It is time for Armenian banks to review their business model
Banking system in Armenia is currently facings difficulties; it has become a serious challenge to ensure as much as stable high growth rate, let alone two-digit growth. The previous model of the banking system was based on extensive development when the high rate of growth was ensured through attraction of new clients. But today in the grip of complicated economic situation and limited market, banks have to find new ways of development and change their business models to keep in step with the times. In the interview to ARKA news agency Artur Hambardzumyan, Head of Innovations and Quality Unit at Ameriabank, talked about transformation of national banking system and technological development.
ARKA – Currently Armenian banks seem to be under some pressure in terms of difficult economic situation, toughening of norms by the regulator and high level of competition. So, in view of this situation, what challenges does the banking system face and how can it beat those challenges?
A. Hambardzumyan – In order to see the current and future challenges faced by the Armenian banks we need to consider their activities in three time horizons: current business, the business tomorrow and the business in future. The challenge of the current business is to confront the negative impacts the market is exposed to due to aggravation of economic situation, growth of non-performing loans and other factors impacting the profitability of banks. If we judge by financial figures of Q2 of the current year, we will see that the issue of the day for a great number of Armenian credit organizations is to save the business and avoid its further aggravation. It is important to note that despite worsening economic conditions some banks still manage not only to maintain their business, but to ensure growth and a considerable level of profitability due to proper business structure and competent management. However, on the whole, the task number one during crisis is to save the business.
In terms of tomorrow’s business the banks have two main tasks: the first task is to diversify the business. As practice shows, banks with diversified loan portfolios, clientele and income sources are more stable. To be more resistant to negative factors influencing the development of business in long-term outlook it is necessary to ensure proper balancing of business. The second task is to ensure efficiency of business, i.e. select a business-model securing the expected level of profitability for shareholders. Note that some 10-15 years ago the model of the Armenian banking system was based on extensive development, when the high rate of growth was ensured through attraction of new clients. Under such conditions nobody cared about proper cost management and efficiency of investments, since the income from new clients and the rapid growth often covered all the problems of business efficiency. Now, however, this model no longer works, and we need to think out how to ensure efficiency and profitability of business. So, the banks face the problem of further development from two aspects: firstly, internal efficiency and proper cost management, and secondly – utilization of untapped internal potential of existing clients and business, as well as search for new income sources and markets that will ensure a pretty level of profitability to be attractive enough for new investments and financing.
And finally, in terms of business in future, the challenges are more global in view of technological revolution and the consequent behavioral revolution, change of both the ways of using banking services and the content of banking services and business themselves. This means that banks have to understand and determine their role as an institution of the future. Obviously, in some 10 years banks will be different, and what we need now is to picture the process of their transformation in the context of ensuring efficiency of banking operations in future when many banking services will be delivered by non-bank players. It is a global problem all banks of the world will face or are currently facing.
Global experience offers very efficient transformation models which are already being adopted by banks worldwide, for instance, cooperation with new players in the capacity of infrastructural platforms and structures that change the role of banks while providing them with a new niche.
To summarize it all in terms of all three time horizons, it is imperative that all resources and attention of the bank’s management are not absorbed by current operations. If banks start prioritizing only current problems, they will simply lose their competitive advantages on the market and even their business. That is why banks need to consider all the 3 horizons (current business, tomorrow’s business and business in future) as integrity, so that the most effective will be that bank which stresses the current business, tomorrow’s business and business in future alike. Only then can we talk about balanced approach to business and long-term transformation possibilities.
ARKA – In this regard, what direction will Armenian banks choose for business model transformation in your opinion?
A. Hambardzumyan – There are several directions of business model transformation. If we consider our banks in the context of limited market and specifics of business in Armenia, one of the directions of transformation in short-term perspective is change of the bank’s size or growth of the scale of business. Obviously, current sizes of banks limit the further possibilities of development and strengthening of their market positions. So the first vector of transformation of Armenian banks’ business model is their consolidation which will ensure a platform for further development in the nearest future.
Another aspect of Armenian banks’ business model transformation is the search for new sources of financing and resources. Since financing of further development at the expense of retained earnings does not ensure the desired growth rates, and on the other hand domestic savings of the population (deposits etc.) are quite limited, we have to turn to new instruments such as debt and equity financing, and they can be accessed through placement of bonds and shares on international markets. In this way banks try to find sources of financing for further development, and to find and use such sources they have to be efficient enough to ensure the desired profitability level for investors.
