong Kong Malaysia Australia Thailand Philippines Taiwan India Indonesia Net interest margin (NIM) Cost of funds Source: Asian Banker Research Not surprisingly we see higher cost of funds correlated to narrower NIM. Markets such as Vietnam and India have the highest cost of funds in the region, but also have the highest margins. This is affected by central bank intervention and a low level of market maturity. However given their rapid development, they also show the biggest decline in cost of funds and NIM last year. In Taiwan, the Philippines, Thailand and Malaysia the gap between cost of funding and NIM is much smaller. These markets also show the expected correlation between falling cost of funds and rising margins. Our interviews show that banks in these markets focus on increasing their CASA deposits, a ratio that has surpassed the 5 mark for leading banks in the Philippines and Malaysia. In Australia we see a large gap between funding cost and interest margin, indicating that banks grew very aggressively on the liabilities side in terms of pricing. In Malaysia on the other hand, the cost of funding has dropped below NIM, reflecting a strong improvement on margins from 2009 to This creates room for more aggressive pricing in the future. The situation in Japan, Singapore and Hong Kong reflect what one would expect from a mature market very narrow margins, but also a low cost of funding. The gap between cost of funds and NIM is also very narrow as the small margins do not leave banks with much room for competitive pricing. Page 8 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

9 3. Large Banks DominateThe Competition For Retail Deposits a. Competition for deposit funding challenged by lack of differentiation Australia, Japan and Korea have very concentrated retail banking markets, with bigger players typically holding more than 8 of the retail deposits. Near zero policy rates in Japan for over a decade have translated into minimal movement in terms of market share shifts. Though Mitsubishi UFG managed to expand its market share in 2010, none of the smaller, more retail focused banks such as Shinsei and Resona, managed to expand in the current market. While the competition for deposits intensified in Korea due to the higher LDR requirements, the country s largest banks were not able improve their market position. A number of major banking scandals involving the top personnel in Kookmin Bank and Shinhan Bank resulted in changes in the banks top management. Kookmin seemed most affected, losing market share particularly to smaller players. Figure 5 Retail deposit market shares of selected banks in concentrated mature markets (Australia, Japan, Korea) Market share of retail dedposits by selected banks in % CBA; 26.9% ANZ; 20.3% Westpac; 17. CBA; 26.6% ANZ; 21.1% Westpac; 17.4% Market share of retail dedposits by selected banks in % MUFG; 31.92% MFG; 18.2 SMBC; 18.04% MUFG; 32.48% MFG; 18.05% SMBC; 18.05% Market share of retail deposits by selected banks in % Kookmin; 39.8% Shinhan; 29.2% Kookmin; 35.5% Shinhan; 29.3% NAB; 9.3% Citi; 1.1% Other; 25.4% 2009 NAB; 9.9% Citi; 1.4% Other; 23.7% Resona; 11.09% Shinsei; 2.84% Rakuten; 0.36% Other; 17.5% Resona; 11.3 Shinsei; 2.42% Rakuten; 0.36% Other; 17.3% Hana; 22.8% Hana; 22.5% Other; 12.4% Other; 8.5% Australia Japan Korea Source: Asian Banker Research Page 9 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

10 In Australia banks competed aggressively for market share in retail deposits, with ANZ expanding its market share by 0.8 pp to 21.1%. Westpac, NAB and Citibank managed to poach market share from CBA, which still holds the majority of retail deposits. Retail banking in Hong Kong, Singapore and Taiwan shows up as a more fragmented basket, despite their small populations. The bigger banks in Hong Kong expanded market share in the last year, with market leader HSBC and Bank of China Hong Kong (BOC HK) expanding by 0.6pp each. These two banks are the market leaders in RMB deposit products. However detailed information on the growth of RMB deposits are kept confidential by the banks. In Singapore the bigger players could not determine the deposit market to their advantage. The three local banks only account for 46% of the market, while the share of global banks StanChart, Citi and HSBC taken together remain stable around 14%. DBS bank has consistently lost market share, but still remains the biggest player by far. Figure 6 Retail deposit market shares of selected banks in fragmented mature markets (Hong Kong, Singapore, Taiwan) Market share of retail deposits by selected banks in % BOC; 10.6% HS; 10.3% StanChart; 6. BEA; 3.9% 24.6% BOC; 12.3% HS; 10.4% StanChart; 6. BEA; 4.4% Citi; 1.5% Market share of retail dedposits by selected banks in % DBS; 27.6% UOB; 10.9% OCBC; 10.6% Citi; 5.8% StanChart; 5.4% HSBC; 2.8% DBS; 