It is time for Armenian banks to review their business model
Media Room
Banking system in Armenia is currently facings difficulties; it has become a serious challenge to ensure as much as stable high growth rate, let alone two-digit growth. The previous model of the banking system was based on extensive development when the high rate of growth was ensured through attraction of new clients. But today in the grip of complicated economic situation and limited market, banks have to find new ways of development and change their business models to keep in step with the times. In the interview to ARKA news agency Artur Hambardzumyan, Head of Innovations and Quality Unit at Ameriabank, talked about transformation of national banking system and technological development.

ARKA – Currently Armenian banks seem to be under some pressure in terms of difficult economic situation, toughening of norms by the regulator and high level of competition. So, in view of this situation, what challenges does the banking system face and how can it beat those challenges?

A. Hambardzumyan
– In order to see the current and future challenges faced by the Armenian banks we need to consider their activities in three time horizons: current business, the business tomorrow and the business in future. The challenge of the current business is to confront the negative impacts the market is exposed to due to aggravation of economic situation, growth of non-performing loans and other factors impacting the profitability of banks. If we judge by financial figures of Q2 of the current year, we will see that the issue of the day for a great number of Armenian credit organizations is to save the business and avoid its further aggravation. It is important to note that despite worsening economic conditions some banks still manage not only to maintain their business, but to ensure growth and a considerable level of profitability due to proper business structure and competent management. However, on the whole, the task number one during crisis is to save the business.
In terms of tomorrow’s business the banks have two main tasks: the first task is to diversify the business. As practice shows, banks with diversified loan portfolios, clientele and income sources are more stable. To be more resistant to negative factors influencing the development of business in long-term outlook it is necessary to ensure proper balancing of business. The second task is to ensure efficiency of business, i.e. select a business-model securing the expected level of profitability for shareholders. Note that some 10-15 years ago the model of the Armenian banking system was based on extensive development, when the high rate of growth was ensured through attraction of new clients. Under such conditions nobody cared about proper cost management and efficiency of investments, since the income from new clients and the rapid growth often covered all the problems of business efficiency. Now, however, this model no longer works, and we need to think out how to ensure efficiency and profitability of business. So, the banks face the problem of further development from two aspects: firstly, internal efficiency and proper cost management, and secondly – utilization of untapped internal potential of existing clients and business, as well as search for new income sources and markets that will ensure a pretty level of profitability to be attractive enough for new investments and financing.
And finally, in terms of business in future, the challenges are more global in view of technological revolution and the consequent behavioral revolution, change of both the ways of using banking services and the content of banking services and business themselves. This means that banks have to understand and determine their role as an institution of the future. Obviously, in some 10 years banks will be different, and what we need now is to picture the process of their transformation in the context of ensuring efficiency of banking operations in future when many banking services will be delivered by non-bank players. It is a global problem all banks of the world will face or are currently facing.

Global experience offers very efficient transformation models which are already being adopted by banks worldwide, for instance, cooperation with new players in the capacity of infrastructural platforms and structures that change the role of banks while providing them with a new niche.
To summarize it all in terms of all three time horizons, it is imperative that all resources and attention of the bank’s management are not absorbed by current operations. If banks start prioritizing only current problems, they will simply lose their competitive advantages on the market and even their business. That is why banks need to consider all the 3 horizons (current business, tomorrow’s business and business in future) as integrity, so that the most effective will be that bank which stresses the current business, tomorrow’s business and business in future alike. Only then can we talk about balanced approach to business and long-term transformation possibilities.

ARKA – In this regard, what direction will Armenian banks choose for business model transformation in your opinion?

A. Hambardzumyan
– There are several directions of business model transformation. If we consider our banks in the context of limited market and specifics of business in Armenia, one of the directions of transformation in short-term perspective is change of the bank’s size or growth of the scale of business. Obviously, current sizes of banks limit the further possibilities of development and strengthening of their market positions. So the first vector of transformation of Armenian banks’ business model is their consolidation which will ensure a platform for further development in the nearest future.

Another aspect of Armenian banks’ business model transformation is the search for new sources of financing and resources. Since financing of further development at the expense of retained earnings does not ensure the desired growth rates, and on the other hand domestic savings of the population (deposits etc.) are quite limited, we have to turn to new instruments such as debt and equity financing, and they can be accessed through placement of bonds and shares on international markets. In this way banks try to find sources of financing for further development, and to find and use such sources they have to be efficient enough to ensure the desired profitability level for investors.

The third and more substantial vector of transformation is various forms of cooperation with non-bank institutions, telecommunication companies, etc., which, too, are looking for new development channels and trying to access the payment market. In my opinion it is pointless to resist this trend, since cooperation will pave a way for transformation of the bank. Even if a new and more efficient player in terms of communication and servicing of clients appears on the market, the bank will still have an infrastructural role in that business. From this viewpoint it is important that banks think about the role of their business now. For instance, if in future PayPal, Facebook or Apple becomes the main instrument for making payments and transfers, what will the banks do in that case? As practice may show, the mentioned non-bank players do seek cooperation with banks since the latter can ensure a better technological platform for payment operations. I think that pure banking, particularly corporate and premium banking, will be available in a limited segment; as to retail banking, here combined products and services will prevail and the bank and non-bank players each will have their proper role in client servicing.

ARKA – When speaking about banks of future, analysts often highlight individual banking. What can you say about it?

A. Hambardzumyan
– Individual banking is based on understanding and getting to know each client. Previously clients were segmented by markets, geography, income, preferences and life style. Currently in the era of the so called Big Data, quantitative and qualitative data about clients enable to design products and offers for each particular client bearing in mind his behavioral and purchasing preferences, including those expressed in social networks. In this context one of the competitive advantages of banks is the financial data about the clients which are not available for many other market players. Here lies the whole fascination of our informational era, when proper processing of information enables you to be more effective and find new markets and needs on the level of every single client.

To be continued
Updated 29.09.2015, 9:48
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