times - sustainable banking

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SUSTAINABLE

BANKING&FINANCEFINANCIAL TIMES SPECIAL REPORT | Thursday June 14 2012

www.ft.com/sustainable-banking-2012 | twitter.com/ftreports

At a time when several euro-zone governments are bat-tling to restructure theirbudgets and make their debt

burdens more manageable, the topicof sustainable finance could hardly bemore pertinent.

But, if the sustainability of manygovernment accounts still looks pre-carious, at least there are encouragingsigns that the worlds financial serv-ices companies, some of whoseexcesses contributed to todays macro-economic woes, are reforming them-selves.

As much of the developed worldstruggles to drag itself out of eco-nomic torpor, banks and other finan-cial services companies are ditchingsome of their hard-charging growthmentality and adapting to a new real-ity in which responsible business and

long-term focus are watchwords.Britains Barclays has even put cit-

izenship at the heart of its publicimage, stressing its clear sense ofbusiness purpose: to help individuals,communities, businesses and econo-mies progress and grow.

Scepticism over such rhetoric per-sists, as tax wheezes continue toemerge, bankers pay levels continueto ride high and customers complainof a lack of affordable credit. But, atthe urging of politicians, regulatorsand shareholders, there are signs ofgenuine reform in banks behaviour.

This is reflected in the 2012 FT Sus-tainable Banking Awards, sponsoredby the Financial Times and the Inter-national Finance Corporation, a mem-ber of the World Bank Group (seeshortlist below). The awards recogniseachievements across four categoriesthat reward banks, asset owners andasset managers as well as their non-fi-nancial partners.

A new award this year acknowl-edges initiatives in financial services

that harness information technologyand communications to address thescarcity of essential goods in theworlds poorest communities. Awardwinners will be announced at a dinnerin London tonight after the FT/IFCSustainable Finance Conference.

The vexed topic of boardroom payhas dominated many companiesannual meetings recently. But atbanks from Citigroup in the US toCredit Suisse and UBS in Switzerlandand Barclays in the UK the share-holder rebellion over the broadertopic of bankers remuneration hasbeen particularly virulent.

In particular, there has been a newfocus on the extent to which thereshould be a rebalancing between theamounts paid out in staff costs andthe amounts distributed in dividendsto shareholders.

A recent Financial Times analysis,examining the distribution of net prof-its and staff pay, found that theworlds big international banks hadsharply increased the proportiongiven to staff while slashing dividends

the tally accounted for by staff payjumped from 58 per cent immediatelybefore the financial crisis in 2006 to 81per cent last year, while dividendsslumped by two-thirds to just 4.5 percent of the total.

Anecdotal evidence suggests inves-tor complaints about that shift are

paying off, with some banks remuner-ation committees indicating a new

preparedness to think about the shareof the spoils in that way.

Regulators and policy makers principally at an EU level believethey are underpinning the trend withnew ideas to limit the generosity ofsenior bankers bonuses to the level ofbasic pay, though many bankers andanalysts argue that such efforts couldbackfire by encouraging sharp infla-tion of basic pay levels and thus offixed costs unhelpful in cyclicaldownturns.

Shareholders are also concernedabout other reforms in bank regula-tion and their side-effects.

Colin Melvin, chief executive ofHermes Equity Ownership Services,which advises pension fund investors,says banks need to engage with regu-lators on the issue of small businesslending costs. In countries across theworld, there has been persistent ten-sion between politicians and banksover a dearth of lending to small andmedium-sized enterprises (SMEs) inrecent years, with SMEs accusing thebanks of a lack of affordable credit

and banks blaming a lack of demand.SME lending is widely seen as a key

potential generator of economicgrowth when it is badly needed in somuch of the world.

The truth, Mr Melvin says, is thatboth sides are right there is a lack ofdemand for credit at current prices,but that comes back to the costs beingimposed through tough new regula-tory capital requirements.

Though politicians of all hues con-tinue to berate the banks over theirbehaviour in the run-up to the crisisand since, some investors at least areconvinced banks are changing their

mentality away from the shor t-termism of the pre-cr isis year stowards a more sustainable focus onlong-term business. On lending,banks are now more focused on sup-porting the economy. We need thissort of thing, says Mr Melvin. Thereare two schools of thought, too, on theevolution of a new breed of shadow

banks entities expanding into pre-viously core areas of bank lending, forexample.

There has been widespread scepti-cism, for example, about the recentmove of UK payday lender Wongainto the area of small business lend-ing. Peter Ewen, managing director ofDutch bank ABN Amro commercialfinance reincarnated from the rem-nants of the business bought in 2008by Royal Bank of Scotland andSantander and Fortis warns busi-nesses against rushing into short-termloan deals.

While short-term loans can cer-tainly plug funding gaps, they canalso be unsustainable and expensive,he says. Wongas price structuremeans a business borrowing the maxi-mum 10,000 over the maximum termof a year could be faced with interestand fees of almost 11,000.

Peer-to-peer business lending hasalso moved into a new league in sev-eral countries around the world in aneffort to sustain SME financing at a

time when banks are seen to be pull-ing back from the area.In the UK a new breed of peer-to-

peer lenders that allow individualsavers to supply funds to small busi-nesses are preparing to compete forup to 100m of UK government moneyand build on their alr eady r apidgrowth.

Similar operations are growing fastin Germany, China and the US, whereformer Morgan Stanley chairman andchief executive John Mack recently

joined the board of peer-to-peer opera-tion Lending Club.

As with payday lending, the peer-to-peer market is praised by some formeeting a financial need and criti-cised by others for being built onshaky ill-regulated foundations

In further flung locations, microfi-nance the funding of very smallbusinesses in developing economies continues to grow rapidly.

Microfinance is a valuable toolbecause it often goes to places wherether e are no bank s, says ScottBrown, head of Visionfund, the

financing arm of Christian charityWorld Vision.

But here, too, there can be prob-lems. Mr Brown, whose business has$360m out on loan to nearly 700,000micro-enterprises largely in ruralareas, says banks are underminingthe model in towns and cities.

As banks move more into microfi-nance, particularly in urban and peri-urban areas, there is tremendous com-petition, he explains.