25.3% UOB; 10.9% OCBC; 9.9% Citi; 5.3% StanChart; 5.5% HSBC; 2.8% Market share of retail deposits by selected banks in % Fubon; 8.51% Esun; 7.05% Cathay; 5.16% CTCB; 4.37% Taishin; 2.7% Citi; 1.08% Others; 71.1% Fubon; 8.53% Esun; 5.42% Cathay; 4.86% CTCB; 4.27% Taishin; 2.7% Citi; 0.91% Others; 73.3% Other; 45.3% Other; 42.2% 2 Others; 36.9% Others; 40.2% Hong Kong Singapore Taiwan Source: Asian Banker Research Hong Kong saw further consolidation of its retail deposit base among the bigger banks. This applies particularly to BOC HK and HSBC. Both banks are also the key holders of RMB deposits in Hong Kong. However Hong Kong banks are keeping RMB deposit growth figures confidential. Page 10 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

11 b. Controlled deposit rates conserving status quo In October 2010, consumer deposits in China saw a decline, while fund sales and wealth management surged. This correlation between deposit decrease and fund sales increases in China has been experienced before. As banks are not able to compete on deposits due to caps on interest rates, the competition for deposits takes place instead in the wealth management space, particularly in terms of Forex accounts and structured deposits. Around 5 of China s retail deposits are held by the four large banks, but with the exception of Agricultural Bank of China (ABC), all of them are losing market share. This is surprising as one would expect from the lack of pricing competition that retail depositors would put money into banks with the most branches or the biggest advertising budget. Also the lack of deposit guarantees should support the bigger banks as depositors tend to bank where their employers do which for bigger companies often means the largescale banks. Figure 7 Retail deposit market shares in China ICBC; 14.9% ICBC; 14.9% CCB; 12.5% Others; 41.5% CCB; 12.3% Others; 41.5% ABC; 13.6% ABC; 13.9% BOC; 10. PSBC; 4. BoCom; 2.5% BOS; 0.2% BOB; 0.3% Industrial; 0.5% Minsheng; 0.6% CITIC; 0.7% SPDB; 0.7% CMB; 2.1% BOC; 9.7% PSBC; 4.5% BoCom; 2.5% BOB; 0.3% BOS; 0.3% Industrial; 0.5% Minsheng; 0.6% CITIC; 0.8% SPDB; 0.8% CMB; 2. Source: Asian Banker Research In this volatile market, one bank is turning the deposit market in China upside down and growing its market share exponentially since the launch of its banking operations in 2007 the Postal Savings Bank of China (PSBC). PSBC grew from next to nothing in terms of deposit market share to 4.5% in Through its massive geographical footprint of 40,000 branches in post offices all across the country, PSBC reaches out to SMEs, rural and low income customers. The bank also benefited from the national economic stimulus package, carrying financial services to rural areas, particularly through micro finance. Some of the smaller players such as China CITIC Bank and Shanghai Pudong Development Bank (SPDB) are consistently growing market share, mainly from the successful cross-selling of base products, such as payments or mortgages. Page 11 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

12 Another factor benefitting smaller banks is CBRC s move to raise deposit reserve ratios to 21% for the big four banks, while maintaining the ratio for small and medium sized banks at 17%. The State Bank of India (SBI) expanded its retail market share to 37.3 % in The move of deposits to India s largest bank clearly indicate the continuing tension in the country s retail banking environment and the lack of trust in the private banking sector. This is aggravated by high inflation which despite the high interest rates disincentivises customers from saving. Growth in time deposits has been rising in contrast to the contracting real transaction demand for money (demand deposits) which is a forward looking indicator for growth slowdown. The RBI has released a discussion paper to liberalise the savings rate. While the move may increase product innovation and increase the attrativeness of savings deposit, it also expected to increase competition to unhealthy levels, increase liquidity risk and oppose financial inclusion, due to banks focusing more on higher deposit balances to mitigate transaction costs. In Indonesia s current low interest rate environment, banks are assured low cost of third party funding, leading to high credit availability. Although liquidity may not be an issue for most banks given the low average industry LDR of 78% at end of the first quarter of 2011, banks with competitive funding structure have greater flexibility to maneuver and remix their loan portfolios and are likely to be the main beneficiaries of intensifying competition in lending. Bank Central Asia (BCA) still leads the market with 11.9% market share, but Bank Rakyat Indonesia (BRI) the market leader in microfinance and Bank Mandiri are moving beyond its traditional wholesale business