Banks offer more products to retain customers

Rudijanto, Contributor, Jakarta

With the continued drop in interest rates, local banks are having a tough time retaining customers as other investment alternatives such as mutual funds and corporate bonds provide higher returns.

Because of this situation, banks cannot continue to rely on conventional banking products, particularly deposit or savings accounts, to raise funds from the public.

Though almost all major domestic banks use various incentives to attract customers, such as promising prizes, including luxury cars like BMW, Mercedes Benz and Jaguar, most of them realize that without alternative products to captivate customers, they could lose their hard-won and once loyal customers.

With a 6 percent interest rate and an inflation rate of between 6 percent and 7 percent this year, banks' products such as savings and deposits give almost nothing to their holders. It is not surprising therefore that many banks have started to look for other solutions to help their clients invest their money.

Citibank vice president for wealth management, K.S. Jagannadhan, said that banks that rely on traditional products such as deposits will have a tougher time attracting the flow of money into banks.

Jagannadhan emphasizes that customers are now looking beyond deposits for alternative solutions. Banks that fail to provide their customers with a complete solution will have problems.

Citibank itself offers non-deposit products such as mutual funds, foreign exchange and insurance products in order to provide more alternatives to its customers. Jagannadhan said that eventually all banks would have to offer complete solutions to customers.

The same approach is also taken by state Bank Mandiri, which has also started to pay more attention to non-deposit products.

Bank Mandiri senior vice president for consumer liabilities, Kostaman Thayib, said that the bank would soon launch its "Fund Supermarket".

Bank Mandiri's Fund Supermarket will present various investment alternatives such as insurance and mutual funds from different investment companies. As of now, Bank Mandiri is only selling products from its subsidiary AXA Mandiri Financial Services.

"It is true that we will launch the Fund Supermarket because of the decline in interest rates, but we are also responding to customer demand. Due to their increased exposure to the media, they have become more educated and well-informed about various ways to invest their money," says Kostaman.

Such investment alternatives are certainly aimed at middle and high-segment bank customers. This market segment normally controls 80 percent of banks' third-party funds.

Citibank's Jagannadhan said that there were approximately 150,000 households in Indonesia that belonged to the affluent segment category in the banking sector.

With more players aiming at this segment, he said the competition would be tight.

But Jagannadhan said that there was still enough room for every player to grow in this affluent sector. What banks need is to present good proposals to the clients and to provide advisory services.

"The focus here is not first on products but on understanding customers' needs, such as what percentage of cash and bonds they should have. We look at customers' balance sheet or their point of view. The bank's advisory role becomes important," he said

He also said that more banks were focusing on this affluent segment because the profit from this segment is high. But he welcomes other players to the segment, because more players will help educate the market. But the challenge is to set yourself apart from the other players.

Like other banks, American Express has also diversified its banking products to further tap the upper market segment. In addition to its credit card and travel checks, the bank also offers a corporate card.

The new card, which is offered to corporate clients, has been designed to help companies better manage their travel and entertainment costs.

"The American Express Corporate Card is a more cost-effective way to pay for business expenses as compared to using cash, direct invoicing from vendors or personal credit cards," said American Express Indonesia's head of global corporate services, Vira Sukardiman.

Vira said the bank also provided advice and guidance, and had the expertise to assist companies in managing and controlling their corporate travel and entertainment expenditures.

Although banks have to cooperate with other companies in offering mutual funds or insurance products to their clients, the income from this service is quite helpful in increasing their profit margin.

Those banks that rely solely on savings and deposits as their main products could be in trouble, because their clients could move to more attractive investment alternatives such as mutual funds, which are becoming more popular amid the dwindling interest rates.

Aside from the challenge posed by other players within the banking industry and from mutual fund issuers, observer and banking practitioner Ugie Nugroho said that corporate bonds could also pose a real threat.

In an article published in Kompas daily, Ugie wrote that corporate bonds had become an easier and cheaper way for Indonesian companies to draw public funds, since the interest rate on bank loans is still above 15 percent.

With a return of 10 percent to 13.75 percent, corporate bonds will be much more attractive than deposits, particularly to banks' corporate clients.

However, Jagannadhan said that Indonesian individual investors would not have an appetite for corporate bonds. Rather than competing with Citibank's products, he said that corporate bonds had their own niche market.

In spite of the low interest rates and the tight competition, Citibank recorded a 10 percent growth in deposits last year. The bank's mutual fund and foreign exchange businesses grew by more than 60 percent and 100 percent, respectively, while its total business grew by more than 40 percent.

"Corporate bonds are not for individual customers because such bonds are expensive. That is why I think I should not worry about it, because it does not compete with my products," said Bank Mandiri's Kostaman.

While the fight to grab more market share in the upper segment continues, Kostaman also said Bank Mandiri would further intensify efforts to maintain growth in other market segments.

"We will launch new gift programs after the completion of the Mandiri Fiesta in February or March 2004," he said.

Mandiri Fiesta is giving away four luxury Jaguar cars, 50 Honda Civic cars and 325 Honda Legenda motorcycles. Bank Mandiri also will give 100 C-Class Mercedes Benz to lucky customers.

As interest rates continue to decline, banks' customers can expect more offers of luxurious gifts. Though they have only a small chance to win, at least they have something to hope for other than the promises of the politicians in the coming elections.

Bank Central Asia (BCA) corporate secretary Lena Setiawati also said that both banking products as well as other investment products had their own strengths and weaknesses.

"Corporate bonds are mostly for long-term investment, while the level of return and the length of investment vary," Lena said.

It is up to customers to choose what kinds of investment alternatives are best for them, but they must remember that their first priority is to make sure that their money is safe.