The third and more substantial vector of transformation is various forms of cooperation with non-bank institutions, telecommunication companies, etc., which, too, are looking for new development channels and trying to access the payment market. In my opinion it is pointless to resist this trend, since cooperation will pave a way for transformation of the bank. Even if a new and more efficient player in terms of communication and servicing of clients appears on the market, the bank will still have an infrastructural role in that business. From this viewpoint it is important that banks think about the role of their business now. For instance, if in future PayPal, Facebook or Apple becomes the main instrument for making payments and transfers, what will the banks do in that case? As practice may show, the mentioned non-bank players do seek cooperation with banks since the latter can ensure a better technological platform for payment operations. I think that pure banking, particularly corporate and premium banking, will be available in a limited segment; as to retail banking, here combined products and services will prevail and the bank and non-bank players each will have their proper role in client servicing.
ARKA – When speaking about banks of future, analysts often highlight individual banking. What can you say about it?
A. Hambardzumyan – Individual banking is based on understanding and getting to know each client. Previously clients were segmented by markets, geography, income, preferences and life style. Currently in the era of the so called Big Data, quantitative and qualitative data about clients enable to design products and offers for each particular client bearing in mind his behavioral and purchasing preferences, including those expressed in social networks. In this context one of the competitive advantages of banks is the financial data about the clients which are not available for many other market players. Here lies the whole fascination of our informational era, when proper processing of information enables you to be more effective and find new markets and needs on the level of every single client.
ARKA – What is the role of technological development in the banking system of Armenia?
A. Hambardzumyan – New technologies play a double role in the banking system of Armenia. On the one hand, they help to solve the business efficiency problem by reducing the cost of operations and creating new possibilities. On the other hand they urge banks to keep abreast of the times. As the attitude and lifestyle of clients evolve, banks cannot but change themselves and change their service channels and methods. There is a definite market segment where new technologies are a must for all clients. Meanwhile, there is also a considerable layer of population for whom these technologies are not available. That is why we cannot say that in the nearest future we will totally shift to online servicing and it will be the only channel; there are such things as generation preferences and comfort. For this reason while shifting to new technologies banks have to bear in mind a considerable number of clients who are used to live communication in the process of servicing. As to technologies themselves, they create great possibilities for banks and the latter have to follow these trends to ensure the desired level of comfort for new generation clients who do not imagine their lives without modern technologies.
ARKA – What is the level of technological development of Armenian banks as compared with other countries?
A. Hambardzumyan – If we compare the level of technological development of Armenian banks with that of developing and developed countries, with Russia, for instance, we will see that Armenian banks follow the “catch-up” model of modernization. Of course, there were cases when certain products appeared on our market earlier than in Russia, for instance ArCa online, payments via virtual cards, but generally we still lag behind in terms of technological development. For instance, mobile banking has only recently been introduced by Armenian banks, while it has been actively developing in many of the CIS countries for a number of years. At that, mobile applications are currently offered by very few Armenian banks. This proves that we are trying to catch up rather than keep in the front line in terms of technologies. On the other hand, figures demonstrate that internet and mobile banking are not yet as popular in Armenia as one might expect. Of course, banks may say that the market is not ready for distance servicing, but on the other hand there was no quality offer either. If mobile banking had been introduced earlier, who knows, currently the number of its users might have been considerably greater.
ARKA – What is the reason for technological backwardness of Armenian banks?
A. Hambardzumyan – The problem lies in their current technological infrastructure. In this respect the main problem of Armenian banks is their dependence on definite local suppliers of banking solutions. Thus about half of Armenian banks use the Armenian Software as a main automated banking system platform. Other banks, among them a number of major ones, use another local solution – Elsoft. Some use their own developments or software developed by parent companies. The National Processing Company, too, has its own share of blame in low rate of technological development. Although local suppliers do try to update their solutions pursuant to their own development strategies, under certain conditions we fail to quickly react to, implement or borrow new technologies. Historically we have a model where free play in terms of IT solutions is limited by growth rates of the suppliers available on the market. Shift to larger international suppliers, who offer cutting-edge solutions, requires big investments, yet local banks lack the required volume of business. Here we face a deadlock: you do not buy expensive software because either you can’t afford it or such costs are not justified, and the local supplier’s offer is outdated. So, the technological capability of Armenian banks itself hinders introduction of state-of-the-art products. The size of business should enable implementation of innovations and the market should be big enough to ensure adequate ROI. So it all comes back to consolidation of the banking system and looking for new markets. Unless the market offers some possibilities no serous investment in innovation will be made.
ARKA – What is the demand for new information technologies in the banking system of Armenia today and what new banking products will appear in the nearest future?
A. Hambardzumyan – In terms of service channels there is a certain market segment which wants quick and easy servicing, so that all banking questions are solved without having to visit the bank, either from the workplace or wherever else you are (for instance, on vacation) in 24/7 mode. Technologies also follow this trend of development. Currently in Armenia self-service channels are on the trend such as internet banking, mobile banking, call centers and high-tech ATMs and POS terminals. In other countries such channels appeared earlier and unlike our market have a great number of users. In Armenia, on the other hand, they are new and I hope that in some 2 or 3 years client servicing will be oriented mainly to distance servicing channels. Among actively developing areas are payment channels, e-commerce and on-line payment terminals, which are widely offered by Armenian banks. The main competition today is for on-line payments. Thus payment operations are one of the spheres that are experiencing intensive development. Of course we hope that in the nearest future individual payments (the so-called P2P “Person to person”) will start developing as well, and people will be able to make remittances via mobile phones by the mobile number or other identification feature. But here the bank should determine its position where on the one hand it will simply issue cards and on the other hand carry the role of an entire infrastructure acting as gateway for online and mobile payments market. This is the reason why payment channels will be popular. They will serve as one of the directions of transformation the Armenian banking business will undergo.