and providing strong competition. Figure 8 Retail deposit market shares of selected banks in fragmented emerging markets (Indonesia, India, Vietnam) Market share of retail dedposits by selected banks in % BCA; 12.1% BRI; 11.4% Mandiri; 9.8% CIMB Niaga; 4.4% Citi; 1.6% BCA; 11.9% BRI; 11.6% Mandiri; 9.5% CIMB Niaga; 5. Citi; 1.5% Market share of retail dedposits by selected banks in % SBI; 35.3% ICICI; 4.9% HDFC; 4.6% Axis; 2.9% PNB; 0.9% SBI; 37.7% ICICI; 5.1% HDFC; 5.1% Axis; 3.5% PNB; 1. Market share of retail deposits by selected banks in % Vietcom; 11.5% Vietin; 10.1% SHB; 7. ACB; 6.4% Sacom; 5.2% HSBC; 0.4% Vietcom; 9.9% Vietin; 9.9% SHB; 8. ACB; 6.3% Sacom; H4.7% HSBC; 0.4% 3 2 Others; 60.7% Others; 60.5% 3 2 Others; 51.4% Others; 47.6% 3 2 Others; 59.4% Others; 60.8% Indonesia India Vietnam Source: Asian Banker Research Page 12 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

13 c. Price competition and consolidation of players Competition among Malaysian retail banks for market share in retail deposits, particularly low-cost deposits, is fierce. In this environment the three larger banks Public Bank, Maybank and CIMB set the standard. The upper market segment in particular is a key target, leaving smaller banks with niche groups, such as civil servants and young lifestyle segment targeted by Alliance Bank or the low value mass market sought by RHB. Figure 9 Retail deposit market shares of selected banks in rapidly consolidating markets (Malaysia, Philippines, Thailand) Market share of retail dedposits by selected banks in % Public Bank; 19.5% Maybank; 17.6% CIMB; 9.1% AMMB; 6.5% HLB; 5.2% Others; 42.2% Public Bank; 20.4% Maybank; 18.9% CIMB; 10.3% AMMB; 7. HLB; 4.9% Others; 38.5% Market share of retail dedposits by selected banks in % BDO; 27.5% Metro; 20.1% BPI; 12.5% Unionbank; 4.4% RCBC; 3.5% Others; 32.1% BDO; 29.7% Metro; 20. BPI; 13.7% Unionbank; 4.1% RCBC; 3.9% Others; 28.6% Market share of retail deposits by selected banks in % Bangkok Bank; 27.8% KTB; 16.4% SCB; 16. K-bank; 8.1% BAY; 7.9% Other; 23.8% Bangkok Bank; 28. KTB; 17.7% SCB; 17. K-bank; 9.8% BAY; 8.1% Other; 19.4% Malaysia Philippines Thailand Source: Asian Banker Research Banks in the Philippines are finding it more difficult to attract new deposits, and with the long-needed consolidation of the banking sector, the larger banks are able to dominate the game even more. Banco de Oro (BDO) continues its acquisition strategy and has been successful in cross selling deposits within the larger retail group and to merchant tenants, thereby binding employees to bank within the group. Bank of the Philippine Islands (BPI), formerly associated with the upper segments, switched its deposit acquisition strategy to include new customer segments, particularly younger and other unbanked groups. The bank actively engages schools and universities, but also seeks to reach out to blue collar workers. Traditionally many banking products in the country are developed around the country s large overseas worker population, including multi-currency accounts and deposits linked to remittances, low cross-border rates, attractive exchange rates and convenient access for beneficiaries at home. Page 13 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

14 4. Changes In How Banks Run Their Deposit Business a. Yields and convenience remain key success factors in deposit collection Analysing what retail bankers identify as their customers key needs, the submissions and interviews have showed that almost 3 believe that yield is the key differentiator for customers. This belief is reflected in the very aggressive pricing strategy deployed by a wide number of banks, leading to a competitive environment in markets like Malaysia and Australia. Convenience also ranks high in the perception of retail bankers, and includes customer needs such as accessibility of funds, transactions and payments, foreign exchange, simplicity in terms of usability and intuitiveness of customer-facing processes and interfaces, and flexibility in choice of channels and timing. Figure 10 What do retail bankers perceive as the most important customer needs for deposits? % of respondents who mentioned 3 25% 2 15% 1 5% Yield Convenience Security Financial advisory High liquidity and flexibility Cross border banking Affordability of account Customer needs identified by retail bankers Source: Asian Banker Research Security is also seen as a key need, such as for example in hedging risk, portfolio balancing, risk diversification and balancing of interest fluctuations. Security as a need depends on the operating environment but also on the complexity of financial transactions. For this reason security was highlighted in banks offering complex investment opportunities to customers, obviously as an attempt to restore confidence after the global financial crisis. Liquidity is also among the top five customer needs. In times of crisis especially, when the whole economy is running dry on liquidity, customers demand flexible access to their funds and thus avoid locking funds in time deposits. Flexibility in this regard remains a key need for customers. Page 14 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