There are higher losses and over-indebtedness of customers. As themarket expands, its important for thesustainability of the sector that every-one puts in place client protection

mechanisms. There needs to be agreater sharing of data on loansthrough credit houses.

It is in the larger-scale convention-ally defined area of sustainable or eth-

ical banking, though, that one of themost encouraging signs of the sectorsgrowth has emerged, as the UKs Co-operative Bank doggedly pursues itsambition to acquire 630 branches fromLloyds Banking Group. As this reportwent to press, the ethically focusedCo-op was still hoping to seal a dealthat would triple its branch network,

despite a fraught negotiation processencumbered by regulatory hurdles.

Overall, it appears advocates of sus-tainable finance have good reason tobe optimistic. The effects of growth in

specialist ethical banking and microfi-nance are being buttressed by conven-tional banks adopting more sustaina-ble business models, nudged along bya like-minded troika of investors, reg-ulators and politicians.

The whole sustainability argumentapplies to the basic principles ofbanks interaction with customers,

says Mr Melvin at Hermes EquityOwnership Services. As they emergefrom the financial crisis, banks havethe opportunity to be responsiblestewards of the economy.

Sector takessteps toreform itsbehaviour

Scepticism remains but

there are signs f inancialinstitutions view theirresponsibilities seriously,writes Patrick Jenkins

Inside this issueEnvironmentBanks have a bigrole in designingproducts that takeinto account thevalue of naturalresources Page 2

Bankers pay Battles overastronomic remuneration may bring itdown to earth Page 2

Profile Running an ethical businesshas helped the UKs Co-operativeBanking Group thrive Page 2

The unbanked A basic account isa first step but not all banks willoffer it Page 3

Serving remote areas Twoarticles on banking in hard to reachor sparsely populated locations:services in less advanced economiesmust be adapted to the needs ofnewcomers, while in the developedworld apps are handybut thepersonaltouch isstillneededPage 3

Regulation Amid aclampdown on cheats, market abuseis being pursued with new vigour

Page 4

Peer-to-peer lending The UKbudget brought good news for thesector Page 4, with expanded

version online

Shortlist Nominees for the 2012 FT Sustainable Banking Awards

Sustainable BankAfrica-Middle EastBank of PalestineBMCE Bank, MoroccoNedbank, South Africa

AmericasBanco de Galicia y Buenos Aires,ArgentinaIta Unibanco, BrazilSantander Brasil, Brazil

Asia-PacificSumitomo Mitsui Banking, JapanXacBank, MongoliaYes Bank, India

EuropeBank Sarasin & Co, SwitzerlandThe Co-operative Banking Group, UKSekerbank, Turkey

Sustainable Global BankBanco Santander, SpainBank of America, USBNP Paribas, FranceCiti, USCrdit Agricole, FranceCredit Suisse, SwitzerlandMorgan Stanley, USStandard Chartered, UK

Sustainable InvestorBridges Ventures, UKDragon Capital Group, VietnamEnvironment Agency, UKLeapFrog Investments, Australia

SAM, SwitzerlandStorebrand, NorwayVantagePoint Capital Partners, US

Sustainable InvestmentCleanStar Mozambique & Bank ofAmerica Merrill Lynch, Mozambique-UK

Embraport & Inter-AmericanDevelopment Bank, Brazil-USKorean Recycling Plant & ZincOxResources, South Korea-UKOptima Energa & AcapulcoMunicipality, MexicoPerPETual Global & Aloe PrivateEquity, India-UKVINTE Viviendas Integrales & IIC &Banamex, Mexico-US

TechnologyIn Sustainable Finance

Credit Suisse with OpportunityInternational, SwitzerlandIta Unibanco, BrazilKilimo Salama, KenyaSustainability Accounting StandardsBoard, USYellowPepper, US

MEESON


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2 FINANCIALTIMES THURSDAY JUNE14 2012

Sustainable Banking & Finance

The heated public debate over bank-ers pay has spread from the politicalrealm to the boardrooms this year,with a series of investor revolts atbanks in Europe and the US.

Executives at Citigroup, Barclays,USB and Credit Suisse were con-fronted at their annual meetings withan investor backlash over what share-holders view as inflated and non-transparent pay schemes.

This shareholder pressure is set to

become yet another downward forceon bankers pay, in what will exacer-bate an already prevalent drop inremuneration.

Pay levels at investment banks,known for their generosity before thefinancial crisis, have dropped by 30per cent globally in the past fouryears on a per-capita basis, according

to a recent study by the Associationfor Financial Markets in Europe(Afme), a lobby organisation.

Bankers pay has been weigheddown by lower returns and a host ofregulatory measures that increase thecost of capital, and force banks toshrink their balance sheets.

But will bankers pay drop even fur-ther and if so, what will be the impacton society as a whole?

Bankers and analysts are unani-mous in their view that the downwardadjustment of remuneration levels isfar from over yet.

For one thing, the fragile economicand financial market environment isset to dent banks revenues for yearsto come. Global investment bankingfees which include mergers & acqui-

sitions advice, and debt and equityissuance stood at $30.6bn at thebeginning of June for the year so far,the lowest level since 2005 accordingto data by Thomson Reuters.

With governments and banks seek-ing to shrink debts, many bankersexpect those weaknesses to persist.

Joseph Leung, founder of executive

search group Aubreck Leung, says:Given this relatively low startingpoint compared to previous years andthe overall shrinking investmentbanking revenue pools weve seen sofar, I think its fair to say that remu-neration expectations for this yearremain muted.

But besides such cyclical issues,long-term forces are under way thatwill structurally dent pay in the finan-cial services sector, perhaps for dec-ades. In a study last year, academicsThomas Philippon and Ariell Resheffound that during two eras of finan-cial market euphoria the 1920s andfrom 2000 onwards the finance sec-tor paid a wage premium of 70 percent above the private sector average.

Crucially, they found that the level

of bank regulation is the most robustdeterminant of this wage premium.

With regulators and governmentsaround the world putting the screwson banks, some industry insiders saythis premium may be eroded further.

Long-term historical evidence sug-gests that the level of regulation is akey driver of remuneration in the

financial sector, so this regulatorywave is likely to exert continueddownward pressure on banking pay inthe years ahead, the lobby groupAfme said in its recent research.

