I talked to Marc Luet, Chief Executive Officer of Citi’s Consumer business for the EMEA region. We discussed the impact of technology on retail banking, the future of the Universal bank and most importantly the “re-coupling” of retail banking conditions between emerging and developed markets.

Interviewer:
I think it’s quite fascinating how you’re managing operations for Citi both in Europe, which many people see as quite an old sclerotic market, plagued with debt and problems and perhaps a bit of resistance to innovation. But then it sweeps across the Middle East and Africa, where you have economies which are growing very rapidly and new consumers which are open to new ideas and new innovations. From your perspective, are these differences being reflected in the retail banking industry? And what are the key differences you’re seeing between these regions?

Marc Luet:
There used to be characteristics of emerging markets which were different from developed markets from a customer banking perspective. One was high growth, so the growth rates both in the GDP, which drives consumer banking in some ways, and growth in banking wallets. That was very different between the two. The legislation and regulatory landscape was very different as well.

The third difference was the ability to price was different, much less regulated. And it was probably a reflection of the fact that the customer information and bureau infrastructure was much less developed in emerging markets. And therefore, that created differences. I think the final difference  was that the substitution on the product set side and the value proposition was much less, and therefore simple products were already creating a differentiation when developed markets had a larger product palette and you had to do more to differentiate your product. So these four characteristics were different: high growth, flexible legislation, ability to price and bureau information, and then product set, or value products.

These differences have all vanished. If you look at growth rates, the spread between the two, at least in our region - and I’ll leave Africa out for a moment, just the countries we are in [at Citi] - that difference has vanished. And Central Europe will grow, GDP growth will be likely 0% to 1% on average if you look across Czech [Republic], Romania, Hungary….in Poland, growth rates have tumbled down from 7% at the high to less than around 2% this year. Russia has come down, the Middle East has come down. Whether it’s the Arab Spring or Dubai issues, growth has come down.

Interviewer:
So from your perspective, are you quite concerned about the EMEA region generally?

Marc Luet:
No, I’m not concerned. I think it will rebound. My point is that a lot of the distinction that existed in the consumer banking markets has vanished. The difference in growth rates has basically subsided. The spread is much less. I think it will rebound, and the region I talk about (EMEA) stays a good region to operate in.

There have been an incredible number of changes on the regulatory front in emerging markets…. whether it be pricing regulations, customer privacy legislation, the the ability to distribute through certain channels in the way we used to do it. Clearly there has been a real concern, shared by regulators, that you couldn’t let banks in general do whatever they wanted with consumers, and you had to really protect the customers in many different ways. So that has changed.

The ability to price, which was linked to lack of bureau information on selling assets, credit cards, loans, etc., that has changed as well. Because now countries like Russia, for instance, are developing solid bureaus which they didn’t have before. So the number of countries without that structure is very few. And pricing has become more regulated.

And then there’s product differentiation. You need to have very strong value propositions to differentiate in emerging markets, just as you do in developed markets. We’re still putting developed markets and emerging market in two different categories, but I’m suggesting that we need to wake up to the fact that they are more alike now than they ever were before.

Interviewer:
There’s a coming together between the two systems. You mentioned regulatory pressures as one, or regulatory change as one area in which these two different sets of markets are coming together. I wonder, though, that’s one particular challenge I’m sure that organisations have to overcome. How much is new competition within these markets a big challenge for you? Of course Citi is a huge global bank, it has a massive international presence, but you are seeing a lot of new home-grown emerging market organisations, a lot of new players within this field, such as mobile network operators. How are you dealing with this new competition?

Marc Luet:
Mobile network operators are operating specifically where you see emergence of the online payments, so money flows. You don’t see them in lending, you don’t see them in wealth management. If you look at the profit and loss of a bank… it occupies a large value chain. The payment area is always what keeps being mentioned as where there is disruption by MNOs.

If we focus on payments, the only thing I’d say is that you have countries that have looked at different models. In Kenya, M-Pesa is very often mentioned, where there was the emergence of an MNO-led model and you then had 5 million people using it as a way to circumvent the lack of infrastructure for payments. I think it’s very often driven by the lack of infrastructure, so it’s not surprising that this has emerged in a region like Africa where the infrastructure was less.

What I’m suggesting is some countries are going to an MNO-led model in a sense, and some countries are going to a bank-led model, where banks do play a role even in emerging payment infrastructure.

Citi signed a deal with America Movil last October, on a payment wallet deal. And we are in cooperation with MNOs in eight markets in Latin America, offering mobile banking services to millions of people across Mexico and Latin America. So banks continue to play a role because a lot of countries will go for a bank-led model where there is cooperation between the MNO and the banks. And I suspect that the increased scrutiny of regulators, including in emerging markets, will lead authorities to seriously consider bank-led models as opposed to MNO-led models where the regulation has yet to be determined and embedded.

Interviewer:
Okay, let’s take it slightly wider than just the payments landscape, I think there’s also an interesting set of competitors coming in as actual other banks, other retail banks. I’m thinking perhaps, looking at areas like Africa. In some parts of Africa you have some very interesting home-grown emerging market banks. Off the top of my head I’m thinking of Equity Bank and Eco Bank who have made quite a mark in their domestic countries. I’m just quite interested, do these kind of competitors…are you finding those a challenge? Or do you see this as good for the industry?

Marc Luet:
I don’t think it’s bad for the industry. There’s room for more than one bank in each market. And I think some of these local banks are actually becoming small regional banks. You see South African banks expanding their reach in Sub Saharan Africa,  East African banks moving into West Africa. 