15 b. Key initiatives by leading banks in the area of deposit product innovation Targeting new customers through product customisation Many banks revisited customer segmentation initiatives in 2010, designing products around customer needs based on consumer research such as focus groups and increasingly also on data analytics. This indicates that banks are moving away from a product push approach towards more customer centricity. Most banks are however still at the beginning of this journey. Many banks have begun to bundle deposit products with asset and fee income products, while best practice banks seek to design a customised value proposition around a target segment s needs. Maybank focused its deposit strategy on acquiring and retaining affluent and high net worth customers. In Malaysia, the bank targets particularly the young affluent segment, offering an interest-bearing current account that offers account holders the convenience of a checking facility with a combination of online features and personal insurance coverage. The account also comes in a shariah compliant version. The bank seeks to cater to the need for globality in financial services. Online accounts are regarded as the anchor for Maybank accounts across the region, in the Philippines, Singapore, and Indonesia. In Singapore the bank launched a new deposit product targeting affluent seniors by covering them with a personal accident insurance as long as their account balance exceeds $24,000. BPI targets customer groups yet under-represented in the bank s franchise. Targeting blue collar workers, BPI launched an interest-bearing savings account with an affordable initial deposit and no maintaining balance. The bank earns money on charging a withdrawal transactions fee of $ 0.11 per transaction. The bank also targets micro SMEs with an interest-bearing savings account with a low maintaining balance of $230, offering instant cheque clearing and easy cheque encashment by allowing customers to use any branch and not restricting them to the home branch. India s ICICI Bank maps customers into different lifecycle stages, offering product bundles for term deposits according to the specific needs of each lifecycle stage. Targeted product bundles are available whether the customer is in the asset building stage of years, when he is focussing on his own needs such as buying a car; or in the responsible stage, when he has to take care of the family by buying a home or paying for education expenses; or in his senior life stage, when he is interested in retirement planning and wealth maximisation. Walking the narrow line between price optimisation, acquisition and retention To be successful in the long term, banks need to focus on explaining the value of a banking service rather than concentrating on price, because a customer s willingness to pay depends on the perceived value of the product. Thus, the only way out of the price trap is to give value-based pricing offers. Page 15 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

16 There is a widespread belief that low savings interest rates are not a customer s primary concern on CASA accounts, unlike time deposits and savings plans, where highly visible rates might make a difference and are a key driver for customer acquisition and retention. Hence banks need to decide where they want to pay competitive rates, and where this does not make sense. For products where rates really matter, an attractive pricing strategy will support acquisition and retention and create a sustainable and profitable business case for the bank. In a low interest rate environment, deposits tend to move toward short term rather than longer term deposits. For this reason banks need to create pricing models to manage pricing and margins of fixed deposits in order to maintain value while pricing competitively. Liabilities pricing models allow banks to quantify the impact of various rate change scenarios thus enabling them to maximise margins in specific deposit products. Vietnam has undergone drastic interest rate fluctuations in the last few years. For this reason many banks introduced floating rate deposits. In 2009, Asia Commercial Bank (ACB) as a first mover introduced a mediumterm deposit with floating interest rates. Its 36 month-term depositors could choose between six different interest payment periods between one and 12 months the longer the period the higher the interest rate. Depositors could withdraw deposits before maturity at