As we approach the festive season, all of us get into human kind's greatest obsession - shopping! Over the past decade, online shopping has come to generate big bucks for businesses. So much so, that 'clicks' are beating 'bricks' by a wide margin in many countries.
While I browse through the various online shopping malls - a thought often hits me - why can't someone enable a common 'bridge' for shopping online? Why is everything designated in currency?
What I mean here is - how do use my airmiles to shop online? I would really love to use my cards membership reward points ON THE WEB for shopping - without the constraints of redemption of vouchers at the 'tie ups'.
I think there is a huge opportunity here for the likes of Pay Pal, Google or even a Mobile phone operator. Offer a 'clearing house' where the world can come and 'convert' their reward points, air miles, membership points and even mobile air time; into units of E currency that translates to purchase of goods and services.
There are some examples of such online usage - American Express in the US allows cardmembers to use their MR points to book hotel rooms and travel tickets at participating outlets. A MSP in Kenya allows its subscribers to transact using their 'airtime' as currency. But these need to be extended to the wide world outside their closed loop.
So, here's the opportunity - use all your accumulated non-financial points/miles/rewards online to shop. It works to the benefit of all parties - the points issuer gets more 'burn' of points, the consumer has more purchasing power, the online malls get more business. Also, such transactions are likely to be more secure than credit/debit card usage online. Whoever heard of sharks stealing 'airmiles'!!
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PS: I see a lot of studies outling business opportunities in mega billions. For e.g. a latest study by a consulting firm claims that the global P2P opportunity by 2012 is 158 B US dollars. Now, I have been seeing a whole of these projections on Chip card usage, online banking, NFC, Mobile banking. The common thread is the big potential opportunity sized up in Billions at a point of time in future. I would really like to know if anyone is tracking these grandoise projections reports. Does anyone evaluate whether these Billion dollar projections actually pan out??
Thursday, December 20, 2007
Sunday, December 9, 2007
Selling Anywhere.com -Web 2.0 is here!
I chanced to see a seemingly innocuous news item on PayPal launching a Beta version of its Store Widget- http://storefront.paypallabs.com/. I am not sure if the Cards and Payments industry is cognizant of the potential implications of the success of this offering!
Ok, how does an online store operate today (I am including the likes of EBay)?
The store has portal hosting the items (goods and services) for sale. Buyers go the store website, use their payment mechanism - cards, PayPal, ACH, etc- and complete the sale. Now, in one stroke, PayPal promises to remove the 'online real estate' requirement! If you want to sell your stuff, don't have to go to E Bay; just host a blog or an url and peddle your wares!
Why should payment providers and Acquiring banks watch this carefully?
Simple answer: if you and I can host a 'store' without requiring an Acquirer / Host, then why should the Merchants of the world bother to use an Acquirer.
While I see the 'geek's glee' on the launch (see the PayPal blog -http://www.thepaypalblog.com/weblog/2007/12/the-paypal-stor.html), this must make the card payment giants - Visa, MasterCard and American Express - to sit up and take notice. If it is so easy to accept payments anywhere on the Web, then this can be a huge differentiator for the PayPals and Googles of the world. Moreover, what stops the Mobile Providers from hitching on to the bandwagon -(e.g. use your mobile number and pay me here.....!). Worse still, what if this is somehow extended to the real world in some form through mobile phones?
Thus far, all such 'revolutions' in the payments world have shown more likeness to Budapest 1956 than Berlin 1989! But then, we are so close to Web 2.0, it may be with you sooner than you think!
P.S: Been watching with great amusement on the Citigroup CEO hunt. The candidates have ranged from the obvious (Gary Crittenden) to the wildest cards - there are notes flying across the Net on Shaukat Aziz (ex-Citibank Executive -PM of Pakistan)! Guess the bookies should now allow Citi shareholders and employees to place their bets against odds. Gives them a bit of a chance to recover their losses!
Ok, how does an online store operate today (I am including the likes of EBay)?
The store has portal hosting the items (goods and services) for sale. Buyers go the store website, use their payment mechanism - cards, PayPal, ACH, etc- and complete the sale. Now, in one stroke, PayPal promises to remove the 'online real estate' requirement! If you want to sell your stuff, don't have to go to E Bay; just host a blog or an url and peddle your wares!
Why should payment providers and Acquiring banks watch this carefully?
Simple answer: if you and I can host a 'store' without requiring an Acquirer / Host, then why should the Merchants of the world bother to use an Acquirer.
While I see the 'geek's glee' on the launch (see the PayPal blog -http://www.thepaypalblog.com/weblog/2007/12/the-paypal-stor.html), this must make the card payment giants - Visa, MasterCard and American Express - to sit up and take notice. If it is so easy to accept payments anywhere on the Web, then this can be a huge differentiator for the PayPals and Googles of the world. Moreover, what stops the Mobile Providers from hitching on to the bandwagon -(e.g. use your mobile number and pay me here.....!). Worse still, what if this is somehow extended to the real world in some form through mobile phones?
Thus far, all such 'revolutions' in the payments world have shown more likeness to Budapest 1956 than Berlin 1989! But then, we are so close to Web 2.0, it may be with you sooner than you think!
P.S: Been watching with great amusement on the Citigroup CEO hunt. The candidates have ranged from the obvious (Gary Crittenden) to the wildest cards - there are notes flying across the Net on Shaukat Aziz (ex-Citibank Executive -PM of Pakistan)! Guess the bookies should now allow Citi shareholders and employees to place their bets against odds. Gives them a bit of a chance to recover their losses!