Probably the most sweeping struc-tural change for investment banks isthe much higher levels of regulatorycapital they will be required to hold.

Tom Gosling, a partner at PwC inLondon, says many investment bankswill need to double their return onequity to get back above their cost ofcapital. He says banks will need toreduce staff costs but at the sametime retain capacity for a possibleupswing in market and client activity.

Cutting peoples pay will be hard

for banks to do they will find iteasier to shed further jobs. But thismay be tough to square with keepingthe level of capability that they need,he says.

In fact, fixed remuneration at theworlds largest investment banks haseven increased in the past four yearsby 37 per cent as banks sought toretain staff and bypass regulation.

The lever that banks are likely topull further will be bonuses and otherincentives. On a per-capita basis, suchvariable pay has dropped by 55 percent between 2007 and 2011.

Politicians are preparing laws thatwould further curb bonuses. In theEU, a proposal is under discussion tolimit them to a maximum of 100 percent of fixed salary.

Investors are pushing for similarchanges, asking for the spoils to bedivided more equally between remu-neration, payouts and retained earn-ings.

They point out that banks sharep ri ce s h av e f al le n f as te r t ha ntotal pay. The FTSE Eurofirst bankingindex, for example, has dropped

more than two-thirds in value since2007.

Bonuses are not only expected toshrink: they are also more oftendeferred and even subject to a claw-back if present profits turn into lossesin the future.

Such measures are already takinghold. A recent poll by the executive-search firm Options Group showedthe proportion of investment bankerswho received no bonuses at all lastyear more than doubled to about14 per cent.

With investment bankers pay ona steady downward trajectory, bank-ers and advisers say the wider eco-nomic and societal consequences aremore profound and structural thanbefore.

A few years ago, a smaller bonusround would have mainly hit theBentley dealer in Berkeley Square, asenior adviser to the sector says. Butnow people do not see this as a one-off, so they start cutting back onspending for things such as cleaners,restaurants or even charity dona-tions.

Battles over astronomic pay may bring it down to earthBankers pay

Daniel Schferon theimpact of recriminationsover remuneration

This regulatory wave islikely to exert continueddownward pressureon banking pay in theyears ahead

Since the 2008 banking crisis,politicians have been desperateto create banks that are low-risk, lend to small businesses,and do not pay huge bonusesto executives.

But while much hope hasbeen invested in entrants suchas Virgin Money and NBNK,chaired by Lord Levene, theformer Lloyds of Londoninsurance market chairman, anolder example has at timesbeen overlooked.

The Co-operative Banking

Group, which traces itsorigins to 1867, had agood crisis. It made aprofit throughout, madecomparatively small write-offsfor toxic investments and badloans, and is now in a positionrapidly to advance lending.

The group says that isbecause, rather than followthe herd driven by short-termprofits, it followed the instinctsand values of its members, whoown it.

Sustainability is in the DNAof the business, says BarryTootell, acting chief executive.

Lending is funded almostentirely by deposits, with littlereliance on wholesale funding.The seizing up of wholesalemarkets where banks borrowfrom others to lend tocustomers plunged manymember-owned buildingsocieties into trouble.

And its age has not stoppedit being an innovator. In 1974,

the Co-op was the first to offerfree banking to those in credit,now common in the industry.

In 1992, it introduced itsethical policy, turning downbusiness from groups itconsidered unsavoury, such asheavy polluters and thoseselling arms. Some 1.2bn inloans have been declined forbusiness activities that areconsidered by customers tobe unethical.

Since 1994, customers havevoted to choose the charitiesthat their spending should helpfund via the Co-op Bank. Some3m has been donated to morethan 80 charities, with acurrent emphasis on greenpolicies. They also receivedividends vouchers earned bytheir spending. Since 2005, theCo-operative Insurance Societyhas selected its investmentson social, ethical andenvironmental grounds.

The bank has also beenbacking wind and solar power,and its CIS tower inManchester the UKs tallestoffice building outside London is now clad in solar panels.

We are investing 1bn inrenewable energy, and 700mhas been committed already,says Mr Tootell.

In 1999, it launched Smile,the first internet-only bank,and all its call centres are inthe UK.

Gross lending to small andmedium enterprises, strugglingfor funding to grow, rose 31 percent during 2010, and 33 percent during 2011.

The 2009 merger withBritannia, a building societyforced into substantial write-offs on its lending, has notchanged its focus, says MrTootell. Rather, it hasincreased its customer base

and geographical reach.Britannia had 250 branches,compared with the Co-operativeBanks 90. Co-op branches arestarting to appear inside thegroups food stores, and thereare now 345 in total.

The merger is complete. Wehave integrated the businessesand we are running them asone organisation.

Some Britannia branchesremain, to retain customerloyalty, and few Britanniamembers have left it. Indeed,the Co-op is winning customersfrom other banks. Since 2007,we have seen a significantflight to trust. We have 2 percent market share ... but we get5-6 per cent of the switches inthe market, Mr Tootell says.The group has 6.5m customers.

Responding to the debateabout whether free bankingis that, because customers payhefty charges for overdrawing,Mr Tootell points to the

Cashminder account, used by300,000 of 1.4m account holders.It offers no overdraft or chequebook, and is aimed at thosewho would otherwise be relianton cash only, which locks themout of the discounts availablefor paying by direct debit.

Cashminder is part of acommitment that includesbanking for prisoners. Researchshows that if they learn tomanage money inside prison,when released they are lesslikely to get into financialdifficulties and be temptedback to crime.

The Co-op has also prioritisedyoung people. Its insurancearm grants lower-costinsurance to young drivers whoagree to have a smartboxthat monitors their drivinghabits in their vehicle. Its15,000 17-22 year olds usingthe system pay an averagepremium of 1,345 well belowhalf the national average of

3,478 for that age group,according to the AA insurancepremium index. They also have20 per cent fewer crashes.

But the Co-ops ambition totake a giant leap by buying 630branches from Lloyds BankingGroup is likely to be thwarted.The Financial ServicesAuthority, which regulates thesector, could decide it wouldhave to oversee the groupsentire business, including itslarger food and pharmacyarms, adding to its liquidityand capital requirements.