a minimum rate equal to normal deposits with a similar term. Due to a loophole in the regulations, the deposit account allows ACB to hold lower reserve requirements as it qualifies as a medium term deposit, but still give customers attractive rates and the flexibility of access to their funds. Hence it is inexpensive for the bank and attracts customers through better interest rates and flexibility. Within a year of the launch, this product made up 64% of the total customer deposits at ACB, attracting more than 200,000 new customers in the two years following its introduction and reaching a balance of $3.5 billion. Figure 11 Factors and mechanisms affecting pricing Factors affecting pricing Value customers place on a product Variations in the way customers value a product Value customers place on certain product attributes Customers Price Sensitivities Identification of Optimal Pricing Structure Competitors Reactions Performance monitoring Emotional Response of customers Are returns worth the cost to serve? Trade off decisions of customers in the selection process Pricing mechanisms On Sale products highly competitive, with focus on customer acquisition Off Sale products optimise margins within balance bands where customers are not rate sensitive focusing on customer retention (see price elasticity on page XXX) Balance and liquidity - the higher the balance the higher the rate, the longer the duration of the investment, the higher the rate Price according to product role within the product continuum Competitor s pricing Source: Asian Banker Research Page 16 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

17 Some banks seek to minimise operational costs and pass cost savings on to customers through attractive rates. Citibank Australia launched an online savings account offering high interest and high flexibility to compete with time deposits of its peers. The high interest rate is offset against low operating and administrative costs. The bank was able to collect over $800 million and 12,000 accounts in ten months, resulting in an average account balance of over $65,000. Due to operational initiatives facilitating online account opening, such as online verification, 7 of new customer accounts were opened online. Offering easy access to deposits also raises average balances. The more transaction opportunities and the cheaper and more convenient it is for customers to withdraw funds, the smaller and more frequent the actual withdrawals and the higher the average balance. Improved advisory With the lack of differentiation in the market, a number of banks try to stand out in the advisory function. These banks intensified training of branch staff to better counsel customers in wealth aggregation and management. Particularly in emerging markets like the Philippines where financial literacy among the mass segment is low, financial advisory is important to convince customers to deposit money in a bank instead of at home. Rewards and loyalty Banks are beginning to introduce loyalty and rewards schemes traditionally more common in the cards space. But the adoption of relationship-based rewards models by Asian banks, such as Abu Dhabi Commercial Bank, Mashreq Bank, and Standard Chartered Bank Hong Kong and Singapore, where rewards are no longer given in product siloes but based on the overall banking relationship, has been slow. In this model a customer earns reward points for every transaction with his bank, be they online transactions, bill payments or credit card transactions. While this is limited to a few banks, more banks are introducing rewards points in the deposits silo, seeking to differentiate themselves and incentivise preferred customer behaviour such as using the internet as a main transaction channel, and returning savings from lower operating costs to the customer in the form of loyalty rewards. Standard Chartered Bank India now offers two new deposit products offering reward points for regular banking transactions, such as online banking transactions and ATM withdrawals. The mobile phone bundled account allows the customer to burn reward points against their mobile phone bill, thereby paying off around 3 of their monthly mobile bill with reward points. The bank also launched a lifestyle deposit account, targeting cricket fans, allowing them to set off reward points against discounts for cricket accessories and tickets as well as news, match information and lotteries. RMB deposits With the internationalisation of the RMB, banks are seeking to tap into the growing interest in CNY deposits in Asia in anticipation of appreciation in the RMB. Hong Kong banks are at the forefront of this development and act as a gateway, not only offering RMB deposits to Hong Kong residents, but also increasingly to mainland Chinese customers looking to invest outside China. While RMB accounts in Hong Kong in 2010 account for $48 billion, Peter Zhang, deputy director general, Shanghai Bureau, CBRC expects a tripling to $130 billion in This means that the contribution to CNY deposits in Hong Kong is expected jump from 5.4% in 2010 to 14.8% in Page 17 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