Tuesday, December 4, 2007
Mobile numbers as Citizen IDs - the next generation!
One of the biggest issues for a bank in any country is the issue of identification of an individual. Most countries don't have a social security ID or a voter's ID (well, in a lot of countries you don't get to vote!) that a banker or any other authority can use to identify its customers. How does the banker know it is dealing with Mr or Ms XYZ and continue its relationship with the customer?
Well, I have an answer - formalize the MOBILE number and use it as Citizen ID! We all know that mobile phone penetration is the biggest story of 2007. For e.g. India added 52 million NEW mobile connections in October! China and Russia also continue to add new connections that exceed the population of a lot of countries. So, what can we do - simply ride on the mobile telephony structure and use mobile numbers for identification. Of course, to get around issues like change in owner, selling your connection needs to be addressed. But governments can simply pass regulations to treat the mobile number and its issuance to run like a Citizen Id system. Not only will this save the governments the huge cost of putting a citizen ID system in place but also ensure that citizens always carry their ID with them! The SIM card is already a secure Chip ; so the security side is taken care of. The bureacrats may turn around and say - why should we use something not created by the State? My response would be; in this age of outsourcing and public-private partnership, it is time for governments to wake up and take off the blinkers.
So, bankers and MSP operators; go for it - promote your mobile numbers as a secure citizen ID. It is safe, secure and also a great social equalizer!! Despite what the Dan Browns of the world may say; your number is no different from my number!.
Mobile phones can be the tipping point of reaching out the 'next billion' unbanked mass.
Prima facie, I am sure we all agree that riding on an existing infrastructure is much better alternative than trying to start from scratch. There is also the serendipity factor - many good things will happen as we go along!
Now on to the brasstacks of using a mobile number for ID purposes.
1) Governments in the countries need to pass a central regulation or law that lays down the mobile number logic and the fact of its being unique to an individual. This way, mobile numbers will not be resuable and MSPs will be required to maintain a method in their number allocation. A comprehensive regulation will need to be passed that covers the entire gamut of credit lending and mobile phone maintainence. This would not only set a railroad but also lend solid credibility.The laws should cover prepaid and postpaid connections - what matters is the number to be attached uniquely to an individual.
2), MSPs will need a 'carrot and stick' approach to get down to issuing mobile phones across the countryside. Ideally, State and Federal governments should subsidize the cost of the mobile instrument and the line costs. I can imagine the MSPs salivating at the prospect of issuing a few hundred million more connections!
3) MSPs will deploy armies of sales persons to reach out to the masses. Where there is an opportunity, the MSPs will lose no time in deploying their resources! The Sales force can also take digital photos of the individuals and even look a simple fingerprint storage technology. In fact, the first line of credit given out can be the phone instrument!
4) Mobile phone owners will happily go for the phone connections when they realize the benefits it offers - credit, identity and most importantly -obviating any middle men (e.g. bureacrats) and any chances of corrupt practices. Credit coming directly onto your phone in the form of electronic money provides no chance for any leakage or skimming. Any subsidies or state benefits should be paid directly to the mobile number; no question of any hanky panky.
5) MSPs will have the flexibility to price their services according to the volumes and area of operation. Since countries like India, China, Russia started off on a GMS platform, the more volumes coming in - the better the revenue / price equation.
6) How do the debtors get cash out of their 'mobile credit'? The answer lies in reaching out to the entity that is closest to the debtor. For example, in India, Post offices exist in almost every district and town - a historical legacy of the British Rule. Electronic cash dispensers (EPOS) with chip readers that can read the chip on the mobile phone will provide the solution. Fingerprint identification should easily enable operation. A live example of mobile phones as a payment option can be seen from South Korea where 'dongles' enable cardholders to use their mobile phones as credit cards. Even for repayment of instalments on the loan, these can act as payment points.
7) Credit grantors will have reference points of : designated mobile number, location, physical verification by the MSP, readily available contact and GSM tracking!
8) From an environmental point of view as well; this presents opportunities. In emerging markets, there are more used mobile phone instruments sold than new ones. As the mobile phones assume stature, there will be more effective use of instruments by pushing it down the food chain. Opportunties for solar cell powered mobile phones will automatically become a necessity.
9) Citizens will also use their mobile phones to send funds to each other - the great P2P opportunity that is yet to see the light of day may become a reality. This is already in vogue in Phillipines where citizens can send money to/from any mobile number in the country.
I am sure MSPs and credit grantors can think of many more opportunities and benefits.
So, I will now wind up my act and hope this subject gets the attention of the right people who matter! The mobiSomething creative has to be implemented; or else for the huge mass of underbanked and underserved opportunity, 'the road to prosperity may remain under construction'.
Well, I have an answer - formalize the MOBILE number and use it as Citizen ID! We all know that mobile phone penetration is the biggest story of 2007. For e.g. India added 52 million NEW mobile connections in October! China and Russia also continue to add new connections that exceed the population of a lot of countries. So, what can we do - simply ride on the mobile telephony structure and use mobile numbers for identification. Of course, to get around issues like change in owner, selling your connection needs to be addressed. But governments can simply pass regulations to treat the mobile number and its issuance to run like a Citizen Id system. Not only will this save the governments the huge cost of putting a citizen ID system in place but also ensure that citizens always carry their ID with them! The SIM card is already a secure Chip ; so the security side is taken care of. The bureacrats may turn around and say - why should we use something not created by the State? My response would be; in this age of outsourcing and public-private partnership, it is time for governments to wake up and take off the blinkers.
