JEDDAH, 10 June — Online banking is expected to become a regional norm in the Arab region within three to six years and those banks that do not respond to the challenge will find themselves at a serious disadvantage.
It is estimated that the cost of a banking transactions executed on the ATM is 10 percent that of the branch, and if the same transaction is conducted on the telephone the cost drops to 1 percent that of the branch and to a fraction of that if the same transaction is carried on the Internet. With only ten branches in India, for example, Citibank was able to use ATMs and e-banking to become the largest credit card issuer in the country.
While the Internet is perceived to represent a new distribution channel for existing banking products and services, it also provides efficiency in transaction cost and offers a way of reaching a broader range of new clients. For the customer, it relieves him of the need to visit the branch to undertake chore banking transactions, offering him instead “anytime, anyplace, anywhere” banking services. Sophisticated customers, who are usually the more profitable clients, value this service most.
There are two main Internet banking models: the integrated approach (clicks and mortar) and the stand alone Internet bank. Most of the Arab banks have opted for the integrated approach whereby they keep their existing brand name and offer Internet banking services as an extension to their branch, ATM and telephone based services.
The stand alone Internet bank (e.g. Egg in the UK) has been adopted mainly by small to medium sized institutions or by major banks that do not have a large market share in a particular market or product.
Online banking is still comparatively limited in the Arab region when compared to Europe or the US, yet a few pioneers have emerged, notably in Bahrain, Saudi Arabia, Kuwait, Jordan and the UAE. As most Arab states prepare to enter the WTO, they face deregulation of the financial services sector and the prospect of competition with multinational banks. Concern about loss of market share has encouraged Arab banks to consider offering online banking services.
There are, nonetheless, a number of constraints in the region — both in terms of social and infrastructure concerns — that must be taken into account when evaluating the development of Internet banking. For one, while many Arab banks may be technologically capable of offering e-banking services, the telecommunications infrastructure in some countries remains deficient. Internet penetration in the region is still relatively low, and as such may not encourage the investments required to develop e-banking.
A recent report by Forrester Research shows that 16-22 year olds are four times more likely than adults to apply for financial products online. The Arab population is a predominantly young one and in the coming few years this younger generation will demand more from their banks and will also be more willing to change banks if their financial requirements are not met.
Internet penetration is also on the rise, creating higher demand for e-banking. By March 2001, more than 3.54 million in the Arab world used the Internet and it is projected that by the end of the year the region will have more than five million users and as many as 25 million Arabs will go online within the next five years.
Consumers in the Arab world are becoming more sophisticated, both technologically and financially. E-banking registration rates among Arab banks’ retail clientele suggest that demand is growing and will continue to rise rapidly along with Internet penetration in the region.
According to a 2001 report by the Pyramid Research consultancy, a division of the Economist Intelligence Unit, out of the Middle East’s top 100 banking institutions only 18 banks (with average asset value of $8.36 billion) offer online transaction services to their customers. The rest are roughly split between those with informational websites (43 banks) and those with no Web presence (39 banks). However, the 18 pioneers of Arab banking have set a regional trend and many of their local retail banking competitors are already busy making plans to follow suit.
Such e-banking services as current account management (including payments of bills), personal loans, brokerage services, mutual funds, issuance of credit cards, etc., are currently available in several Arab countries, including two local banks in Bahrain, three in Egypt, three in Jordan, three in Kuwait, four in Lebanon, one in Qatar, four in Saudi Arabia and five in the UAE.
Adoption rates are high by global standards relative to the Gulf region’s low Internet penetration. Around 14 percent of Internet users in the Gulf countries where e-banking is an option are registered to bank online; the equivalent figure in the US is 17 percent. The Gulf states have responded better to the challenges of e-banking than many other Arab countries. Three GCC countries — Bahrain, Kuwait and the UAE — boast adoption rates equal to or higher than those in the US; 29 percent in Kuwait, 21 percent in the UAE, and 17 percent in Bahrain.