The FSA has also raisedquestions over the mutualsability to integrate the businessand its membership-run board,which includes a Methodistminister, a plasterer and anurse, though the group pointsout that they are all trained.

The Lloyds opportunity wasan interesting way towardsincreasing our scale andreach, says Mr Tootell. Wewere doing it anyway, and willcontinue to do so.

Credit due forfollowing instinctrather than herdProfileCo-operativeBanking Group

Running an ethicalbusiness has helpedthe Co-op thrive, saysAndrew Bounds

Wi th m an y b an ksstruggling for theirown survival, theycould be forgiven

for putting saving the environ-ment lower on the agenda.

However, some argue thatbecause of the need for compa-nies to manage growing con-straints on natural resources,now is the time for the financialsector to play a bigger role insupporting a green economy.

A bank thats fighting forsurvival cannot focus as muchon environmental issues, saysLars Thunell, chief executive ofthe International Finance Cor-poration (IFC), the private sec-tor arm of the World BankGroup.

But with the higher price oncommodities and resources ingeneral, and the scarcity wereseeing in water, using resourceseffectively is coming to the fore-front. That will drive a lot ofsustainability work.

In one signal of this, 20 finan-cial institutions recently signeda new pledge the Natural Capi-tal Declaration. The declaration,which will be announced at thismonths Rio+20 summit, is acommitment by financial sectorinstitutions to integrate naturalresource considerations into thedevelopment of financial prod-ucts and services.

Signatories include NationalAustralia Bank, Netherlands-based Rabobank, the UKsStandard Chartered Bank, Ned-bank of South Africa and theIFC.

But while it is one thing tosign up to a declaration to pro-tect natural resources, it isanother to integrate environ-mental considerations into allbanking operations

Nor does signing a declarationprotect banks from criticism those that signed up to theEquator Principles, the volun-tary set of social and environ-mental standards launched in2003, have in the past beenaccused of lack of transparency

and continuing to lend to envi-ronmentally damaging projects.

Mr Thunell points out that theEquator Principles have donemuch to help financial institu-tions manage social and envi-

ronmental risks.The Equator Principles today

include 80 banks, including Chi-nese and other banks from thedeveloping wor ld and thesame standards are used byother international financeinstitutions around the world,he says. Thats an example ofhow voluntary standards arebecoming global standards.

However, the principles covermainly loans to large-scaleprojects and demand long-termassessment and monitorin soare not easily applicable to alltypes of financial products.

The Equator Principles havenot really been able to advancethe environmental cause in thefinancial sector because of theproject finance focus, says RayDhirani, finance policy officer atWWF UK, the campaign group.

He argues that banks have abigger role to play by designingfinancial products that take intoaccount the value of naturalresources.

He cites the example of for-ests: If you can monetisethings like Brazil nuts, sustaina-ble timber and rubber, you canuse those multiple revenuestreams to back something likea bond.

Then you also value the eco-systems underlying all that, andyou use that valuation to attractinvestment.

To promote this idea, WWF isworking with the Global CanopyProgramme, a UK non-govern-mental organisation, to pilot amulti-revenue forest financemechanism in Acre, Brazil.

The project involves designinga forest-backed security, such asa bond, to raise capital for sus-tainable forest managementthat would be asset backed orasset linked.

The revenue generated from

forest products could be used topay securities holders interestand final principle.

Some of the capital raised willbe invested locally in pro-grammes promoting sustainable

livelihoods and in conservationmonitoring and enforcement.

WWF believes such productscould have growing appeal.

With many countries facingfinancial difficulties and yieldson government bonds falling, itsees alternative asset classesand long-term financial instru-ments attracting more interest,particularly among institutionalinvestors such as pension funds.

Things like green bonds andrenewable energy bonds need tobe developed along with indexesand benchmarks that bring innew issues, ones that are notheavily weighted on fossilfuels, says Mr Dhirani.

Its beginning, but a lot morewill be required if were going toget the scale needed to tackleclimate change.

In valuing natural capital,banks do have one advantage.

Theyve got a very importantcapability, says Graham Lloyd,financial services expert at PAConsulting Group. Because thegreat core strength of banks istheir ability to take an intelli-gent view of the value of anasset and its associated risk.

Mr Lloyd cites the example ofa corn trader in Chicago, whomight have little interest indeforestation in the Amazon. Ifsomeone translates the value ofa hectare in rainforest into ther ai nf al l i n I ow a a nd t heknock-on effect on corn prices,then suddenly that corn traderhas a strong interest, he says.

Financial institutions can

assist with the pricing of that.He also argues that banks

could help large environmentalprojects such as offshore windfarms attract investment byb re ak in g u p t he ir r is ks

whether they are associatedwith the turbines transmissionssystem or marine life takingsome of the pressure away fromgovernment backers and mak-ing environmental projectsmore attractive to investors.

When you service a marinewind farm in the North Sea, youhave to take significant andcostly steps to not damagemarine mammals and, for inves-tors, that can feel like a bridgetoo far, he explains.

But if you take that bit of itout and leave them with whatthey can work with, you have adifferent proposition.

Of course, dividing up therisks associated with an off-shore wind farm or putting aprice on the value of ecosystemsis new territory for bankers andcan be extremely complex.

Not all financial institutionshave expertise in environmentalissues such as deforestation orclimate change.

Moreover, in times of finan-cial difficulty, banks could wellargue that establishing a greenbusiness unit is too costly.

The IFCs Mr Thunell saysthat while the financial crisismay have some impact, otherfactors may drive banks to takesustainability issues intoaccount. We see a very posi-tive correlation between envi-ronmental and developmentalimpact and financial sustaina-bility.

Mr Lloyd believes that in cre-ating green financial products,banks simply need to rely onskills they already possess.

What they have are peoplewhose sole purpose is to under-stand and price risk and to cre-ate attractive financial instru-ments for investors, he says.

So they have the ability todraw on those resources.