So, bankers and MSP operators; go for it - promote your mobile numbers as a secure citizen ID. It is safe, secure and also a great social equalizer!! Despite what the Dan Browns of the world may say; your number is no different from my number!.
Mobile phones can be the tipping point of reaching out the 'next billion' unbanked mass.
Prima facie, I am sure we all agree that riding on an existing infrastructure is much better alternative than trying to start from scratch. There is also the serendipity factor - many good things will happen as we go along!
Now on to the brasstacks of using a mobile number for ID purposes.
1) Governments in the countries need to pass a central regulation or law that lays down the mobile number logic and the fact of its being unique to an individual. This way, mobile numbers will not be resuable and MSPs will be required to maintain a method in their number allocation. A comprehensive regulation will need to be passed that covers the entire gamut of credit lending and mobile phone maintainence. This would not only set a railroad but also lend solid credibility.The laws should cover prepaid and postpaid connections - what matters is the number to be attached uniquely to an individual.
2), MSPs will need a 'carrot and stick' approach to get down to issuing mobile phones across the countryside. Ideally, State and Federal governments should subsidize the cost of the mobile instrument and the line costs. I can imagine the MSPs salivating at the prospect of issuing a few hundred million more connections!
3) MSPs will deploy armies of sales persons to reach out to the masses. Where there is an opportunity, the MSPs will lose no time in deploying their resources! The Sales force can also take digital photos of the individuals and even look a simple fingerprint storage technology. In fact, the first line of credit given out can be the phone instrument!
4) Mobile phone owners will happily go for the phone connections when they realize the benefits it offers - credit, identity and most importantly -obviating any middle men (e.g. bureacrats) and any chances of corrupt practices. Credit coming directly onto your phone in the form of electronic money provides no chance for any leakage or skimming. Any subsidies or state benefits should be paid directly to the mobile number; no question of any hanky panky.
5) MSPs will have the flexibility to price their services according to the volumes and area of operation. Since countries like India, China, Russia started off on a GMS platform, the more volumes coming in - the better the revenue / price equation.
6) How do the debtors get cash out of their 'mobile credit'? The answer lies in reaching out to the entity that is closest to the debtor. For example, in India, Post offices exist in almost every district and town - a historical legacy of the British Rule. Electronic cash dispensers (EPOS) with chip readers that can read the chip on the mobile phone will provide the solution. Fingerprint identification should easily enable operation. A live example of mobile phones as a payment option can be seen from South Korea where 'dongles' enable cardholders to use their mobile phones as credit cards. Even for repayment of instalments on the loan, these can act as payment points.
7) Credit grantors will have reference points of : designated mobile number, location, physical verification by the MSP, readily available contact and GSM tracking!
8) From an environmental point of view as well; this presents opportunities. In emerging markets, there are more used mobile phone instruments sold than new ones. As the mobile phones assume stature, there will be more effective use of instruments by pushing it down the food chain. Opportunties for solar cell powered mobile phones will automatically become a necessity.
9) Citizens will also use their mobile phones to send funds to each other - the great P2P opportunity that is yet to see the light of day may become a reality. This is already in vogue in Phillipines where citizens can send money to/from any mobile number in the country.
I am sure MSPs and credit grantors can think of many more opportunities and benefits.
So, I will now wind up my act and hope this subject gets the attention of the right people who matter! The mobiSomething creative has to be implemented; or else for the huge mass of underbanked and underserved opportunity, 'the road to prosperity may remain under construction'.
Sunday, December 2, 2007
Getting the next billion!!!
Getting the next Billion!
Just the other day, I was reading a series of reports by Boston Consulting Report (BCG). Normally, such reports use statistics like a drunk using a lamp-post - for support than illumination. But these reports are an exception! The report on India particularly fascinated me. According to BCG, the next big opportunity for banks is the 'billion ' unbanked customers in countries like China, India, Brazil and of course Africa. India alone has more than 135 million housholds that are outside the purview of the banking sector. Thus far, there has been no real effort to reach out to this segment as a profitable segment. They have always been patronised and the banks have been condescending than anything else. But now with the changed scenario and 'sub prime' wallop, banks have to review their outlook towards the massive unbanked.The report provides some ideas on how to reach out to these 135 million households. From my take, there are two solid routes - 1) use the social hierarchy 2) Mobile phone infrastructure.What do I mean by socal hierarchy - it is the village headman, local leaders to whom this unbanked normally goes for favors and help. Imagine if each village's panchayat or mukhia turns into a sales agent for a bank. The agent can also have an element of responsibility for the repayment. Now, the mobile phone network is growing at a breakneck pace across India. When you have more than 50 million new connections across the country, surely it is big enough for us to take notice. We can all learn from the Phillipines example; use the mobile phone to send money, operate your bank account, your credit is always with you on the phone and secure on a SIM card chip. The biggest historical issue for a low income Indian is the treatment meted out to him by a banker who looks and talks down to him. Contrast that when he doesn't have to go to a bank and has more trust when he has his money in electronic form always with him! Each village can have a mobile training centre where people help those who need to operate.Think about it; win win scenario for all - banks, mobile operators, governments and also the huge mass of unbanked!
