The Irruption of the Electronic The Irruption of the Electronic Distribution Channels and the Distribution Channels and the New Banking System ScenarioNew Banking System Scenario

Fernando Ferreira & Pedro CravoSchool of Technology and Management

Beja - Portugal

NEWI, Wrexham, North Wales, UKSeptember 7th to 9th 2005

António FreitasSocial Faculty of Bahia

Brazil

Why have we chosen this subject?Why have we chosen this subject?

The last decades showed that technological progress The last decades showed that technological progress brought important strategic and structural changes to brought important strategic and structural changes to the Portuguese banking sector.the Portuguese banking sector.

With this in mind, our objective with this paper was With this in mind, our objective with this paper was to analyse the Portuguese banking sector’s evolution to analyse the Portuguese banking sector’s evolution trends, considering the contribution of technological trends, considering the contribution of technological innovation to its modernization and development.innovation to its modernization and development.

IntroductionIntroduction

Portuguese banks and financial institutions changed Portuguese banks and financial institutions changed deeply in the last 3 decades because of the increasing deeply in the last 3 decades because of the increasing use of ICT.use of ICT.

Internet Banking has been responsible for a total Internet Banking has been responsible for a total redefinition of the distribution services, creating a redefinition of the distribution services, creating a highly competitive environment.highly competitive environment.

Introduction Introduction (cont.)(cont.)

Technological innovation turned banking services Technological innovation turned banking services into a complex market, where the frontier between into a complex market, where the frontier between financial services can no longer be easily financial services can no longer be easily distinguished (e.g. banking distinguished (e.g. banking ↔ insurance).↔ insurance).

This led to the creation of important economic This led to the creation of important economic groups that offer all kinds of financial services groups that offer all kinds of financial services transforming the traditional transforming the traditional distribution channels..

QuestionsQuestions

To what extent can technology increase the To what extent can technology increase the competition level between financial institutions?competition level between financial institutions?

Can it create or destruct competitive advantages?Can it create or destruct competitive advantages?

What are the trends for the banking sector future?What are the trends for the banking sector future?

The New Banking System ScenarioThe New Banking System Scenario

New and more aggressive competitors;New and more aggressive competitors; Globalization;Globalization; Technological innovation;Technological innovation; The need for human resources with the right skills.The need for human resources with the right skills.

• This scenario poses several difficulties to the This scenario poses several difficulties to the development of the Portuguese banking system.development of the Portuguese banking system.

The New Banking System ScenarioThe New Banking System Scenario (cont.) (cont.)

Major difficulties for Portuguese financial services:Major difficulties for Portuguese financial services:• ICT use;ICT use;

• Strategies implementation;Strategies implementation;

• Introduction of new financial products and services;Introduction of new financial products and services;

• Clients adaptation to the new distribution channels.Clients adaptation to the new distribution channels. In the last decade, the situation has improved, but In the last decade, the situation has improved, but

with different speeds in the essential dimensions of with different speeds in the essential dimensions of its development.its development.

New Distribution ChannelsNew Distribution Channels

The importance of ICT resulted in the diversification The importance of ICT resulted in the diversification of the distribution channels used by banks.of the distribution channels used by banks.

Importance of the distribution channels

12%

5%

56%

27%

32%

18%

6%

Cheques

Direct Debits

Others

Cash Withrawal

Balance/Statement Print

Payments

Source: Banco de Portugal, 2001

Recent and Future TrendsRecent and Future Trends

Traditional distribution channels will suffer significant Traditional distribution channels will suffer significant disinvestment, as opposed to ICT investment.disinvestment, as opposed to ICT investment.

The financial activity will be led by information The financial activity will be led by information access’ equity power and by the offer of new financial access’ equity power and by the offer of new financial products and services.products and services.

Business will focus on clients, instead of products. Business will focus on clients, instead of products. Thus, clients loyalty will be a critical factor for the Thus, clients loyalty will be a critical factor for the survival of financial institutions.survival of financial institutions.

Recent and Future TrendsRecent and Future Trends (cont.) (cont.)

Products and Services can be easily copied and Products and Services can be easily copied and improved. This kind of investment doesn’t make improved. This kind of investment doesn’t make sense any more.sense any more.

Banks should focus on clients orientation.Banks should focus on clients orientation.

Multi-channel distribution strategies are arising, Multi-channel distribution strategies are arising, leading the traditional agencies network of most leading the traditional agencies network of most banks to shrink.banks to shrink.

Recent and Future TrendsRecent and Future Trends (cont.) (cont.)

ICT’s use is no longer just simply convenient; it’s ICT’s use is no longer just simply convenient; it’s now an important factor of competitive advantage.now an important factor of competitive advantage.

With higher penetration rates, lower costs and several With higher penetration rates, lower costs and several other advantages, this distribution channel will be other advantages, this distribution channel will be preferred by clients.preferred by clients.

The expansion of this (new) channel strongly The expansion of this (new) channel strongly depends on the number of Internet users.depends on the number of Internet users.

ConclusionsConclusions

Challenges increase according to clients expectations, Challenges increase according to clients expectations, and those increase with the emergence of new and those increase with the emergence of new transaction methods based on new technologies.transaction methods based on new technologies.

The Internet and ICT increment the access to The Internet and ICT increment the access to information, changing consumers behaviour.information, changing consumers behaviour.

Financial institutions try to fulfil the clients needs and Financial institutions try to fulfil the clients needs and to do so, they need to make use of new technologies to do so, they need to make use of new technologies and adopt a new approach to business.and adopt a new approach to business.

ConclusionsConclusions (cont.) (cont.)

But... The majority Portuguese banks recognise the deficient

use of these technologies. Eurostat ranks Portugal almost in last place concerning

the number of Internet users. The government needs to implement policies that

incentive the use of new technologies, but also that protect users and prevent them from adopting a self-exclusion behaviour.

Thank you!Thank you!

Pedro Manuel Cravopedro.cravo@estig.ipbeja.pt