Risk assessment skills canproduce dividend for nature

Environment

Banks have a big roleto play by designing

products that take intoaccount the value ofnatural resources,writes Sarah Murray

Branching out: supporting activities such as sustainable forest management in the Brazilian Amazon is good for the finance sector Alamy

ContributorsPatrick JenkinsBanking Editor

Sharlene GoffRetail Banking Correspondent

Brooke MastersRegulation Correspondent

Andrew BoundsNorthern Correspondent andEnterprise Editor

Daniel Schfer

Investment BankingCorrespondent

Jane BirdSarah MurrayCharles BatchelorRod NewingFT Contributors

Andrew BaxterCommissioning Editor

David ScholefieldRichard GibsonSub Editors

Steven BirdDesigner

Andy MearsPicture Editor

For advertising contact:Ceri Williams, tel +44 0207873 6321, [email protected]

Barry Tootell: bank is making biginvestments in renewable energy

A bank that isfighting forsurvival cannotfocus as muchon green issues,says the IFCsLars Thunell


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FINANCIALTIMES THURSDAY JUNE14 2012 3


An important social priorityin fighting poverty andencouraging economicgrowth is to address the2.5bn unbanked in theworld, 50 per cent of theadult population. The firststep in bringing them thestability and benefits offinancial services is to getthem to use a basic currentaccount that is specificallydesigned for those withpoor credit scores.

They enable those whocannot get a full servicecurrent account to accessbanking facilities, as theyonly need to prove theiridentity and where theylive, says David Black,b an ki ng s pe ci al is t a tDefaqto, an independentfinancial research company.

To get a full service cur-

rent account you need tohave a credit check, which

might stop a lot of peoplewho are excluded frommainstream credit.

A basic bank accountallows people to receivewages, pension or benefits;bank cash and cheques: pay

bills by direct debit orstanding order: withdrawcash from a machine: andsome include a debit card.

However, they do notallow holders to writecheques, hold credit cardsor take out overdrafts.

In the wake of the finan-cial crisis there is concernthat, as the banks move tode-risk their balance sheets,they will try to disenfran-chise customers withoutcredit scores.

Strictly speaking, becausethere are no cheques oroverdrafts, these accountsare risk free. The problemis that banks lose money onsuch accounts, even thosechar ging monthly fees,because they are unable tocharge high interest ratesor sell users other, morelucrative, financial services.

These accounts are oftenprovided as a result of pres-

sure from governments oras a part of social responsi-

bility agenda. Very few cus-tomers will become profita-ble by improving theircredit rating enough for afull-service account.

Accor ding to Money-SavingExpert.com, an inde-

pendent website, banksmake it bureaucraticallydifficult to open one, sounless you specifically askfor them by name, the bankstaff may not mention theoption. Instead you will justb e g iv en n or ma l b an kaccount application forms,fail the credit score and berejected.

The sites solution is toforce banks to offer theirbasic account to all thoserejected after credit checks.

The 2.5bn unbanked fig-ure comes from MeasuringFinancial Inclusion: TheGlobal Findex Database, ar ecent r eport from theWorld Bank DevelopmentResearch Group. It foundthat by far the most com-mon reason for not havinga formal account (65 percent) is lack of enoughmoney to use one.

This speaks to the fact

t ha t h av in g a f or ma laccount is not costless in

most parts of the world andmay be viewed as unneces-sary by a per son whoseincome stream is small orirregular, says the report.

The next most commonreason reported for not hav-

i ng a n a cc ou nt i s t ha tbanks or accounts are tooexpensive (25 per cent).

As well as r estrictingaccess, in order to controlcosts, basic accounts are at

risk from levying of chargesto mitigate losses, such asmonthly account fees orcharges for withdrawingcash at automated tellermachines.

However, Graham Lloyd,a financial services expertat PA Consulting Group,finds that withdrawingbasic accounts is generally

not happening. This ispartly because banks do not

want to be seen to be pull-ing out of such a needy sec-tor when they are alreadyon the defensive over theircustomer image and percep-tions of greed.

Also, even the sectors

meagr e deposits plusthose of any indignant cus-tomers who might leaveshould the bank abandonthe disenfranchised havea premium value in theseliquidity-constrained times.

There are already signs ofbasic account customersresisting imposition of fees.

It has led to dramaticc on su me r b ac kl as h i ndeveloped regions, saysKumail Tyebjee, seniorprincipal of financial serv-ices at Infosys, a consulting,technology and outsourcingcompany. One of the mostvisible was against institu-tions that added fees todebit card services. Disen-franchised customers areseeking out alternativevalue offerings, such asWalmart Financial Centersand Western Union.

In the developing world,mobile payments systems

are cheaper and easier forcustomers to access. Mr

Tyebjee points out 70 percent of the worlds popula-tion will own a mobile by2013. Mobile services arealso less costly and moreprofitable for the banks.

The area where the poor

have been most heavily dis-enfranchised is in the sub-prime mortgage market.

Mr Black says that heavyr is k m or tg ag es a re n olonger available, mediumr isk have almost disap-peared and although verylight risk loans are stillavailable, few lenders in themarket are offering them.

He is mor e concer nedabout people who took outa normal mortgage someyears ago and have sinceencountered credit prob-lems.

They wont be able toremortgage anywhere else,he says, so they are stuckwith their lender in itsmortgage rate. Similarly,anybody with a heavy sub-prime mortgage will not bea bl e t o m ov e b ec au senobody will want them.

There is no doubt that thefinancial crisis has created

a greater need for basicbank accounts, as credit

problems for the disenfran-chised increase. Chris Gib-son, a director at NavigantConsulting, an expert serv-ices firm, believes that thecurrent account marketneeds greater competitionand choice to improve prop-ositions to marginalisedcustomer segments.

While the market makes

m uc h o f t he m ov es t oimprove competition, we

are yet to see any differ-ence, he says.

Several new entrants tothe market have yet to adda current account to theirproduct set. Others havelaunched with a currentaccount proposition, butbranch locations situated inmore affluent areas meanthat only those customers

are likely to benefit fromtheir products.

Financial crisis creates greater need for basic servicesThe unbanked

A simple account isa first step but notall lenders will offer

it, says Rod Newing

The poor havebeen most heavilydisenfranchisedin the subprimemortgage market

It is harder for the poor to buy bricks and mortar

In some remote parts mobile bankingmeans a customised van that visitsisolated communities at regular inter-vals. But, for most bank customersnowadays, mobile banking is an appon a smartphone that allows them tocheck their account and, increasingly,mak e payments to other mobiledevices.

