Tanzania Daily News (Dar es Salaam)

20 November 2012

Tanzania: Trends in Retail Banking

EMERGING businesses, particularly small and medium enterprises (SMEs) are facing a number of challenges, especially in securing capital.

'Business Standard' Staff Writer interviewed Dr Hildebrand Shayo, a senior lecturer with the Open University of Tanzania (OUT) on the future of retail banking industry in Tanzania, where the CRDB Bank, Dar es Salaam Community Bank (DCB), National Microfinance Bank (NMB) and several others are the key players in supporting SMEs. Excerpts ....

Will future customers still need retail banks amidst growing mistrust and defaulting rate?

This depends on the bankers themselves and how strategically they are positioned to provide the enabling environment to businesses to access their facilities. Most banks, just like businesses, are currently undergoing reforms to be more competitive and serve their customers who are demanding better transactions. The market for the banks is widening even more day after day.

These days and in Tanzania, like anywhere in the world, there are already signs that customers are questioning the ability of banks to look out after their financial well-being. Hardly a third half of consumers I spoke to in Dar es Salaam recently believe what bankers are telling them.

Another survey carried out between January 2012 and October 2012, also indicated that over two thirds of Tanzanian businesses looking for small scale loans conduct their own research before buying financial services products outside the traditional banking system.

This trend has made bankers begin to re-think what and how they are supposed to do to satisfy the increasingly informed and demanding customer base. At the same time, a confluence of industry developments, including consolidation, regulation, industry specialisation, changing workforce needs and new technologies such as mobile-based transactions are putting additional pressure on banks' operating models and raising questions about traditional strategies for growth and value creation vis a vis contemporary money transfer structure.

As pioneers on SME's accessibility to capital and markets or their produce, what does the future look like? Or what will it take to create and maintain advantage in this highly competitive industry?

n assessment of the forces shaping the industry suggests that the future will require superior efficiency and operational excellence from all banks, while industry leadership will be attained by institutions most adept at harnessing products, services and process innovations to anticipate and meet customer desires.

In due course, to deliver on these imperatives, banks will have to focus on their core strengths and niche -- those activities in which they excel and partner with best-in-class specialists for everything else -- achieving more by doing less.

What are your views on the economic landscape of the banking business in Tanzania? Will it look much different than it does today in supporting SMEs in future?

On the outside, the competitive landscape of the retail banking industry will not look much different than it does today. Mergers and acquisitions are likely to kick in especially mid-tier banks, industry specialists and non-bank financial institutions will play a more prominent function.

But most of today's players, including widespread banks, community banks, industry specialist banks and non-bank financial institutions will still be vying to differentiate themselves in a crowded marketplace.

However, it is important to note that traditional approaches to creating value through growth and efficiency will no longer be enough. Advantages gained through acquisition, if it will happen, are to lead to new market entry and reconfigured product offerings, will be fleeting at best, while partnering and outsourcing will make efficiency a basic requirement for all.

In terms of priority, what will be the likely impact to the retail banking and their efforts to enable business enterprises to grow?

Of these drift, the first two -- increasingly powerful customers and intensifying competition -- stand out as the most significant forces that will drive industry change over the next decade. The other three trends -- changes in managing human capital, regulations and technologies -- will strongly contribute to and reinforce the effects of intensifying competition and customer empowerment on banks' strategic choices.

It is vital to remember in this emerging setting, where SMEs and mid sized companies that are said to be the engine of growth innovation will take many forms, including advances in products and services, markets, operational processes, customer intimacy, and new channel and diversification strategies.

However, innovation will not be possible, nor will it bring about the desired impact, unless banks create the requisite conditions for innovation development. There are four strategic options that banks must follow to cultivate innovation and position themselves for sustainable growth.

In the course of the future, who will determine the rule of the game, banks or borrowers?

Over the next ten years, I am certain that the retail banking industry will be required to adapt to rapidly changing customer expectations. Customer diversity and individualism will pervade buying behaviour, and how customers perceive value will change as a result of pronounced shifts in demographics and value systems.

'Norms' will become increasingly rare. It is also imperative to recognize that population growth will increase the relative numbers of both the oldest and youngest customer segments, posing significant new challenges and opportunities for banks.

While older customers tend to require more high-touch service but are generally more loyal, because youthful customers are unpredictable, technology savvy and highly inclined to research and negotiate the best deals. Across all age groups, long-standing life stage patterns are becoming more unpredictable.

People are now marrying later, divorcing rate is getting more problematic and starting second and third careers is now a fashion. Haven't you recognised that employees who are already working are searching for career development that is working and studying at the same time?

These changes are leading to unprecedented diversity in the financial needs of households. I can guarantee you customers' decision patterns will become more complex. Value-oriented buying based on the price-quality dynamics will become increasingly influenced by personal views and the desire to express those views outwardly.

Customers will demand low prices for basic goods but pay premiums for products and services that matter more to them personally. Overall, banking customers will be becoming more hands-on and more mistrustful trends that are even stronger in younger generations.

What about defection?

Once more, rough estimates based on my own assessment is that banks are experiencing defection rates that as high as 30 per cent as customers are less inclined to think that banks act in their best interest. Sources suggest that less than one-third of the customers of top 10 banks, for example, consider their banks to be advocates.

More importantly, about as many as 31 per cent believe that their bank does what is best for its bottom line at the expense of customers. And as time progresses, technology and competition will continue to make it easier to research, compare, form and break relationships -- driving switching costs toward zero.

What will be the position of the universal banks and ultra-focused niche players by let say 2015?

By 2015, the results of two prominent competitive forces will be clearly visible: A 'middle squeeze' of traditional banks and the emergence of far greater numbers of industry specialists and non-bank financial institutions -- each with distinct competitive growth strategies.

For instance, towards 2015, I can envisage universal banks increase profitability with more targeted offerings while expanding through selected acquisitions and new market entry. Community banks will boost their market share by building on local knowledge and deep customer relationships with a wide range of products and services.

For industry specialists I can envisage them expanding customer base by providing targeted products and services for high growth niches while leveraging superior process capabilities and for the non-bank building on existing customer base and distribution network with an emphasis on open sourcing of targeted products and services.

In a nutshell, the industry will witness consolidation at its middle as it continues to be affected by large banks spreading their reach, and the emergence of specialised banking players that will set new cost and service level standards. Acquisitions led by large banks, however, will continue to be less attractive until the acquirer and potential target valuation gap narrows.

Dr Hildebrand E Shayo, BA (Hons), MA, PhD (Economics) UK, is a senior lecturer at the Open university of Tanzania (OUT).

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