Just the other day, I was reading a series of reports by Boston Consulting Report (BCG). Normally, such reports use statistics like a drunk using a lamp-post - for support than illumination. But these reports are an exception! The report on India particularly fascinated me. According to BCG, the next big opportunity for banks is the 'billion ' unbanked customers in countries like China, India, Brazil and of course Africa. India alone has more than 135 million housholds that are outside the purview of the banking sector. Thus far, there has been no real effort to reach out to this segment as a profitable segment. They have always been patronised and the banks have been condescending than anything else. But now with the changed scenario and 'sub prime' wallop, banks have to review their outlook towards the massive unbanked.The report provides some ideas on how to reach out to these 135 million households. From my take, there are two solid routes - 1) use the social hierarchy 2) Mobile phone infrastructure.What do I mean by socal hierarchy - it is the village headman, local leaders to whom this unbanked normally goes for favors and help. Imagine if each village's panchayat or mukhia turns into a sales agent for a bank. The agent can also have an element of responsibility for the repayment. Now, the mobile phone network is growing at a breakneck pace across India. When you have more than 50 million new connections across the country, surely it is big enough for us to take notice. We can all learn from the Phillipines example; use the mobile phone to send money, operate your bank account, your credit is always with you on the phone and secure on a SIM card chip. The biggest historical issue for a low income Indian is the treatment meted out to him by a banker who looks and talks down to him. Contrast that when he doesn't have to go to a bank and has more trust when he has his money in electronic form always with him! Each village can have a mobile training centre where people help those who need to operate.Think about it; win win scenario for all - banks, mobile operators, governments and also the huge mass of unbanked!
Getting the next Billion!
Just the other day, I was reading a series of reports by Boston Consulting Report (BCG). Normally, such reports use statistics like a drunk using a lamp-post - for support than illumination. But these reports are an exception! The report on India particularly fascinated me. According to BCG, the next big opportunity for banks is the 'billion ' unbanked customers in countries like China, India, Brazil and of course Africa. India alone has more than 135 million housholds that are outside the purview of the banking sector. Thus far, there has been no real effort to reach out to this segment as a profitable segment. They have always been patronised and the banks have been condescending than anything else. But now with the changed scenario and 'sub prime' wallop, banks have to review their outlook towards the massive unbanked.
The report provides some ideas on how to reach out to these 135 million households. From my take, there are two solid routes - 1) use the social hierarchy 2) Mobile phone infrastructure.
What do I mean by socal hierarchy - it is the village headman, local leaders to whom this unbanked normally goes for favors and help. Imagine if each village's panchayat or mukhia turns into a sales agent for a bank. The agent can also have an element of responsibility for the repayment. Now, the mobile phone network is growing at a breakneck pace across India. When you have more than 50 million new connections across the country, surely it is big enough for us to take notice. We can all learn from the Phillipines example; use the mobile phone to send money, operate your bank account, your credit is always with you on the phone and secure on a SIM card chip. The biggest historical issue for a low income Indian is the treatment meted out to him by a banker who looks and talks down to him. Contrast that when he doesn't have to go to a bank and has more trust when he has his money in electronic form always with him! Each village can have a mobile training centre where people help those who need to operate.
Think about it; win win scenario for all - banks, mobile operators, governments and also the huge mass of unbanked!
The report provides some ideas on how to reach out to these 135 million households. From my take, there are two solid routes - 1) use the social hierarchy 2) Mobile phone infrastructure.
What do I mean by socal hierarchy - it is the village headman, local leaders to whom this unbanked normally goes for favors and help. Imagine if each village's panchayat or mukhia turns into a sales agent for a bank. The agent can also have an element of responsibility for the repayment. Now, the mobile phone network is growing at a breakneck pace across India. When you have more than 50 million new connections across the country, surely it is big enough for us to take notice. We can all learn from the Phillipines example; use the mobile phone to send money, operate your bank account, your credit is always with you on the phone and secure on a SIM card chip. The biggest historical issue for a low income Indian is the treatment meted out to him by a banker who looks and talks down to him. Contrast that when he doesn't have to go to a bank and has more trust when he has his money in electronic form always with him! Each village can have a mobile training centre where people help those who need to operate.
Think about it; win win scenario for all - banks, mobile operators, governments and also the huge mass of unbanked!
Tuesday, November 27, 2007
Citi's new sophisticated investor!
Today's big news - Abu Dhabi investing 7.5 Billion USD in beleagured Citigroup. the deal looks exactly as the one Talal Bin Waleed got through in 1990. A D govt is floating in cash and funnily, a lot of it is oil money which they have received from the US. Funnily enough, the CEO Bischoff says he welcomes this investment by one of world's sophisticated equity investor!! Duh -- since when did the AD govt become a 'sophisticated' investor?? The irony of it all is inescapable! Last year, at a conference gathering in Dubai, the CEO of a major Arab Bank said that Goldman Sachs wasn't doing justice to the GCC with its BRIC report - BRIC is actually GRIC!! the combined wealth and real GDP growth of the GCC countries far exceeds that of Russia and Brazil.
So, folks, while the hype around Chindia flows across the world, the GCC cash mountains will sweep across the world and prove that 'oily places' and 'holy places' are the most important places in our world.
If Qatar and Kuwait also join the fray and invest in poor Citi- it may be renamed as 'Abu Dhabi -Saudi- National Citi Bank of GCC' - very soon.!
So, folks, while the hype around Chindia flows across the world, the GCC cash mountains will sweep across the world and prove that 'oily places' and 'holy places' are the most important places in our world.
If Qatar and Kuwait also join the fray and invest in poor Citi- it may be renamed as 'Abu Dhabi -Saudi- National Citi Bank of GCC' - very soon.!