Both represent a response to thechallenge bank s face in ser vingwidely dispersed customers and previ-ously unbanked individuals in away that makes economic sense.

The financial pressures and chang-ing customer habits that have seenbanks slash branch numbers in townsare, if anything, even more acute inthe countryside.

Not so very long ago banks wouldexpect to incur half a million poundsor dollars in fixed costs and the samein variable costs to establish a pres-ence and would calculate they needed10,000 people to justify a physicalpresence, says Andy Maguire, globalhead of the retail banking practice atBoston Consulting Group (BCG).

But that was probably not thebrightest way to think about it; sothey look at the customer footprint tofind out what sort of an outlet theywanted where.

This could involve providing aservice from the back of a van or lightplanes landing on a beach. It couldinvolve agency banking from a solici-tors office or sharing the counter ofthe general store with fishing nets,newspapers and packs of cigarettes.

US banks started to make wide-spread use of grocery stores, initiallysimply for cheque-cashing, in the1960s. Wells Fargo and Bank of Amer-ica became big users of the format,which saves on construction and fit-ting-out costs while giving access tolarge numbers of customers whowould otherwise not visit their bank.

And the stores realised they couldincrease customer loyalty by offeringon-the-spot financial services.

Royal Bank of Scotland has a dozenmobile banking offices serving remoteparts of Scotland. The service devel-oped from field cash offices used topay soldiers wages during the secondworld war and was launched in 1946by National Bank of Scotland, sinceabsorbed by RBS. In the 1960s a boatserved the islands around Orkney.NatWest runs a mobile banking serv-ice in the West Country, South Walesand Cumbria.

The advantage of a mobile branch isthat the staff who operate it can pro-vide a fairly full range of bankingservices. Other low-cost options,including off-site ATMs and unstaffedkiosks, offer a more restricted rangeand are not suitable for really remotelocations because they need a securepower supply and security for restock-ing them with cash.

But real opportunities for banks toreach remote customers has comewith the growth of the internetand the mobile phone.

In Africa and other partsof the developing world that

lack traditional bankingand fixed line telephoneinfrastructure, mobilenetworks have filledthe gap, pr oviding

mobile-to-mobile payment services.In South Africa, which straddles the

developed and developing worlds,FirstRand Bank claims to have turneditself into the countrys largest vendorof iPhones and other smart devices inan attempt to attract customers and

increase the range of services used byexisting customers. Subsidiary FirstNational Banks FNB banking appallows users to access their accounts,make payments and buy a range ofprepaid mobile products.

From Afr ica, the use of smart-phones to mak e cash transfer isspreading to the developed world.

This year, Barclays launched Pingitfor its 12m current account custom-ers, allowing them to transfer moneyto anyone via a mobile phone.

Contactless payments made by hold-ing a phone against a reader are alsoforecast to grow with Vodafone andVisa announcing Visa pay Wave, trig-gering payments for small items.G oogle, O2, a nd T -M ob il e h av eunveiled plans for similar deviceswhile high street chains includingBoots and McDonalds have installedpayment readers in their outlets.

The replacement cycle for mobiledevices is quite short so the mobileoperators can roll out innovationsver y quickly, says Ted Bissell,mobile business expert at PA Consult-ing Group.

But systems that allow electronic

cash transfers are a long way fromproviding a full banking service thatwould benefit remote communities.

That still requires personal service even if credit-checking now dependson computer programmes rather thanindividual judgment.

The tight controls on banking willimpose limits on the use of mobiles.Regulations governing the adviceyou can give and the requirement toknow your customer to preventmoney laundering will constrain whatpeople can do on the mobile, saysC hr is H ar ve y, g lo ba l h ea d o f Deloittes financial services practice.

The prospect of tight regulation hasnot stopped mobile phone companiestaking a close interest in providingthe networks that make cash trans-fers and other transactions possible.

In the past they have wor kedclosely with bank partners but couldthey, like some of the retailers, go italone? O2 is seeking a licence from theFinancial Services Authority thatwould allow it offer financial serviceswithout a banking partner.

It is not a question of competitionbetween the phone companies and thebanks, comments Ranu Dayal, seniorpartner in BCGs financial institutionspractice.

It is more about what are the rightterms of co-operation.

The phone companies can providethe channels but you will need a bankor a banking structure to facilitatetransactions.

Mobile bankingmeans boats andaircraft for someDeveloped world

Charles Batchelorsaysapps are very handy forcustomers but the personaltouch is still needed

Systems for electroniccash transfers are along way from providinga full banking service

Going mobile: oneanswer to servingremote areas

Most people in the moreremote parts of the devel-oping world keep theirmoney under the mat-

tress, offering the financial servicesindustry a huge opportunity to winnew customers.

But gaining the trust of peopleunaccustomed to bank accounts is dif-ficult, as is delivering services tooften isolated and inaccessible areas.

A quinoa farmer from the BolivianAndes is mentally programmed to dobusiness informally, with oral deals,and book-keeping done with a note-book and pencil, says Julius Abensur,a financial services expert at PA Con-sulting Group.

Debts are honoured because if peo-ple default they know they will beexpelled from the community. Impos-ing formal and complex bureaucracyon people accustomed to this way ofdoing things wont work, Mr Abensurexplains.

Winning the confidence of such peo-ple involves understanding and adapt-ing to their ways. A member of theUros community, who live on floatingislands on Lake Titicaca in Peru, ismore likely to listen to a casuallydressed banker arriving by canoethan one with a tie who wants toavoid muddy feet.

Being close to communities is cru-cial, agrees Frank Nagel, head of Afri-can banking at Netherlands-basedRabobank Development, which hasminority holdings in banks in Africa,South America and China.

Rabobank believes that local owner-ship of the majority stakes in banksin rural communities is essential tosuccess. Having a physical presence isalso important, says Mr Nagel, whichis why local branches are necessary.

Banking is about trust, so it has tohave a face your branch, Mr Nagel

says. In some places, the branch is atruck, equipped with cash machinesand tellers, that visits a weekly mar-ket. Even that is quite an operationalchallenge, because roads are bad,vehicles are heavy and prone tobreak down, and connectivity ispatchy in remote areas.

