One of the accelerating trends in Latin American retail banking today is the effort by financial services institutions to migrate customers from thebranch to automated channels such as the Internet and kiosks.
But Latin American FSIs must overcome a unique set of challenges before the goal can be reached.
To start, the economic and social composition of the population necessitates the integration of blossoming Internet banking strategies into an overall multiple channel approach that appeals to the mass market of banking consumers. Indeed, despite the surge in Internet-related activity, consumer channel usage in Latin America is still heavily dominated by the branch, which represents over 80% of transaction volumes and approximately 70% of all current channel spending.
Certain aspects of Latin American consumer banking behavior have allowed this branch culture to perpetuate. For example, bill payment in Latin America is still conducted almost exclusively at the branch, simply because the postal system is so unreliable. As a result, going to the local branch on a regular basis is heavily ingrained in Latin American society and is unlikely to be eliminated in the foreseeable future. Until alternative delivery channels are capable of eliminating the need to visit a branch-such as for online bill payment-even the more technologically savvy consumers in the region will be slow to move their banking outside brick-and-mortar venues.
The Latin American banking technology infrastructure is also quite different from those in the United States and Europe. The "lost" decade of the 1980s, which was marred by hyperinflation and economic turmoil, meant that portions of the region missed out on some of the early computer and Internet technologies. In the long run, this could work out to be an advantage since Latin American FSIs can now leapfrog directly from antiquated to current generation technical infrastructures. They are unencumbered by technology that is already "outdated" due to the Internet-age speed of contemporary technology advancement.
But this is one bright spot in an otherwise iffy financial technology infrastructure forecast. Serious obstacles impede the rapid deployment of remote delivery in Latin America. Personal computer penetration rates remain in the single digits in all Latin countries-a grim situation that is directly attributable to the inherently inconsistent telecommunications infrastructure and exorbitant charges for Internet access. Furthermore, high acquisition costs for PCs continue to stifle growth of online banking in Latin America.
Brazil Leads the Pack
Regardless of these impediments, a large number of Latin American banks, particularly in Brazil, are increasingly investing in alternative delivery channels such as call center banking, cash dispensing machines in supermarkets, smart cards and Internet banking.
The Brazilian financial services industry has evolved into one of the most advanced in the world after almost 30 years of high inflation required banks to develop protection instruments. Home banking was introduced in the mid-1990s to offer customers a method of allocating funds from their paychecks as soon as they were deposited, thereby avoiding the risk of daily devaluations of up to 3%.
Today, a leading Brazilian bank is ranked third in the world in terms of number of online users.
However, this example is clearly still very much the exception rather than the norm, and banks are feverishly moving to lower the barriers of entry to e-finance for their customers.
For example, in an effort to improve low Internet banking rates, major FSIs are now beginning to offer free Internet access in collaboration with major telecommunications providers, as well as low-interest credit for the purchase of personal computers. In doing so, participating banks are hoping not only to migrate a larger portion of their customers away from the overcrowded branch-thus increasing customer service-but also to take advantage of the lower per-transaction costs that can be realized via the online medium.
Pruning the Branch
Despite these initiatives, it is likely the branch will continue to dominate as the channel of choice for the consumer over the next five years. (See chart on page S3.) This will necessitate increased automation and streamlining of efficiencies to handle the growing flow of customers into the brick-and-mortar channel. Both the call center and the Internet channels will experience rapid growth rates as FSIs seek to satisfy the needs of their highly profitable, high-income customers, who are increasingly demanding convenience of delivery.
Financial services institutions are also striving to improve customer profitability and value. At a typical Latin American FSI, the top 10% to 15% of customers contribute well over 80% of profits. It is therefore no surprise that banks are moving so aggressively to roll out new services in an effort to retain their bread and butter. Simply put, banks will do everything to make their customers happy. If they don't, another bank will.
Despite all good intentions of providing customers with the services they desire, Internet strategy at Latin banks is still driven by cost. Saving money on the Internet is still a pervasive mantra throughout the region.
Online banking is not simply less costly-it is dramatically less costly than the branch, $0.32 versus $1.20 respectively. In addition, Latin American branch transaction costs are notably lower than in the United States. This is primarily attributable to the fact that the cost of branch personnel is low in Latin America, where salaries are lower and expenses for employee benefits, retirement funds, and insurance are negligible.
But conversely, Latin American Internet transaction costs are higher than in the United States due to the relatively low number of Internet transactions in the region. Moreover, with current investment activity heavy in major Latin markets, banks are not yet positioned to take advantage of radical cost savings because they are still absorbing the upfront technology costs.
For these reasons, the main challenge facing financial institutions remains in getting banking consumers to use this Internet channel.
Meeting Competitive Needs
Many institutions have already had some success moving customers toward the Net. After decades of economic turmoil, the percentage of "unbanked" customers is in decline and the technology-savvy customer base in the high-end income bracket is growing steadily. More and more, the banking industry is contemplating the addition of new delivery channels to maintain its competitive edge and grow its business. Banks are trying to migrate a portion of their highly profitable customers to self-service delivery of banking services.
With competitive pressures mounting as best practices in delivery channel implementation are imported from Spain via financial behemoths Banco Santander Central Hispanoamericano (BSCH) and Banco Bilbao Vizcaya Argentaria (BBVA), regional institutions throughout Latin America are responding quickly to the steadily growing adoption of self-service banking by high-end consumers. Banks recognize that they must move quickly to satisfy comprehensive delivery channel needs or else risk losing their best customers to a competing institution.
Offering multiple delivery channels is no longer a matter of convenience; it is a matter of survival. In fact, in many Latin American banks, the e-commerce directors report directly to the bank president, not to the IT director. Financial service technology in the Internet era is emerging as a critical business issue that is gaining attention from top bank management and budget directors.
About The Author: Virginia H. Philipp is an analyst, Latin America & Caribbean, for TowerGroup.