Friday, November 23, 2007
credit card issuing risk in the middle east
CREDIT CARD ISSUANCE IN THE MIDDLE EAST – THE CHALLENGES IN UNSECURED LENDING
The Region
Credit cards have swept through the Middle East region at an astonishing rate over the last decade. At the start of the 1990s, the people in the Middle East region believed that cards are a luxury item reserved for the rich and famous. Today because of the overwhelming growth in technology and consumer spending, cards are now a common mode of payment and often form a principal link between banks and their customers.
But this success has its challenges. As card Issuers focus on launching new products and services to feed public demand and grow their business to reap in big profits, the burden placed on the Credit Manager to manage the lending portfolio cannot be trifled with. New opportunities created by technology such as Internet, Electronic and mobile commerce cannot obviate the fundamental lending risks and the basic need of sound credit decisions. Without sound risk management at individual, national and international levels, losses can become serious and business confidence in cards becomes seriously affected with severe impact on profitability.
The Middle East region offers card issuing banks all the many challenges that emerging markets offer but also present some unique hurdles to overcome, that it can be easy to overlook the fundamental areas in lending. Supporting a sustainable yet profitable pace of expansion, the threat of stiff competition, and the disruptive potential of new technologies are items on the agenda of every Credit Manager in the region. Inexperience contributes to the problem. Unlike the Europe and Americas where credit cards are now a part of everyday life and lending strategies/practices have reached an advanced degree of sophistication, the Middle East presents a scenario of rapid growth opportunities against 'anarchic' market background.
The Credit Risk Manager's job and the underlying challenges, in a card issuer can be summarized under the following heads:
Cultural factors
Religious factors/Shariah Law
Within the Islamic faith, Shariah Law does not recognise the concept of the lending of money for profit, (based upon interest). This principle presents a number of issues for card issuing banks. In addition, Shariah Law influences the legal processes available to banks in the Gulf region. This makes the lending process more complex and often presents a sense of hostility against the product itself. Moreover, the application of the law in recoveries often results in unviable situations where the card issuer is asked by the court to provide charge slips and receipts for every transaction forming the unpaid card debt!
The current political environment with a sizable number of people being anti-American and anti-West presents makes the credit screening process more difficult.
Demographics and population:
The Middle East has a unique workforce composition in that a sizeable majority is composed of foreign workers and expatriates. So, within the region, probably more so than any other region in the world, frequent, prolonged and extensive international travel is common. There are a number of factors associated with this phenomenon:
· During the summer months, particularly June to August, many members of the population take prolonged holidays to Europe and the USA. Often these trips are in excess of two months.
· Inter-Gulf travel is frequent and common for economic and social reasons.
· The large expatriate communities will return to their home countries at key times of the year, (particularly in the summer months and during key holiday periods such as December).
This ‘travelling’ culture creates a number of credit risk management issues that are specific to the Middle East region. These include peaks of high expenditure, frequent cash usage, ATM withdrawals, and missed payments. Missed payments may be due to the customer’s inability to pay for both geographic and economic reasons.
This issue generates the obvious credit risk management concerns – continuous spending but no payments. To manage this, Credit-Risk Managers often implement a fixed pre-payment capability. This may also be addressed by taking a fixed deposit, against which the bank may offset subsequent monthly card payments.
Cash Culture
The Middle East is very much a cash-driven society. Cheques and promissory notes are the least favoured methods of consumer payments. Paying by cash is an opportunity to negotiate a favourable discount and therefore ATM withdrawals have much higher value and frequency than seen elsewhere. This is exacerbated by merchants, who encourage cardholders to pay with cash in order to avoid paying Merchant Acquirer fees.
This cash culture also encourages cardholders to withdraw the full cash limit on the card account shortly after it has been issued. However, the fees, service charges and interest, (where applicable), for cash usage represent a significant source of revenue for all of the member banks. It is an important decision for the Credit unit to manage the cash withdrawal limits of cardholders at an optimal balance between risk and revenues.
Lax Payment Culture
Customers make payments when they consider it appropriate, (self determined), rather than when requested. This is a particular issue when the cardholder does not perceive the minimum payment due as significant, and is not aware of the consequences of non-payment. In addition, there is a belief that minor delinquency and slow payment is acceptable!
Many a Credit Manager faces accounts with a high level and value of delinquency, which paid in full when actions were taken that increased the perceived importance of payment to the cardholder.
Again, this culture will be very difficult to change. However, there are a number of areas where Credit management improvements may be made. These include:
· Enhanced customer education campaigns throughout all channels of communication, explaining the importance of regular payment and the customer service/credit implications of non-payment.
· Accelerated collection actions on persistently delinquent accounts, or accounts that have reached a high level of delinquency in the past. This will elevate the importance of regular payment to the cardholder.
Infrastructural Factors -Absence of Credit Bureaus
Within each of the countries in the Middle East, there are different levels of access to credit bureau or shared negative payment information. There is a marked reluctance in sharing positive information out of competitive beliefs.
Although there are credit bureau initiatives underway in many of the countries in the region, there are formidable obstacles to be overcome and it is unlikely for Credit Managers to reap the benefits of structured credit bureau information.
Banks believe that reliable credit bureau information is required to make a more prudent accept or decline decision on new account applications. Banks also believe that it is necessary for the Central Banks to impose legislation to ensure that data is submitted consistently to a shared negative or credit bureau file. Without Central Bank guidance and regulation, limited progress will be made.
Many card issuers in the region have formed 'informal' information sharing channels as a first step towards convincing potential contributing banks of the benefits of this type of service. Initially this comprises of a shared negative file with reciprocal participation and defined standards. Central Banks in most of the countries circulate C-Lists (list of known defaulters) that provide some limited benefits.