So another approach is for localshops to provide services such as cashwithdrawals and deposits, on thebanks behalf. Rabobank Developmentis in the process of introducing this inKenya and Tanzania.

Shopkeepers are often keen to takeon this role, as it brings in more cus-tomers, Mr Nagel says.

PAs Mr Abensur agrees that usinglocal shops adds trust to transactions,because they are the heart and soulof rural areas.

Having a partnership with a shopcan make it possible for a bank toprovide the cash that is still the main-stay of rural economic activity, andavoid having to transport it long dis-tances over poor roads. In Ukraine,PrivatBank now offers local shops and

small businesses financial incentivesto become clients, and deposit theircash in its regional branches so that itis available to customers to withdraw.

Ukraines fixed phone infrastructureis also unreliable, says Dmytro Dubi-let, PrivatBanks marketing director.Because transmission rates are slow,PrivatBank now transfers information

from branches to head office via satel-lite networks or in batches, instead oflive stream.

But, as in many developing coun-tries, mobile communications arespreading fast, with coverage almosteverywhere, and reliable connections.So PrivatBank requires all its custom-ers to have mobile phones, and uses

their numbers as their ID.Customers can phone the bank and

speak to call-centre agents who typetheir requested transactions into thesystem. Those with smartphones canalso use one of the banks simple, sin-gle-function apps, for example to pho-tograph their gas bill for automaticpayment. Its super easy and verypopular with customers who havetried it, says Mr Dubilet.

In Kazakhstan, by contrast, 3G serv-ices of up to 8Mbps are widely availa-ble. Although most of the countrys16m people live in rural areas, theyare rapidly becoming technologicallyadvanced, says Nurlan Zhakiparov, anexecutive director of Kommertsbank.

Five years ago, many people didnot understand the chip and pin sys-tem, and asked colleagues to with-draw cash for them from ATMs.

But no bank in Kazakhstan hasmore than 20 per cent market share,which fuels strong competition, andmakes technology a key differentiator.

This year, Kommertsbank intro-duced contactless credit and debit

cards, and within a few months it willbe the countrys only bank to have abranch on Facebook. This will bemore than just a source of informa-tion, says Mr Zhakiparov; it will pro-vide services such as enabling peopleto apply for a bank card, make pay-ments, or change direct debit details.

Kommertsbank also offers its cus-

tomers services such as the ability toorder flowers for delivery worldwide,or sign up for roadside rescue.

In another innovative approach tothe problem of providing services toremote regions, PrivatBank allowspeople looking for additional sourcesof income to register as agents, andsign up customers on a commission

basis. About 40,000 such agents havesold at least one product within thepast three months.

All they have to do is get the per-sons name and phone number so thata specialist from the bank can followup the lead. We sell quite a lot ofproducts this way, Mr Dubilet says.

Unlike many parts of the developedworld, Kazakhstan does not have biga problem with online fraud, says MrZhakiparov. This is because it hasbeen able to leapfrog earlier technol-ogy, moving directly to more securesystems that present fewer opportuni-ties for fraudsters.

There are huge openings for entre-preneurship in financial services forthe developing world, and many peo-ple with good ideas for startups, saysKosta Peric, head of innovation atInnotribe, a Swift initiative to enablecollaborative innovation in financialservices.

He cites the success of text-message-based peer-to-peer payment servicesin Kenya and Pakistan.

Another area in which banks could

have a role is in enabling businessesto accumulate credits for being goodtraders, similar to star ratings oneBay or Amazon, but amalgamatingall their activities, says Mr Peric.Innotribe aims to be a catalyst forsuch innovations by holding events atwhich bankers and entrepreneursfrom the developing world can meet.

Money under the mattressis no longer necessaryDeveloping world

Banking in remote areaspresents challenges andopportunities everywhere,as these two articles show.

Jane Bird finds services inless advanced economiesmust be adapted to theneeds of newcomers

PrivatBank allows peoplelooking for additionalincome to register asagents and sign upcustomers on commission

In Ukraine, transactionscan be carried out usingsimple mobile phone apps

Alamy


4/4

4 FINANCIALTIMES THURSDAY JUNE14 2012


Fo r m an y r et ai linvestors, the 2008banking crisis crys-tallised nagging

concerns that the financialm ar ke ts w er e r ig ge dagainst them.

The evidence came fromall around the globe, fromthe taxpayer-financed res-cues of AIG and Royal Bankof Scotland to the collapseof Bernard Madoffs Ponzischeme and the revelation

that banks including Gold-man Sachs had bet againstthe same complex productsthey were peddling.

Small investors fled themar kets in droves, andmany have stayed on thesidelines, shell-shocked bycontinuing bad news thecollapse of Irelands bank-ing sector, the writedown ofgovernment debt and possi-ble eurozone exit in Greece.

Rebuilding a safe, sustain-able banking sector willrequire creating conditionsthat tempt ordinary peopleback into the markets andone of the best ways to dothat, regulators and politi-cians believe, is by crackingdown on cheats of all kinds.

Enforcers from aroundthe world have stepped uptheir fight against insiderdealing and market abuse,bringing criminal cases andstepping up the size of the

fines they impose. More andmore, they are conductinginvestigations that crossinternational borders.

I n t he p as t c ou pl e o f months, the UK secured thecriminal conviction of aLondon spreadbetter whowas leaked information onUS technology mergers bythe wife of a deals account-ant in California.

M ea nw hi le t he H on g K ong mark ets tribunalbanned a Boston-basedfunds manager for tradingahead of a Chinese rightsissue. Stamping out mis-conduct in the markets isnot just the job of the regu-lator.

It is in the interests ofeveryone involved in finan-cial services to rebuild trustand confidence in the sec-tor, says Tracey McDer-mott, acting enforcementchief of the UK FinancialServices Authority.

Since 2009, the FSA hassecured 11 convictions andis prosecuting 16 more peo-ple for insider dealing.

The US continues to leadthe pack in enforcement last October the US Attor-

neys office in New Yorkwon the longest sentencefor insider trading, 11 years,for G alleon hedge fundfounder Raj Rajaratnam.

This year it has pressedon with prosecutions of some of his alleged sourcesof information, pushing thetotal number of convictionsin its sprawling hedge fundprobe above 50.