18 Figure 12 Composition of Hong Kong s total deposits Total deposits in Hong Kong in $ billions YoY growth of total deposits in Hong Kong in % HK$ denominated deposits in US$ RMB denominated deposits in US$ YoY Growth HK$ deposits F YoY Growth RMB deposits Source: Asian Banker Research HSBC has stayed abreast of this development, changing its strategy from one based on conventional HKDled deposits to a foreign currency-led proposition. Since 2Q 2010 the bank has deepened this strategy by exploring new income streams from foreign exchange investment while offering customers a wider choice of liabilities products for their wealth management needs. Foreign exchange is therefore no longer a simple currency exchange transaction but has turned into an asset class of its own. In this regard the bank offers not only FX services but a comprehensive suite of solutions to customers FX investments. These range from foreign currency savings and time deposits, payment and transfer, FX trading, exclusive FX Switching service, to foreign currency funds, bonds, stocks, structured product and life insurance. This proposition is supported by customer seminars to feed customers with FX market information, purported to build FX momentum and elicit interest in FX. Renminbi is also taking off in other Asian markets such as Japan and Malaysia where banks like HSBC is driving RMB deposits and investments. HSBC Japan s CNY deposit accounts allow customers to hold Chinese yuan deposits directly rather than investing in instruments linked to CNY. Deposits include savings and time deposits with maturity from one to three months. Unlike markets like Hong Kong, there are no restrictions on the amount of CNY purchased or sold daily and customers are free to move their funds as long as it stays within the offshore CNY market. Other players have joined the fray, including Malaysia s Public Bank which launched RMB fixed deposits and current accounts. These products aim to provide more currency options for customers to invest in China s booming economy as well as to increase the bank s foreign currency deposits. Singapore s DBS and OCBC have also launched RMB deposit products for While Hong Kong banks are coy about actual numbers surrounding the growth of their RMB deposits, which are doubtlessly growing at outstanding rates, a Malaysian bank shared that it collected deposits worth $125 million within only nine months in 2010, accounting for 2% of its overall deposit growth. Page 18 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

19 5. Operational Initiatives Focus On Automation And Analytics In the back-office, we see no groundbreaking changes in terms of operational initiatives in Banks are seeking to promote online accounts due to the lower cost involved. We also see more initiatives to analyse data around deposits to improve the bank s asset and liability management and improve pricing capabilities. Banks also strive to facilitate the account opening process, but know your client (KYC) requirements remain tedious. a. Account opening process Regulatory KYC requirements are a key barrier to online account opening. With Japan as the only exception in Asia Pacific allowing online account opening, banks are seeking ways to make the account opening process faster and more convenient. In Australia banks are eager to crack online account opening and so far four banks offer e-verification. CBA introduced an online electronic identity verification process for opening a transaction account, savings account or credit card account. With this online identification process, existing customers can be fully identified, complete their account application, receive an online banking ID and password and if applying for an everyday transaction or savings account, secure their account number within ten minutes without having to complete any further checks. Citibank Australia also introduced account opening through e-verification where customer s details are verified against external databases in real time to provide instant approval. In other markets banks try to facilitate account opening by minimising hassle for customers through streamlining forms, introducing straight-through processing, and intelligent queue management systems enabling the customer to enter his information before reaching the counter. In Thailand and Malaysia banks make use of biometric readers by scanning the customer s ID card, auto completing the necessary customer information saved on the card and then verifying it through