Judicial System for debt recovery
In some of the countries like Saudi Arabia, a promissory note can be enforced in the courts against a defaulting debtor, and many banks take this as part of the application process.
In the United Arab Emirates, a dishonoured cheque can form the basis of a criminal charge action through the courts. Most credit card grantors require new applicants to provide a signed undated cheque to the value of the credit limit. This can then be presented in the event of a subsequent default. Once dishonoured, the legal process can begin.
The majority of the banks in this region often find it difficult to take legal action against a defaulting debtor due to the complexities associated with the legal processes in each country. In Kuwait, for example, legal recourse is possible and generally effective, although it is costly and time consuming. In almost all circumstances, legal action, if successful, results in the recovery of the capital balance only.
Postal Services
The use of postal boxes as a mailing address is common within the Middle East & Gulf region. However, in general, it is a challenge for all card issuers to ensure that the monthly billing statements reach cardholders without fail and in time to pay by the due date.
Postal boxes are in short supply and are expensive for individuals. Cardholders typically utilise their employer’s postal boxes to receive mail, or share a postal box with five or more people. The speed and reliability of the postal service is regarded highly erratic and often unacceptable. It is also possible that cardholders use the poor mailing system as a convenient excuse for non-payment. As the majority of contact details held for the customers are postal box based, several banks experience problems with the quality of data for physical addresses. Many cardholders simply have a street name with no apartment or house number details.
The dependence upon postal boxes, the absence of accurate physical address details and shared common surnames, all present a number of challenges when attempting a physical trace of a delinquent cardholder.
There are number of steps that need to be implemented to lessen the impact of this issue:
· Implementation of enhanced audit and control procedures for the capture of the physical address details of new applicants. As bills for utilities, such as water and electricity contain a full physical address, these can be requested as part of the application process, to ensure correct data capture.
· Application capture screens or physical application processes should be modified to ensure that a full physical address is mandatory.
· As postal communication represents a problem, the application form should be modified to capture all alternate contact details, such as mobile telephone and e-mail addresses.
· The use of alternative customer contact channels, such as the use of calls to mobile telephone numbers, SMS text messages and e-mail should be tested within account management policies such as collections.
· Tracing facilities, such as automated batch or on-line directory enquiry facilities, (via national telecommunications companies or mobile telephone service providers), are other added value industry services that could be initiated by the bank membership association suggested above.
Floating Expatriate Population
One of the most unique social and commercial characteristics of the Middle East-Gulf region is the size of the expatriate population. The UAE has the highest proportion of expatriates as a percentage of total population, at 75%, with Kuwait next at 50% and Saudi Arabia with 30%.
The average tenure of employment varies between the UAE, Saudi and Kuwait, with expatriates working on average for 4 years in the UAE and between 2 and 3 years in Saudi and Kuwait. After these periods expatriate employees typically stay for another full term or leave the Gulf region and return to their home countries.
Many of the banks in the region (particularly UAE) have actively grown their account bases by targeting expatriates. As a logical corollary, they face significant credit losses as a result of expatriate cardholders ‘skipping’ the country and not returning, leaving their unpaid debts behind. This was rampant recently during the US led war in Iraq; a large number of Western expatriates left the region for security reasons – leaving behind a trail of unpaid debt.
Legislation exists to apply for a ‘travel ban’ to prevent account holders from leaving the country if they have outstanding debts and delinquent accounts. However, this process is cumbersome, expensive and slow.
As part of the application process, banks that offer credit cards to expatriates confirm valid employment details and stipulate a minimum employment period before accepting. In general, no employment contract information is captured, other than work permit details.
Some card issuing banks have stringent requirements, where an irrevocable salary assignment and an existing banking relationship are required before an expatriate can open a credit card account.
This issue is tricky to resolve without significant customer service implications or impacting upon the potential growth of card portfolios.
There are, however, a number of prudent risk management steps that can be implemented:
· As part of the account opening process, additional criteria could be applied to reduce the risk of ‘skips’, including irrevocable assignment of salary and or a fixed deposit as security against a credit limit.
· The card application form must request for applicant’s address in the home country, as well as their relatives contact details. This will assist in tracing if the customer ‘skips’ back to their home country.
· Copies of the passport of the applicant. Also, where applicable take copies of Social Security ID and driving licence information of the country of origin.
· Contract expiry details should be captured as part of the application process and confirmation calls to employers could be made close to the expiry date, to confirm contract renewal.
· Additional confirmation procedures should be considered for applications from individuals who are approaching the end of an employment contract, (verification of renewal of employment contract).
· The expiry date of the card can be synchronised with the employment contract expiry and additional confirmation procedures could be implemented as part of the card renewal process. If card collection is via a branch network, verification of renewed employment contracts could be implemented as part of the card delivery process.
· Subjective reviews of an account can be conducted a number of months prior to the employment contract expiry date to identify non-typical account performance, such as excessive balance build. This may proactively highlight potential ‘skip’ accounts. If the account shows early stages of delinquency approaching the end of the contract, a pro-active application for a travel ban may be filed, or discussed with the cardholder.
In summary, credit card lending in the Middle East is a formidable challenge to manage for a Credit-Risk Manager. It requires a combination of sound lending skills and tailored credit management practices in a 'fuzzy' environment. However, a credit manager can play a significant role in contributing to healthy profits of the institution as return on investment in the card business in the region is in the range of 15% to 27%. The importance of the Credit/Risk role in this business cannot be undermined in any way.