US enforcer s are alsolooking at several recentpublic market flaps, includ-ing the Facebook initialpublic offering and JPMor-gan Chases giant tradingloss, although it is not clearwhether they will end upbringing official actions.

Meanwhile, the UK is ona campaign to force Cityfirms to guard inside infor-mation more closely, in aneffort to cut down on suspi-cious trading ahead of m er ge rs a nd e ar ni ng s

announcements.The FSA is increasingly

demanding approved people in financial firm manage-ment or client-facing posi-tions report misconductwhenever they see it.

Recent cases against com-pliance officials have ham-mered the message home.

Th e b eh av io ur o f approved people is critical

to this. Not only must theyabide by our rules and prin-ciples but they must notturn a blind eye to the mis-conduct of others, MsMcDermott says.

In Ireland, regulators andprosecutors are continuingto deal with the fallout ofthe banking sector crisis.

The Gardai is still pursu-ing a criminal investigationof the collapse of AngloIrish Bank, while regulatorsare focused on the boards ofthe six institutions thatreceived state aid.

In 2011, the Central Bankwrote to all 55 of the sittingboard members warningthem that if they were stilli n p os t a ft er t he 2 01 2annual general meeting,they could be subject to a

formal review of their con-duct.

Twenty-six, including allthe non-executive directors,

have said they will resign,according to the CentralBanks annual report.

People familiar with theprocess said the supervisorshave taken a close look atroughly 10 people who arestill in place and may pur-sue regulatory cases againsta couple of them.

Hong Kong regulators, fortheir part, are crackingdown on market partici-pants who are based outside

the territory. The MarketM is c on du c t T ri b un alrecently banned a formerUS-based fund managerfrom trading in the terri-tory for two years for sell-ing shar es ahead of anequity placing by a Chinesefruit and vegetable supplier.

Meanwhile, the Securities

and Futures Commission isengaged in a long-runninglegal battle with Tiger Asia,a US-based hedge fund, over

the regulators effort tofreeze some of its assets.

M ar k S te wa rd , S FCenforcement chief, says theterritory is trying to ham-mer home the message thatHong Kong will not wink atbehaviour that would beunacceptable in the US orthe UK.

Ive met a number of for-eigners who come here andthink Hong Kong is a wild

jurisdiction. There is no

place for cowboys in HongKong, he says.

Firms are star ting torespond to all the pressure,hiring more compliancepeople and spending moreon systems to spot suspi-cious trading.

More firms are undertak-ing projects as they now

fear a tap on the shoulderby the r egulator, saysWolfgang Fabisch, chiefexecutive of b-next, which

provides compliance serv-ices. Until now many com-p an ie s f el t t he y w er eexempt from monitoring formarket abuse but are nowtaking it more seriouslyand are starting to act.

This incorporates bothbuy and sell-side firms.

Sell-side firms are more

interested in market manip-ulation and the buysidefirms are more interested inthe insider dealing aspects.

Clampdown oncheats aimed at

restoring faithRegulation

Market abuse isbeing pursued withnew vigour, writesBrooke Masters

Coming down: since the nationalisation of Anglo Irish Bank questions have arisen over business practices and lending, including loans to directors PA

P2P market Boost for UK lendersWhile the UKs springBudget brought a move totax one of the UKsfavourite hot snacks andanother to clamp down oncharitable giving bothlater amended it alsobrought good news for aniche group of lenders.

Peer-to-peer platforms,which enable individuals tolend directly to each otherand to small businesses,were told they would qualifyfor up to 100m ofgovernment investment tohelp boost the UKsanaemic credit supply.

The move brought intothe mainstream a newbreed of lenders.

P2P groups appeared inthe UK in the mid-2000s,enabling savers to earnhigher interest rates bylending to other peoplerather than stashing moneyin a bank.

Demand has increasedduring the financial crisis,as banks have withdrawncredit lines to shrink theirbalance sheets and guardagainst another downturn.

Many have been growingquickly in the past few

years, and say their loan

books have expanded evenfaster in recent months.

The handful of P2P sites including Zopa andRateSetter, which offerpersonal loans, and FundingCircle, ThinCats and MarketInvoice, which lend tobusinesses are set tolend up to 200m this year.

P2P sites have lowercosts than the big highstreet banks, and canprovide higher returns.

People who provide loans from students to Citytraders can obtain pre-tax

yields of up to 10 per cent.Borrowers either

consumers or smallbusinesses may be ableto obtain loans more easilyand cheaply than they couldthrough traditional lenders.

The question is whetherP2P lenders will thrive, orwhether improved bankcredit supply could

jeopardise their growth.The groups believe they

can offer a sustainablealternative to bank lending,and that challenges facingthe banks, such as tougherrequirements on capital,

and increased transparencyover charges will mean theywill never return to theirunchecked and unprofitablelending they did before thecrisis.

Also, government andregulators are determinedto improve competition,particularly for SMEs, tocounter the sharp fall inlending to these borrowers.

The UK SME lendingmarket is incrediblyconcentrated more thanany other in the world,says Samir Desai, co-founder and chief executiveof Funding Circle, thelargest P2P site for SMEloans. In the UK around 90per cent of SME lending isin the hands of four banks.In the US there arethousands of regionalbanks, while in Germany,France even in China there is more choice.

Funding Circle, which hasapplied for some of the100m of governmentfunds earmarked foralternative finance, lendsmore than 1m a week onits platform, which is fivetimes as much as a yearago. The company recently

raised 10m to fund furthergrowth, and hopes to belending 10m a month bythe end of this year.

Banks are pulling backfrom certain areas, whichP2P groups are keen to fill,such as export invoices.According to MarketInvoice, these enableinvestors to settle bills forcompanies ahead of theirdue date.

Around 30 per cent ofUK SMEs are trading withlarge foreign corporations,but banks only want to dealwith UK invoices, says AnilStocker, co-founder ofMarket Invoice.

But with any largelyuntested form of lending,there are challenges, suchas consumer protection.Some experts fear that P2Plenders may not appreciateall the risks.

Money deposited in P2P

sites is not protected bythe UKs Financial ServicesCompensation Scheme, soany losses have to be borneby individual lenders.

Sharlene Goff

times - sustainable banking

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