Lachowski: PKO BP has to learn about humility
The bank lost 100,000 customers in the last year alone, and now has been drawing up new products and services in an attempt to curb the desertion. The bank is fighting to hold onto its desired market share of 40% of current accounts, which will be no minor feat, said Slawomir Lachowski, the bank's 41-year-old vice president in charge of sales and marketing. To keep that level, PKO BP must attract 600,000 new customers in 1999, he said, which means that it will have to revolutionize its customer service, product lines and accessibility - all areas in which the bank is considered to be poor. The bank also needs to deal with mountains of old housing loans made under communism and roll out a new information technology system that will link up all of its 1,000 branches before it can even begin to mull privatization. In addition, it has to return to profitability, after posting a zl. 790 million ($226 million) loss in 1998. The WBJ's Malgorzata Halaba talked to Lachowski about the challenges PKO BP faces. Following is an edited, translated version of their conversation.
Q: Five or six years ago PKO BP, with its more than 1,000 branches, was in the best position to dominate the retail banking sector. Now it's old fashioned, overstaffed, inefficient, and has a diminishing market share. What can be done about this?
A: First of all, PKO BP is still a leader in retail banking. The question is how to use its assets without allowing them to lose value in the future. In terms of the network, PKO is twice as big as the second-largest bank, Pekao. They have about 700 branches, but we have more than 1,000 of our own and 6,000 independent agents. So, in terms of a network, we are the bank that can't be compared to anything operating in Poland. In terms of the number of customers today, with 43% of all individual accounts at the end of 1998, we are the leader.
Q: But a large number of those accounts are 'passive' or 'dead,' meaning that they see little activity and a number of your clients have many accounts open at the same time.
A: We have calculated that in terms of customers, the number is even higher. We had more than 3 million individual accounts, the largest part of which was 'family' accounts, shared by a wife and a husband. We also had 4 million savings accounts. This is our asset, provided we will be able to keep these customers. The fourth quarter of last year already showed that PKO has enormous possibilities in terms of reserves. Cosmetic changes in retail products alone resulted in a net growth of individual accounts by 160,178 (in the last quarter of 1998). But this also means that we had to open more than 200,000 new accounts to have such a net growth. For the first time we reversed the downward trend, because during the previous quarters of 1998 we used to open, on average, about 80,000 new accounts, which was about 20,000 fewer than Pekao. During the fourth quarter, with a 168,000 increase, we outdistanced Pekao by more than 40,000 (new) accounts.
Q: But how is the bank going to keep its leading position?
A: PKO wants to be a bank of first choice for households, a leader in the retail banking market. To keep it, we can't afford any further loss in market share. In retail banking, the main measurement of the market position is the number of individual accounts, the size and number of consumer credits and the number of cards issued. Having said that, I would like to see 1999 reverse the trends we saw during the last few years. We assume that the bank can't afford to lose any more of its market position, as measured by the market share in the number of individual accounts. Considering that the market is growing very fast and that during the next two to three years about 5 million-7 million new accounts will be opened in Poland, PKO BP has to have an appropriate share in this market, in this bigger pie. At the same time, it has to efficiently defend the customer base it already has.
Q: So what's your target in terms of market share?
A: Forty percent. And this means we will have to open about 600,000 new accounts in 1999. That's a lot.
Q: You mentioned Pekao several times. Is it your main competitor? What about new entrants, such as Handlobank and Millennium?
A: In terms of size, Pekao is several times larger than the next bank in line. It has about 20% market share, and it is three to four times more than the third largest bank. So it's not surprising that we're focusing on Pekao, at least in terms of size. But of course, in terms of quality we can learn much more from other banks that entered the market relatively recently. PKO BP has to learn about humility; it has to accept that it's not the only bank on the retail market, and that it is not _
Q: The best? The most modern? Definitely not.