The Region
Credit cards have swept through the Middle East region at an astonishing rate over the last decade. At the start of the 1990s, the people in the Middle East region believed that cards are a luxury item reserved for the rich and famous. Today because of the overwhelming growth in technology and consumer spending, cards are now a common mode of payment and often form a principal link between banks and their customers.
But this success has its challenges. As card Issuers focus on launching new products and services to feed public demand and grow their business to reap in big profits, the burden placed on the Credit Manager to manage the lending portfolio cannot be trifled with. New opportunities created by technology such as Internet, Electronic and mobile commerce cannot obviate the fundamental lending risks and the basic need of sound credit decisions. Without sound risk management at individual, national and international levels, losses can become serious and business confidence in cards becomes seriously affected with severe impact on profitability.
The Middle East region offers card issuing banks all the many challenges that emerging markets offer but also present some unique hurdles to overcome, that it can be easy to overlook the fundamental areas in lending. Supporting a sustainable yet profitable pace of expansion, the threat of stiff competition, and the disruptive potential of new technologies are items on the agenda of every Credit Manager in the region. Inexperience contributes to the problem. Unlike the Europe and Americas where credit cards are now a part of everyday life and lending strategies/practices have reached an advanced degree of sophistication, the Middle East presents a scenario of rapid growth opportunities against 'anarchic' market background.
The Credit Risk Manager's job and the underlying challenges, in a card issuer can be summarized under the following heads:
Cultural factors
Religious factors/Shariah Law
Within the Islamic faith, Shariah Law does not recognise the concept of the lending of money for profit, (based upon interest). This principle presents a number of issues for card issuing banks. In addition, Shariah Law influences the legal processes available to banks in the Gulf region. This makes the lending process more complex and often presents a sense of hostility against the product itself. Moreover, the application of the law in recoveries often results in unviable situations where the card issuer is asked by the court to provide charge slips and receipts for every transaction forming the unpaid card debt!
The current political environment with a sizable number of people being anti-American and anti-West presents makes the credit screening process more difficult.
Demographics and population:
The Middle East has a unique workforce composition in that a sizeable majority is composed of foreign workers and expatriates. So, within the region, probably more so than any other region in the world, frequent, prolonged and extensive international travel is common. There are a number of factors associated with this phenomenon:
· During the summer months, particularly June to August, many members of the population take prolonged holidays to Europe and the USA. Often these trips are in excess of two months.
· Inter-Gulf travel is frequent and common for economic and social reasons.
· The large expatriate communities will return to their home countries at key times of the year, (particularly in the summer months and during key holiday periods such as December).
This ‘travelling’ culture creates a number of credit risk management issues that are specific to the Middle East region. These include peaks of high expenditure, frequent cash usage, ATM withdrawals, and missed payments. Missed payments may be due to the customer’s inability to pay for both geographic and economic reasons.
This issue generates the obvious credit risk management concerns – continuous spending but no payments. To manage this, Credit-Risk Managers often implement a fixed pre-payment capability. This may also be addressed by taking a fixed deposit, against which the bank may offset subsequent monthly card payments.
Cash Culture
The Middle East is very much a cash-driven society. Cheques and promissory notes are the least favoured methods of consumer payments. Paying by cash is an opportunity to negotiate a favourable discount and therefore ATM withdrawals have much higher value and frequency than seen elsewhere. This is exacerbated by merchants, who encourage cardholders to pay with cash in order to avoid paying Merchant Acquirer fees.
This cash culture also encourages cardholders to withdraw the full cash limit on the card account shortly after it has been issued. However, the fees, service charges and interest, (where applicable), for cash usage represent a significant source of revenue for all of the member banks. It is an important decision for the Credit unit to manage the cash withdrawal limits of cardholders at an optimal balance between risk and revenues.
Lax Payment Culture
Customers make payments when they consider it appropriate, (self determined), rather than when requested. This is a particular issue when the cardholder does not perceive the minimum payment due as significant, and is not aware of the consequences of non-payment. In addition, there is a belief that minor delinquency and slow payment is acceptable!
Many a Credit Manager faces accounts with a high level and value of delinquency, which paid in full when actions were taken that increased the perceived importance of payment to the cardholder.
Again, this culture will be very difficult to change. However, there are a number of areas where Credit management improvements may be made. These include:
· Enhanced customer education campaigns throughout all channels of communication, explaining the importance of regular payment and the customer service/credit implications of non-payment.
· Accelerated collection actions on persistently delinquent accounts, or accounts that have reached a high level of delinquency in the past. This will elevate the importance of regular payment to the cardholder.
Infrastructural Factors -Absence of Credit Bureaus
Within each of the countries in the Middle East, there are different levels of access to credit bureau or shared negative payment information. There is a marked reluctance in sharing positive information out of competitive beliefs.
Although there are credit bureau initiatives underway in many of the countries in the region, there are formidable obstacles to be overcome and it is unlikely for Credit Managers to reap the benefits of structured credit bureau information.
Banks believe that reliable credit bureau information is required to make a more prudent accept or decline decision on new account applications. Banks also believe that it is necessary for the Central Banks to impose legislation to ensure that data is submitted consistently to a shared negative or credit bureau file. Without Central Bank guidance and regulation, limited progress will be made.
Many card issuers in the region have formed 'informal' information sharing channels as a first step towards convincing potential contributing banks of the benefits of this type of service. Initially this comprises of a shared negative file with reciprocal participation and defined standards. Central Banks in most of the countries circulate C-Lists (list of known defaulters) that provide some limited benefits.
