With an eye to the future, BRE Bank focuses on the internet
The race for market share in retail banking has picked up speed in recent weeks with Handlobank, Wielkopolski Bank Kredytowy (WBK) and Bank Zachodni (BZ) upping their customer targets and accelerating their branch network rollouts.
But new entrant BRE Bank is poised to strike this year with an internet-based formula, which analysts say will reap strong profits and follows a growing trend in the United States and Western Europe that threatens branch-based banks' margins.
"The question mark hanging over branches is how profitable they will be in the future," said James Mellersh, a banking analyst at Morgan Stanley Dean Witter. "They've been built on the assumption that they would supply the great bulk of banking products," but with the advent of low-cost internet and telephone-based banking, "two years later this is looking tenuous."
Retail is considered the banking market with the most potential because individual clients are a cheaper source of capital for financial institutions. "Retail customers are basically more profitable than corporate clients because they have a lot less information at their disposal and hence there's a lot more pricing power opposite them," Mellersh said.
Furthermore, while only 40% of Poles have retail accounts, the market offers enormous growth prospects through the array of services outside current account and personal loan products, such as credit cards and mortgages. Consequently banks have focused on rolling out their branch networks as an expensive but effective way of getting to the customer.
The overwhelming market leader in retail is Powszechna Kasa Oszczednosci Bank Polski (PKO BP) with a 42% market share. But competitors are catching up fast. Allied Irish Bank (AIB), a controlling shareholder of WBK and BZ, said last week it will increase both banks' retail outlets from 355 to 500 by 2003, investing $100 million in their development. WBK alone now has around 500,000 retail customer accounts, said press spokesman Piotr Gajdzinski.
Simultaneously, Handlobank, the retail arm of Bank Handlowy, plans on increasing its 59 branches to 100 by the end of the year, serving more than 200,000 customers, said marketing director Grzegorz Bobrownicki-Libchen. Handlowy and its strategic partner Citibank "are looking at" merging both banks' retail operations. But direct competitor Millennium, BIG Bank Gdanski's retail division, which was founded at the same time as Handlobank in October 1998, has 130 outlets and plans on 250 by the end of 2001. More recent entrant Lukas Bank plans on 130 branches and hopes for 250,000 customers by the end of the year.
BRE Bank, however, is planning to spend zl. 303 million ($68.2 million) this year on something altogether more ambitious. After its failed merger with Handlowy, BRE will offer retail services via internet-based distribution channels such as PCs, mobile phones and cable and satellite TV. It will rely less on new outlets, although in bigger cities it may open small branches, said Marek Juras, an analyst at Erste Securities Polska.
While BRE has released few details, Mellersh said it will target the top 20% of retail clients. To this end BRE is building on its only secure footing in retail affluent private banking clients which last year made up 24% of BRE's zl. 7.36 billion ($1.9 billion) in total deposits.
Mellersh said that without the operating costs of rolling out a branch network, BRE can give its clients more competitive prices than its peers through instant internet access in the home and the workplace. "An IT operation has a very low cost base and can offer more favorable terms for standardized products like deposits and loans as well as faster service," he said. "And banks with a cost basis will have to respond to it" by lowering prices and eating into their margins.
BRE's business model follows those of the world's largest internet banks, U.S.-based Bank Egg and the U.K.'s Wingspan Bank, Juras said. In two years, both have grabbed large client bases through competitive deposit rates and a very wide range of products, he said. "(BRE) is not following Handlobank and Millennium's pattern and will try to be ahead of the others," Juras said.
In the past year, many retail banks have started offering both telephone and internet banking services. WBK, Handlobank, Lukas and others all offer the possibility of transactions over the internet, while Millennium plans on introducing the service before the end of the year, said Agnieszka Zygo, its public relations manager. Both Handlobank and Millennium offer fixed-line phone banking, while WBK and Pierwszy Polsko-Amerykanski Bank (PPA Bank) allow clients to check their account balances on their respective websites via mobile phones.
But such services are in their early stages of development and need time for clients to get used to new ways of making transactions, Juras said. Moreover, while internet banking is picking up in Poland, banks expanding their networks are aware that around 40-60% of the population will "never use internet banking and need the physical presence" that branch-based distribution offers, Juras said. More than two thirds of Poland's IT population is under 28, and so does not constitute the banks' core target group, he said.
Nonetheless, Mellersh said that most banks see "the internet as something complementary, not disruptive" and that e-banking is growing fast among BRE's target group. He predicted that in five years the top tier of Polish retail clients will use internet and phone banking as the distribution channel of choice to compare prices and make transactions, displacing branches as the predominant point of sale for those customers. Moreover, he foresees the emergence of "intermediaries" cross-selling other banks' products, such as mutual funds. "It throws customer loyalty wide open," Mellersh said. BRE is acting "smaller and smarter instead of bigger and average."