A: You know what's at the root of the problem? For many years PKO used to be the only retail bank in Poland and couldn't be compared to anybody. Its employees started to believe that at the same time it was the best. But it was only because of a lack of a benchmark. And several years ago when other banks entered the retail market, I mean those nine regional banks that were established after the break up of the NBP (National Bank of Poland), they copied PKO, its products, internal regulations and so on. So this reinforced that belief among PKO's employees about their own grandeur. Over the last two to three years, the situation has drastically changed. On the one hand, the banks that copied PKO four or five years ago started to launch innovative solutions very different from PKO's standards. On the other hand, banks with foreign ownership appeared and they could benefit from the experience and ready-to-wear products of their foreign shareholders. We witnessed product and customer service solutions that strayed very far from those proposed by PKO BP. We can say that until the middle of last year, PKO still hadn't woken up from its dreams about power; it still preferred to believe it was the only one, the best one, and the one that knew what retail banking was about. PKO failed to notice what was going on next door, that the competition was using not only its own domestic experience but also the best foreign practices. Today, our prescribed medicine is the following: to compare ourselves to the best banks.
Q: The best meaning whom?
A: Well, there is not one bank we would like to copy. But for sure our competition has a number of products that periodically will be the best ones in the market and which we will try to imitate, in the same way as our best products will be copied by our competition. Retail banking is such a business where sustaining a competitive advantage in terms of the quality of the product is a matter of minutes. One can copy the best products overnight, the only problem is to be able to see what products the customers want most. And we all learn that by watching the market, not only in Poland but also abroad and by adjusting our products to the customers' needs.
Q: But looking at these new entrants. How much of their experience are you going to use?
A: Let me put it this way: A model of retail banking as proposed by Handlobank and Millennium has to be integrated into our offer. This is not a model PKO can just implement, simply because we have a different history and we serve different customers. But to meet future challenges, we have to act as they do and even to do something more. We have to be accessible to customers, regardless of place and time. We have to develop electronic banking to the same level they have developed. And when we have this, supported by a physical branch network and a high level of customer service, then we will be ready for the 21st century.
Q: PKO is releasing an approximately $100 million tender for a new information technology system that will bring all of its branches on-line. That will enable the bank to offer more products, such as internet banking. Have you considered offering that service?
A: Yes, we have. In my opinion, the internet has incredible potential for banking - potential that we still do not quite comprehend. On the other hand, the next two to three years will still see only limited internet use here. However, we plan to open an internet branch this year with a full range of products to send the signal that the bank is, firstly, aware of the fact that the internet will be the standard way of doing retail banking in the future. Secondly, it will send a signal to the market that PKO is capable of facing such issues. I hope that in the autumn our customers will be able to use internet services.
Q: You talk about the positive influence technology can have on the bank's success in retail banking, but what about the human side, in other words, good customer service?
A: These two elements are combined. Smiling and politeness not supported with competent advice and fast and efficient service is not perceived to be good service. Smiling and nice words are not enough. High-quality service means well-trained personnel equipped with the appropriate technology.
Q: Still though, if a customer has to deal with long lines, slow service and then faces a rude teller at the end of it _
A: I fully agree. And I also agree that we have a lot to do in this area. But at the same time I want to say that I'm proud of our employees in the branches who have shown a lot of patience and good spirit, considering the difficulties the bank is facing. Maintaining quality customer service stems from a number of factors, starting with selecting the people who will deal with the customer, the right training, and daily monitoring. The problem in many Polish banks, including PKO, is that until recently the move from the teller's job to the back office to shuffle papers was considered a promotion. And these are two completely different jobs, in which completely different skills are needed. Not everybody is well suited to deal with the customer; I would say only a few people are. So we have to select those people who would improve PKO's reputation in this area: It's an enormous challenge, especially for us.
Q: How many people does PKO employ?
A: More than 40,000.
Q: How efficient are they? How do you measure their productivity?
A: There are two ways to improve efficiency: by employment reduction, or by increased business. I prefer the second approach. There are a lot of banks in Europe that employ more people than PKO, and they are perceived as very good banks. Of course, one of the main goals is to rationalize the employment. But again, I'm all for business development and through this, ensuring each employee becomes more efficient. The best motivation for employees is positive motivation. People who would be able to adjust to the new bank, who will be able to generate more business, could lead to the situation in which the bank will not have to be downsized.
Q: So you are assuming that the bank will maintain its level of employment?
A: No, I didn't say that. I didn't say that we should leave employment at the same level. Downsizing is crucial. This means that the proportion of people working between the back and front office must be balanced, and that employees can focus on finding new customers and serving them, not on filling out papers, because that's something technology can do.
Q: What are these proportions now?
