CE Top 500 Executives' interviews
Interview with Alicja Kornasiewicz,
CEO, Pekao SA
1. What are the biggest challenges to business growth:
a) In retail banking?
In retail banking, the client base is changing which leads to changes in the banking environment. We can observe a change in customer behaviours with the increasing use of direct channels (which reshapes the role of physical branches), with the high switching rate and the tendency to seek the lowest prices. Clients have also changed their attitudes towards investments, expressing a lower risk aptitude that’s unlikely to increase to pre-crisis levels, though less so than in Western Europe.
Competition is the second key challenge. Small players that need to quickly enlarge their customer base drive the growing price pressure on transactional products. We also see potential competitive pressure from low cost, highly automated operators entering the market, thanks also to the impressive evolution of direct channels. Competition also spurs constant innovation which benefits the customer as new solutions are quickly adopted by multiple players.
The third challenge is the banking environment itself with possible volatility of the interest rate depending on convergence scenarios to the Euro.
On the other hand, CEE countries still have a very significant growth potential thanks to the increasing base of banked customers, growing business production and a younger population on average, coupled with a process of margin erosion that is still at an early stage.
b) In corporate banking?
In corporate banking we can see signs of a revival, with most banks ready to provide companies with financing. The demand for working capital loans is finally growing. At the same time, companies are largely reluctant to make large, long-term investments as a slight slowdown of the economy is still very likely. There is a need for an investment stimulus capable of influencing credit dynamics. We believe that in Poland, large infrastructural projects related to Euro 2012 could liven up the corporate banking market.
2. What does the banking industry have to do to expand the client and revenue base:
a) In retail banking?
In CEE, the banking industry will see a natural increase of the client base due to new banked customers entering the market and a wider diffusion of key banking products. This will be accompanied by mild revenue growth due to a higher penetration of banking products, tempered by potential margin reduction.
CE banks have a strong opportunity to participate in this growth by acting fast on several fronts, such as:
- Introducing a leading-edge service model to increase the customer experience;
- Investing in multichannel service models;
- Mastering credit skills;
- Creating a strong, positive image and maintaining a high reputation.
As a whole, the CE region still has a low saturation of retail banking products when compared to Western Europe and the US. This means room for growth, both in terms of client base and revenues, and cross-selling will be one of the top priorities for banks in the coming years. In Poland, we have observed a dynamic development of the mortgage loans market, and Pekao is a key player in this field.
b) In corporate banking?
The key driver to expand banking activities in the corporate segment is an effect-based sales model, offering complex service and advisory for high-potential clients and cost-optimal service for other companies. Also key are cross-selling, full product range utilization, and a diligent price policy. Moreover, growth of commercial activities should be complemented by an accurate analysis of the market at the local level and selective acquisition of new attractive clients. All this should be supported by tailor-made marketing and communication campaigns.
3. Do you expect there to be any lasting changes affecting the banking industry as a result of the credit crisis? If so, what are they?
We certainly expect that the recent credit crunch will have long-term implications for the banking industry. First of all, the trend will revert from de-regulation into re-regulation, with regulators willing to introduce stricter rules addressing risk management, capital requirements or customer protection. We are also likely to see a stronger correlation between loans and deposits growth (no approval for loan growth funded from external sources).
International banking groups might want to introduce organisational changes to address doubts arising from events such as the failure of Icelandic banks in the UK and attempts to transfer assets from UK’s Lehman just before bankruptcies.
Last but not least, the industry will have to rebuild its reputation and regain trust, which will require increased spending on public relations and promotional campaigns.
4. What are the next big IT developments that CE banks will need to implement?
We see four key areas for IT development in the banking industry. First of all, the development of electronic channels which includes mobile banking and contactless card systems. Secondly, the consolidation of service support systems, to enable customers and employees to access all services from one location. Thirdly, targeting customers and adjusting the product offer to their individual needs will require further development of IT solutions for CRM systems supporting the sales processes. The fourth area for IT development concerns interbank settlement systems, as part of international standards such as. SEPA and PSD.
5. What are the biggest IT risks for CE banks?
The rapid development of electronic banking increases the requirements for ensuring all transactions are secure. Alongside the expansion of electronic channels, there is an increase in fraud. Fighting it will require advanced solutions.
The growing number of processed transactions and the expectations of uninterrupted 24/7 availability of IT systems are very demanding in the context of business continuity assurance. This makes it necessary to develop and maintain high-availability and backup solutions. Their effectiveness is a compromise between acceptable risks and acceptable costs.
Today's IT systems use resources and services that are in many cases provided by outsourced service providers such as telecom operators. The operation of IT systems is largely dependent on the quality and continuity of external providers.
6. What are the major drivers behind those significant IT developments that you will need to make?
As the IT function in banking is becoming more business and client oriented, and the wider implementation of service management systems is a good sign, IT developments are for the most part driven by business needs.
From a business perspective, the most important driver is cost optimisation of IT systems’ operation and function, in particular the centralization and consolidation of IT systems and services within the organization.
The perspective of internal and external clients is no less important. Technology is becoming more and more user-friendly, thanks to the rapid development of front-end systems, which allows us to develop solutions that are functional as well as easy to use.
7. Do you consider (organizational) integration between Risk and Finance functions as a way to better manage balance between risk and profitability? If not, why?
Close cooperation between these two functions is crucial. However, organizational integration is not recommended because of the potential conflict of interest. Whereas the role of the Risk Management function is to assure that a bank does not exceed a certain level of risk, according to shareholders’ risk appetite, the Finance function develops risk-adjusted measures in cooperation with Risk and populates them in the motivation system.