fingerprint matching. Account opening times have come down to eight to ten minutes for best practice banks. While the number of branch visits for most banks also has come down to only one visit to open an account, we still see communication problems for example, when a customer wants to make an online appointment in a branch to open an account many banks require the customer to call the branch directly. In our research on Successful Branch Transformations we found that 83% of all banks in the region have streamlined their account opening process in the last 24 months. Instant PIN setting for ATM cards, internet and phone banking and instant issuance of debit cards, electronic form filling, a single account opening location at the consultation booth, and a turnaround time that balances speed with a customer s onboarding experience and needs-based dialogue have become standard in best practice banks. The level of automation at account opening has reached on average 75%, and executives say this will improve to 9 by Page 19 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011

20 b. Customer onboarding Hyped in blogs and research papers, but not executed thoroughly on the ground, are comprehensive onboarding mechanisms aimed at helping banks guide customers into preferred behaviour and banking habits. Onboarding improves the cross-selling ability of banks, as the first weeks and months of a new relationship are the most fruitful for customer engagement. Customer centricity and the ability to plan, align and optimise customer communication across channels are central to a successful onboarding mechanism. However, few banks integrate questions on customer preferences in the account opening process to generate new leads and segment the customer. Staff quality and clearly defined processes and responsibilities are key challenges. c. Transactional and channel initiatives A number of initiatives also sought to enhance the customer experience by improving convenience through the use of alternative channels. A good example is the single account view across multiple accounts, for best practice banks, even cross-border accounts. Banks were also active in expanding the offering of personal financial management tools to help customers analyse and manage their spending patterns. With improved core banking systems, real time transactions involving intrabank funds transfers is becoming more common, as well as improved bill payment services. Though these initiatives take place in the transactional space, they benefit the value proposition of the deposit business of a bank and make deposit products more usable and interesting for customers while offering the opportunity to generate fee income. While mobile RDC has taken off in the US, it has not in Asia as yet. Allowing customers to scan cheques with their mobile phone without the need to deposit it at a branch is likely to receive some attention from the banks, as it has the potential to reduce branch traffic considerably. The reason this development may be bypassed in Asia is that only four countries, Hong Kong, Korea, Singapore and Malaysia, use cheques as a major payment means. Moreover, banks are actively promoting other payment means and as such the use of cheques has been declining, particularly in those countries. The only market where cheque payments are increasing at the moment is Vietnam, where mobile phone technology is far from able to carry out remote capture. d. Improving liabilities management through improved deposit analytics With pricing still one of the key differentiators in the competition for deposit market share, deposit analytics enables banks to ensure better margin management within the savings and investment portfolio, using rates as a lever for the price sensitive customer while recouping margin on off-sale products with price insensitive customers. Deposit analytics are also crucial for needs-specific product development. In order to utilise deposits analytics for pricing, banks need to identify seasonal and external economic variables that help customers make product purchase decisions at various times in a year/cycle and the underlying reasons for those decisions. This can be achieved by collating internal client behaviour and modelling it against external economic variables, such as inflation and prime interest rates, to find the ones that best explain behaviour through a full economic cycle. By understanding this behaviour, the bank is in a position to ensure that the offerings that speak to those clients are congruent. This entails pricing to attract new funds and clients; marketing spend being used most effectively regionally, in the appropriate media as well as the optimal times to maximise uplift. Page 20 Asian Banker Research Product Customisation Is the Key to Acquiring New Retail Deposits 17 August 2011