A: Until recently, most of the employees worked in the back office. Now these proportions are becoming more balanced. In the future, only a small part will be able to work in the back office, with the majority working in the front office. And not only as tellers in the branches, but also outside the branches. There should be more people than desks, also in retail banking. This means there will always be people who are busy with the customer. This is the model of retail banking that has a chance to survive. The time when you just waited for the customer is over.
Q: You have a huge network of branches, most of which are in prime locations. Have you ever considered the possibility of getting rid of the larger premises and opening small, fully automated branches instead?
A: Our strategy centers on building distribution, and that includes physical branches, agencies and a network of ATMs, phone banking and the internet. That strategy assumes that in the mid term, the branches will continue to be the main distribution channel for PKO. We want, based on the existing infrastructure, to extend into small points of sales without back offices. The large ones will act as 'wide back offices' serving not only themselves, but also the branches without the back offices. The new ones will be three-to-four person branches that can open with relatively low costs. But so far we aren't intending to close down any branches.
Q: How soon will PKO be privatized, and how attractive will the bank be by then? How much ground have you lost over the last five or six years?
A: I think we are a very attractive bank. Taking into account the interest of foreign banks in this market, which is much higher now than it was in the past, the privatization possibilities for PKO are greater. I can't see any technical problems related to PKO's privatization. First, the privatization process should start as soon as possible. The year 2000 is quite realistic, assuming we have solved our housing-loan problem. The first step in the privatization, floating up to 10% of the bank's shares on the stock exchange, would dramatically change the position of the management board as well as relations with the owner, which right now is the state treasury. Of course, there would be changes in terms of corporate governance, but the focus would still be on generating profit or value for the shareholders. Even if we are still not ready for full privatization - meaning that a majority stake would be sold - the process itself should start as soon as possible. Of course, talking about the privatization model, it's up to the owner, in this case, the state treasury. As the largest retail bank, we will have about 10 million customers when the privatization begins as compared to 7 million now; the model should assume a dispersed shareholding structure, such as individuals as well as institutional investors. Also, it could be possible to use a group of core investors. But savings banks very often have a very strong position in EU countries. They usually focus on their local markets and are interested in strategic alliances rather than takeovers. PKO could be part of the trend in the sector. In Germany, saving banks dominated the market. If I can dream, and let's treat it as a dream, it's possible to have a privatization where small investors are the most important, then the group of financial, passive investors, and a group of core, stable investors from the sector.
Q: Where do you have your bank account?
A: At PKO. Not only, but my main account is with PKO. But many of my colleagues, people who make decisions regarding PKO's products, have their accounts with other banks. It's obligatory. It's the best way to learn about our competition.
Q: Five or six years ago PKO BP, with its more than 1,000 branches, was in the best position to dominate the retail banking sector. Now it's old fashioned, overstaffed, inefficient, and has a diminishing market share. What can be done about this?
A: First of all, PKO BP is still a leader in retail banking. The question is how to use its assets without allowing them to lose value in the future. In terms of the network, PKO is twice as big as the second-largest bank, Pekao. They have about 700 branches, but we have more than 1,000 of our own and 6,000 independent agents. So, in terms of a network, we are the bank that can't be compared to anything operating in Poland. In terms of the number of customers today, with 43% of all individual accounts at the end of 1998, we are the leader.
Q: But a large number of those accounts are 'passive' or 'dead,' meaning that they see little activity and a number of your clients have many accounts open at the same time.
A: We have calculated that in terms of customers, the number is even higher. We had more than 3 million individual accounts, the largest part of which was 'family' accounts, shared by a wife and a husband. We also had 4 million savings accounts. This is our asset, provided we will be able to keep these customers. The fourth quarter of last year already showed that PKO has enormous possibilities in terms of reserves. Cosmetic changes in retail products alone resulted in a net growth of individual accounts by 160,178 (in the last quarter of 1998). But this also means that we had to open more than 200,000 new accounts to have such a net growth. For the first time we reversed the downward trend, because during the previous quarters of 1998 we used to open, on average, about 80,000 new accounts, which was about 20,000 fewer than Pekao. During the fourth quarter, with a 168,000 increase, we outdistanced Pekao by more than 40,000 (new) accounts.
Q: But how is the bank going to keep its leading position?