8. How can best practice governance, risk and control activities provide competitive advantage?
Introducing these should result in a decrease of the cost of capital in the long term as the risk premium should be smaller. It should also lead to a decrease in the volatility of earnings.
Interview with Maciej Witucki,
CEO, Telekomunikacja Polska SA (TP SA)
1. What significant changes have you had to make to your business strategy as a result of the financial crisis?
The impact of the global financial crisis on the telecom sector has been moderate. Both residential and business customers, facing economic slowdown, have not been reducing the usage of telecommunication services, but rather seeking cost optimisation within the possibilities offered by the industry. Internet access services and e-commerce, as well as web advertising services (in line with their growing popularity), have remained relatively insensitive to the economic slowdown.
TP Group is under strong pressure coming more from regulatory authorities than from the financial crisis, especially taking into consideration that Poland has been only suffering from economic slowdown and not from recession.
2. How has your company’s R&D strategy changed over the last year?
Our R&D strategy has not significantly changed over the last year, but the changes that were initiated a few years ago have been amplified. We are working closer with France Telecom’s group R&D in order to optimise costs and mutually benefit. We’re pursuing fewer ‘technological’ activities and focusing instead of selection and end-to-end integration of vendor solutions that better fit our needs, and on developing new services. The TP Group is working towards an Open R&D, which entails selection of the best external solutions from academic research and external companies, working with them at an early stage and thus shortening the time-to-market of our innovations. We are also harnessing the power of community by developing Open Platform solutions that enable us to co-innovate with partners and deliver services that can be enriched and customised by each end-user.
3. What do you believe will be the greatest opportunity for growth within the telecoms industry once the recession is over?
We believe that the growing popularity of online services—including e-commerce, social media and networks, online entertainment—and its expansion to personal mobile usage via smartphones, netbooks, tablets and other connected devices will stimulate mobile data services adoption. Moreover, we strongly believe in the potential of the M2M segment and further growth in the demand for high speed and quality fixed line broadband stimulated by video content (video on demand, non linear TV, streaming of games, which would not be possible to deliver on a mass scale using mobile technologies). We also believe that the Euro 2012 Football Championship will have a positive impact on telco market growth.
4. What do you expect will be the main drivers for telecommunications over the next 12 months?
We expect that the telco market will be more and more competitive during the next 12 months especially in terms of prices. The main market drivers seem to be as follows:
- Delivery of new broadband lines thanks to TP investments based on TP-UKE Agreement (700,000 brand new lines and 500,000 upgraded lines through 2012) and significant extension of the broadband market as a result
- Development of Very High-Speed Broadband (VDSL, DOCSIS 3.0 and potentially FTTH) enabling growth of new generation online services
- Accelerated mobile broadband development
- Bundled telco services as a must-have element in any marketing offer
- Growing popularity of High Definition TV, Video on Demand and catch-up TV to capitalise on the new speeds offered by VDSL or FTTH
5. How do you see next-generation smartphone penetration developing in your market over the next six months? How is the adoption of the smartphone changing your revenue strategy?
Current smartphone penetration amounts to roughly 7% and we expect significant growth over the next 12 months. Growing adoption of smartphones stimulates data usage and creates revenue opportunities both in terms of upselling data packages and in retention of more advanced customers. For example, our response was to launch new mobile tariff plans that meet customers’ needs. One of them ("Panther") includes a data traffic package by default.
6. How do you see social media and networking affecting the telecommunications industry in the next 12 to 24 months?
In our view, the growing popularity of social media and networking will carry over to mobile services thanks to the growing adoption of smartphones and handsets dedicated to such services. This trend also creates an opportunity for new revenues from data rate plans dedicated to social media or mobile internet access in general.
The development of social media and networking can also affect fixed-line broadband market in two aspects: by stimulating the penetration of broadband access and by stimulating usage of higher-speed broadband.
7. How you expect advertising to fulfil its potential as an income source for telecoms companies over the next one to two years?
Online and mobile advertising is still the fastest-growing segment of the advertising market. The development of the broadband market (higher bandwidth, growing internet penetration) and increasing involvement of telco players in content services makes advertising a new and attractive revenue source and even a key part of the business model for such services. Mobile advertising (SMS marketing, mobile online content, LBS, augmented reality and more traditional ad-financed mobile content like games, applications, music, and ringtones), thanks to its personalized character, remarkable targeting and capability of tracking effectiveness of campaigns, seems to be a particularly attractive and potentially dynamically growing source of additional revenues for telco operators.
8. What other revenue streams do you intend to promote most strongly over the next one to two years – e.g. mobile banking, broadcasting, media and data etc?
TP Group intends to maintain its leading position on the core telco market as the main element of its strategy. At the same time we are considering additional revenue streams coming from non-telco activities, such as financial services (mobile payment), media and entertainment.
The new Orange portal, as well as multimedia services, will be another revenue stream for TP Group. We expect that the development of our new web portal will increase the popularity of TV and content services provided via the Internet, which can help to stimulate revenues. New devices like TV sets connected to the Internet will support this trend.
9. What other revenue streams appear to be promising to the telecommunications industry over the next 12 to 24 months? E.g. mobile banking, broadcasting, media and data, etc.
Among other revenue streams in the business-to-business segment, machine-to-machine services appear to be promising, in addition to value-added services for mobile (mail offers, navigation and other LBS). In the business-to-consumer segment, we expect to see growth in 3- and multi-screens services based on web TV.
The growing popularity of smartphones seems to be the natural enabler of a wide range of services and applications offered both by telco operators and other providers, creating an opportunity for revenue-sharing business models possible to be used as well as other forms of cooperation between providers.