Judicial System for debt recovery
In some of the countries like Saudi Arabia, a promissory note can be enforced in the courts against a defaulting debtor, and many banks take this as part of the application process.
In the United Arab Emirates, a dishonoured cheque can form the basis of a criminal charge action through the courts. Most credit card grantors require new applicants to provide a signed undated cheque to the value of the credit limit. This can then be presented in the event of a subsequent default. Once dishonoured, the legal process can begin.
The majority of the banks in this region often find it difficult to take legal action against a defaulting debtor due to the complexities associated with the legal processes in each country. In Kuwait, for example, legal recourse is possible and generally effective, although it is costly and time consuming. In almost all circumstances, legal action, if successful, results in the recovery of the capital balance only.
Postal Services
The use of postal boxes as a mailing address is common within the Middle East & Gulf region. However, in general, it is a challenge for all card issuers to ensure that the monthly billing statements reach cardholders without fail and in time to pay by the due date.
Postal boxes are in short supply and are expensive for individuals. Cardholders typically utilise their employer’s postal boxes to receive mail, or share a postal box with five or more people. The speed and reliability of the postal service is regarded highly erratic and often unacceptable. It is also possible that cardholders use the poor mailing system as a convenient excuse for non-payment. As the majority of contact details held for the customers are postal box based, several banks experience problems with the quality of data for physical addresses. Many cardholders simply have a street name with no apartment or house number details.
The dependence upon postal boxes, the absence of accurate physical address details and shared common surnames, all present a number of challenges when attempting a physical trace of a delinquent cardholder.
There are number of steps that need to be implemented to lessen the impact of this issue:
· Implementation of enhanced audit and control procedures for the capture of the physical address details of new applicants. As bills for utilities, such as water and electricity contain a full physical address, these can be requested as part of the application process, to ensure correct data capture.
· Application capture screens or physical application processes should be modified to ensure that a full physical address is mandatory.
· As postal communication represents a problem, the application form should be modified to capture all alternate contact details, such as mobile telephone and e-mail addresses.
· The use of alternative customer contact channels, such as the use of calls to mobile telephone numbers, SMS text messages and e-mail should be tested within account management policies such as collections.
· Tracing facilities, such as automated batch or on-line directory enquiry facilities, (via national telecommunications companies or mobile telephone service providers), are other added value industry services that could be initiated by the bank membership association suggested above.
Floating Expatriate Population
One of the most unique social and commercial characteristics of the Middle East-Gulf region is the size of the expatriate population. The UAE has the highest proportion of expatriates as a percentage of total population, at 75%, with Kuwait next at 50% and Saudi Arabia with 30%.
The average tenure of employment varies between the UAE, Saudi and Kuwait, with expatriates working on average for 4 years in the UAE and between 2 and 3 years in Saudi and Kuwait. After these periods expatriate employees typically stay for another full term or leave the Gulf region and return to their home countries.
Many of the banks in the region (particularly UAE) have actively grown their account bases by targeting expatriates. As a logical corollary, they face significant credit losses as a result of expatriate cardholders ‘skipping’ the country and not returning, leaving their unpaid debts behind. This was rampant recently during the US led war in Iraq; a large number of Western expatriates left the region for security reasons – leaving behind a trail of unpaid debt.
Legislation exists to apply for a ‘travel ban’ to prevent account holders from leaving the country if they have outstanding debts and delinquent accounts. However, this process is cumbersome, expensive and slow.
As part of the application process, banks that offer credit cards to expatriates confirm valid employment details and stipulate a minimum employment period before accepting. In general, no employment contract information is captured, other than work permit details.
Some card issuing banks have stringent requirements, where an irrevocable salary assignment and an existing banking relationship are required before an expatriate can open a credit card account.
This issue is tricky to resolve without significant customer service implications or impacting upon the potential growth of card portfolios.
There are, however, a number of prudent risk management steps that can be implemented:
· As part of the account opening process, additional criteria could be applied to reduce the risk of ‘skips’, including irrevocable assignment of salary and or a fixed deposit as security against a credit limit.
· The card application form must request for applicant’s address in the home country, as well as their relatives contact details. This will assist in tracing if the customer ‘skips’ back to their home country.
· Copies of the passport of the applicant. Also, where applicable take copies of Social Security ID and driving licence information of the country of origin.
· Contract expiry details should be captured as part of the application process and confirmation calls to employers could be made close to the expiry date, to confirm contract renewal.
· Additional confirmation procedures should be considered for applications from individuals who are approaching the end of an employment contract, (verification of renewal of employment contract).
· The expiry date of the card can be synchronised with the employment contract expiry and additional confirmation procedures could be implemented as part of the card renewal process. If card collection is via a branch network, verification of renewed employment contracts could be implemented as part of the card delivery process.
· Subjective reviews of an account can be conducted a number of months prior to the employment contract expiry date to identify non-typical account performance, such as excessive balance build. This may proactively highlight potential ‘skip’ accounts. If the account shows early stages of delinquency approaching the end of the contract, a pro-active application for a travel ban may be filed, or discussed with the cardholder.
In summary, credit card lending in the Middle East is a formidable challenge to manage for a Credit-Risk Manager. It requires a combination of sound lending skills and tailored credit management practices in a 'fuzzy' environment. However, a credit manager can play a significant role in contributing to healthy profits of the institution as return on investment in the card business in the region is in the range of 15% to 27%. The importance of the Credit/Risk role in this business cannot be undermined in any way.
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