A: PKO wants to be a bank of first choice for households, a leader in the retail banking market. To keep it, we can't afford any further loss in market share. In retail banking, the main measurement of the market position is the number of individual accounts, the size and number of consumer credits and the number of cards issued. Having said that, I would like to see 1999 reverse the trends we saw during the last few years. We assume that the bank can't afford to lose any more of its market position, as measured by the market share in the number of individual accounts. Considering that the market is growing very fast and that during the next two to three years about 5 million-7 million new accounts will be opened in Poland, PKO BP has to have an appropriate share in this market, in this bigger pie. At the same time, it has to efficiently defend the customer base it already has.
Q: So what's your target in terms of market share?
A: Forty percent. And this means we will have to open about 600,000 new accounts in 1999. That's a lot.
Q: You mentioned Pekao several times. Is it your main competitor? What about new entrants, such as Handlobank and Millennium?
A: In terms of size, Pekao is several times larger than the next bank in line. It has about 20% market share, and it is three to four times more than the third largest bank. So it's not surprising that we're focusing on Pekao, at least in terms of size. But of course, in terms of quality we can learn much more from other banks that entered the market relatively recently. PKO BP has to learn about humility; it has to accept that it's not the only bank on the retail market, and that it is not _
Q: The best? The most modern? Definitely not.
A: You know what's at the root of the problem? For many years PKO used to be the only retail bank in Poland and couldn't be compared to anybody. Its employees started to believe that at the same time it was the best. But it was only because of a lack of a benchmark. And several years ago when other banks entered the retail market, I mean those nine regional banks that were established after the break up of the NBP (National Bank of Poland), they copied PKO, its products, internal regulations and so on. So this reinforced that belief among PKO's employees about their own grandeur. Over the last two to three years, the situation has drastically changed. On the one hand, the banks that copied PKO four or five years ago started to launch innovative solutions very different from PKO's standards. On the other hand, banks with foreign ownership appeared and they could benefit from the experience and ready-to-wear products of their foreign shareholders. We witnessed product and customer service solutions that strayed very far from those proposed by PKO BP. We can say that until the middle of last year, PKO still hadn't woken up from its dreams about power; it still preferred to believe it was the only one, the best one, and the one that knew what retail banking was about. PKO failed to notice what was going on next door, that the competition was using not only its own domestic experience but also the best foreign practices. Today, our prescribed medicine is the following: to compare ourselves to the best banks.
Q: The best meaning whom?
A: Well, there is not one bank we would like to copy. But for sure our competition has a number of products that periodically will be the best ones in the market and which we will try to imitate, in the same way as our best products will be copied by our competition. Retail banking is such a business where sustaining a competitive advantage in terms of the quality of the product is a matter of minutes. One can copy the best products overnight, the only problem is to be able to see what products the customers want most. And we all learn that by watching the market, not only in Poland but also abroad and by adjusting our products to the customers' needs.
Q: But looking at these new entrants. How much of their experience are you going to use?
A: Let me put it this way: A model of retail banking as proposed by Handlobank and Millennium has to be integrated into our offer. This is not a model PKO can just implement, simply because we have a different history and we serve different customers. But to meet future challenges, we have to act as they do and even to do something more. We have to be accessible to customers, regardless of place and time. We have to develop electronic banking to the same level they have developed. And when we have this, supported by a physical branch network and a high level of customer service, then we will be ready for the 21st century.
Q: PKO is releasing an approximately $100 million tender for a new information technology system that will bring all of its branches on-line. That will enable the bank to offer more products, such as internet banking. Have you considered offering that service?
A: Yes, we have. In my opinion, the internet has incredible potential for banking - potential that we still do not quite comprehend. On the other hand, the next two to three years will still see only limited internet use here. However, we plan to open an internet branch this year with a full range of products to send the signal that the bank is, firstly, aware of the fact that the internet will be the standard way of doing retail banking in the future. Secondly, it will send a signal to the market that PKO is capable of facing such issues. I hope that in the autumn our customers will be able to use internet services.
Q: You talk about the positive influence technology can have on the bank's success in retail banking, but what about the human side, in other words, good customer service?
A: These two elements are combined. Smiling and politeness not supported with competent advice and fast and efficient service is not perceived to be good service. Smiling and nice words are not enough. High-quality service means well-trained personnel equipped with the appropriate technology.