ARKA – Ameriabank was acknowledged as the most innovative company of the year at DigiTec 2015 Business Forum. What did the bank do to win that prize? What cutting-edge technologies have been implemented?
A. Hambardzumyan – Ameriabank has been focusing on the innovations I specified above for several years already. Note that our technological development faced the same limitations that often hindered introduction of innovations. Yet we will do our best for the clients to feel comfortable and get more opportunities to bank.
The distinctive feature of our servicing is the multichannel approach when the bank offers to the client all possible service channels. We have introduced cash-in ATMs, established a Contact Center which enables not only to solve current problems of clients but to make banking transactions. This Center serves as a distance banking channel by phone and actually substitutes a bank branch. In March of the current year we introduced mobile banking for IOS and Android and recently also for Windows; it is totally integrated with the internet banking we had introduced back in 2009. We have already successfully updated our mobile applications by adding new functions and possibilities. Our mobile banking is rather developed in terms of transactions; it enables you to perform practically all kinds of payment operations as well as manage card and current accounts. Physical tokens generating authorization keys are replaced by mobile application called “AmeriaToken”. We have also introduced the service of fraud-monitoring for our clients, which enables to identify and block suspicious card operations automatically in 24/7 mode. Wherever they are, whatever their problem, our clients can just call us at any time of the day and all their questions will be answered. We also have been actively promoting e-payment terminal to boost development of e-commerce in our country and to give the businessmen (merchants) an opportunity to offer their services online. E-commerce is as yet a fresh trend in our country and in this regard we try not only to offer these services to our clients but sometimes act as a pioneer in innovative solutions. This is the reason why DigiТec acknowledged us as the most innovative company of the year.
ARKA – What are the bank’s plans for further innovative transformation?
A. Hambardzumyan – Ameriabank will go on developing distance service channels despite the limited branch network in contrast to other banks. It is a fact that alternative service channels will be a priority for us, and by that I mean not only mobile banking, but the full range of self-servicing facilities, including branches fully based on self-servicing. Another development trend requires enhancement of our role in cash and online payment market, card business and payment infrastructure. Recently a new service has been launched which enables clients to make instant transfers from any Visa, Master or Arca card to Ameriabank cards and accounts through our website. This is a worthy alternative to fast money transfer systems. It enables you and your friends and relatives to transfer funds to Ameriabank clients from any country worldwide without leaving their desk.
We will do our best to make all new services available to our clients in Armenia via new technological platforms and make Ameriabank the main player providing the relevant infrastructural component. The market is, of course, a small one and we will be behind global developments since major global players are not much interested in the Armenian market in terms of its potential.
ARKA – In your opinion what is the main competitive advantage of a high-tech bank today?
A. Hambardzumyan – The bank with serious and developed IT platforms and solutions will have a considerable competitive advantage. There is an opinion according to which banks are being transformed into IT companies. That is why now we are actively searching for alternative solutions for our informational and technological infrastructure that will ensure flexibility and enable us to timely react on new demands of clients and catch the possibilities of increasing the scale of business. So, the banks paying much attention to investment into technologies and other innovations will have a long-term competitive advantage.
It is important to consider innovations in banking broadly, not only in terms of solutions for clients. When we speak about innovative transformation we mean a broader concept, i.e. technological development of the bank’s infrastructure, governance methods, internal systems and business-processes which in their turn determine the level of the bank’s efficiency.
ARKA – How can the banking system regulator contribute to the development of high-tech banking?
A. Hambardzumyan – The regulator should assist in this process. From January 2015 the Central Bank has started to gradually toughen the requirements to statutory fund (shift to Basel III). From 2018 all intangible assets, including investments in IT systems, will be deducted from regulatory capital. All this, not to mention the minimum capital norm of AMD 30 bn, will limit the possibilities of small-scale banks to invest in their infrastructure. This might be the trend in international banking practices, but such requirement will hardly boost investments in technological development of banking in our market. I think we need to find definite triggering methods and ways together with the regulator. Here we mean not only the local market but also the possibilities of Armenian banks to participate in global competition for client, since banking has long since obtained global character. For this reason it is necessary that banks become well-equipped technologically. The regulator, of course, is not the most important aspect of technological development, but in any case it may both hinder investments as well as contribute to attraction of them.