Q: Still though, if a customer has to deal with long lines, slow service and then faces a rude teller at the end of it _
A: I fully agree. And I also agree that we have a lot to do in this area. But at the same time I want to say that I'm proud of our employees in the branches who have shown a lot of patience and good spirit, considering the difficulties the bank is facing. Maintaining quality customer service stems from a number of factors, starting with selecting the people who will deal with the customer, the right training, and daily monitoring. The problem in many Polish banks, including PKO, is that until recently the move from the teller's job to the back office to shuffle papers was considered a promotion. And these are two completely different jobs, in which completely different skills are needed. Not everybody is well suited to deal with the customer; I would say only a few people are. So we have to select those people who would improve PKO's reputation in this area: It's an enormous challenge, especially for us.
Q: How many people does PKO employ?
A: More than 40,000.
Q: How efficient are they? How do you measure their productivity?
A: There are two ways to improve efficiency: by employment reduction, or by increased business. I prefer the second approach. There are a lot of banks in Europe that employ more people than PKO, and they are perceived as very good banks. Of course, one of the main goals is to rationalize the employment. But again, I'm all for business development and through this, ensuring each employee becomes more efficient. The best motivation for employees is positive motivation. People who would be able to adjust to the new bank, who will be able to generate more business, could lead to the situation in which the bank will not have to be downsized.
Q: So you are assuming that the bank will maintain its level of employment?
A: No, I didn't say that. I didn't say that we should leave employment at the same level. Downsizing is crucial. This means that the proportion of people working between the back and front office must be balanced, and that employees can focus on finding new customers and serving them, not on filling out papers, because that's something technology can do.
Q: What are these proportions now?
A: Until recently, most of the employees worked in the back office. Now these proportions are becoming more balanced. In the future, only a small part will be able to work in the back office, with the majority working in the front office. And not only as tellers in the branches, but also outside the branches. There should be more people than desks, also in retail banking. This means there will always be people who are busy with the customer. This is the model of retail banking that has a chance to survive. The time when you just waited for the customer is over.
Q: You have a huge network of branches, most of which are in prime locations. Have you ever considered the possibility of getting rid of the larger premises and opening small, fully automated branches instead?
A: Our strategy centers on building distribution, and that includes physical branches, agencies and a network of ATMs, phone banking and the internet. That strategy assumes that in the mid term, the branches will continue to be the main distribution channel for PKO. We want, based on the existing infrastructure, to extend into small points of sales without back offices. The large ones will act as 'wide back offices' serving not only themselves, but also the branches without the back offices. The new ones will be three-to-four person branches that can open with relatively low costs. But so far we aren't intending to close down any branches.
Q: How soon will PKO be privatized, and how attractive will the bank be by then? How much ground have you lost over the last five or six years?
A: I think we are a very attractive bank. Taking into account the interest of foreign banks in this market, which is much higher now than it was in the past, the privatization possibilities for PKO are greater. I can't see any technical problems related to PKO's privatization. First, the privatization process should start as soon as possible. The year 2000 is quite realistic, assuming we have solved our housing-loan problem. The first step in the privatization, floating up to 10% of the bank's shares on the stock exchange, would dramatically change the position of the management board as well as relations with the owner, which right now is the state treasury. Of course, there would be changes in terms of corporate governance, but the focus would still be on generating profit or value for the shareholders. Even if we are still not ready for full privatization - meaning that a majority stake would be sold - the process itself should start as soon as possible. Of course, talking about the privatization model, it's up to the owner, in this case, the state treasury. As the largest retail bank, we will have about 10 million customers when the privatization begins as compared to 7 million now; the model should assume a dispersed shareholding structure, such as individuals as well as institutional investors. Also, it could be possible to use a group of core investors. But savings banks very often have a very strong position in EU countries. They usually focus on their local markets and are interested in strategic alliances rather than takeovers. PKO could be part of the trend in the sector. In Germany, saving banks dominated the market. If I can dream, and let's treat it as a dream, it's possible to have a privatization where small investors are the most important, then the group of financial, passive investors, and a group of core, stable investors from the sector.
Q: Where do you have your bank account?
A: At PKO. Not only, but my main account is with PKO. But many of my colleagues, people who make decisions regarding PKO's products, have their accounts with other banks. It's obligatory. It's the best way to learn about our competition.