You didn’t have that in Africa ten years ago, you have it now and probably in Africa you will see more competition as the [consumer] wallet grows. We’re not confronted with that directly in the sense that our consumer presence in Africa is fairly limited right now. But yes, but there is increased competition.

Interviewer: 
Where are Citi’s key emerging markets at the moment? Which would you identify as real growth areas that you’re looking to really expand into?

Marc Luet:
In the Europe sphere, clearly we’re looking at Russia, a very strong market for us, and we also see potential in Poland. I think Hungary and Czech Republic also have potential, even if the GDP growth rates are a little subdued right now. Central Europe as well will rebound. And I certainly think in Dubai and UAE in general has more potential for us. So, where we are putting some focus and more attention? Certainly Russia, Poland and the UAE would be key markets for us.

Interviewer:
Perhaps to take you back slightly to technology because you covered earlier that you’ve recently made a partnership with America Movil. Mobile banking is certainly something that a lot of the major banks are looking to move into now. As an overall trend, you’re seeing technology as a very disruptive force on the industry. Do you see it as a cure or a curse for a major retail bank like Citi? Arguably, bigger organisations are sometimes a little bit slower than smaller organisations at adapting to these new types of technology. Is this something you’re concerned by or do you think you’re well placed to embrace technology as a way for going forwards?

Marc Luet:
I think it’s an opportunity for us. Just a few facts. You know we have 228 branches across 10 markets in EMEA. So our bricks and mortar is very limited, always has been, we have always been proponents for a different model, for distributing our products, interacting with the customers. In the past 18 months we’ve rolled out mobile banking platforms in all of these markets. We are on a significant journey for digital across the globe. And we’ve had recent successes to be on tablet applications in the US, we’ve been recognised by the market as being innovative. So I think it’s an opportunity for us. Definitely.

It addresses some of what could have been construed as weaknesses in the past. It was construed as a limitation in the sense that we didn’t have a large branch network. Digital allows us to address that.

I have seen a global survey that looked at countries like Brazil, China, India, South Africa but also the US, the EU, Canada, so developed markets… for simple transactions, and the differences between simple transactions and complex transactions. For simple transactions, internet and mobile was preferred in all these markets, uniformly across the board. Even for complex customer transactions, if you rank branch versus mobile and internet as methods of interaction, or ATMs… in developing countries, customers are much less tied to the physical branch than their counterparts in the US and Canada.

So there’s a differentiation, and even for complex transactions, digital is, in developing markets, seen as being a way to address complex transactions. We were talking about mobile payments, or usage of mobile payments in various countries. There was another survey that I’ve seen, saying that in the UK, the British consumer exhibited less interest and enthusiasm of mobile payments than some of these other developing places. Because the [branch] infrastructure is still there. 

Interviewer:
Do you think anything will move some of these developed markets, who are very stuck in having a presence on the high street…what will be the impetus that will change their way of thinking and their attitudes. Do you think it will be a hard process or an easy one? Because I'm assuming the change has to occur at some point.

Marc Luet:
I think it will be hard, because moving a large organisation with an embedded infrastructure is hard. Big institutions are also usually tied to legacy platforms, and the amount of work and cost generated by switching to up-to-date, cutting edge platforms, that’s a very big exercise. It requires cost and time. So the technology shift will be painful, I have no doubt about that.

Interviewer:
Another interesting argument that’s broken out in the UK anyway recently, there was a study by the consumer group Which? Which? really attacked the idea of the free bank account. The views from the chief executive suggested that there is no such thing as a free bank account for retail consumers, we pay the price in many other ways. What’s your view on this at the moment, on this debate opening between free banking accounts, whether they actually exist, or whether actually we should be charged for our bank accounts?

Marc Luet:
Price is a way to extract value, the value you give to the customer extracted back. Banks add valuethrough delivering the service, being a reliable platform where transactions take place. The confidence the customer can have that money is transferred in the way it should be transferred, the money is stored in the way it should be stored, and that the value propositions that are offered deserve pricing is important. I don’t subscribe to the view that anything can be free. There is convenience delivered, and value propositions that are quite substantial and brought to the customer add value.

Interviewer:
I think the point being made by the research done by Which? was actually challenging the fact that some banks refer to their current accounts as being ‘free’. And the Which? research was questioning that label of free bank account. It was suggesting that because of the reduced amount of interest that we get for our savings, and because of a number of other charges for certain transactions, the idea of a free bank account is ludicrous anyway, it doesn’t exist, it’s an illusion.

Marc Luet:
And therefore should not be advertised that way.

Interviewer:
Absolutely. I was just wondering if that was anything you agreed with or whether you didn’t agree with it. I was just trying to get your view on that.

Marc Luet:
I think you have to be clear in your communication. I think the point that Which? is making is a little stretched. Because they could apply that to anything that is sold in any type of industry, right? That one thing is free but you actually pay for this other piece and therefore, the first piece is not quite free.

Interviewer:
You’ve brought up a really interesting point there. Communicating with the customer, that’s actually one of the key points of our summit coming up in December. There’s no doubt about it, certainly in the UK and in most of Europe, and in the US as well I guess, there’s been a big fall out in trust between some of the major retail banks and the public. What do you think, with the current situation as it is, banks need to do now to rebuild their relationships with customers? And try and win back some of the public’s trust.

Marc Luet:
I would say it’s two things: consistency and culture. There is no quick fix to any of this. It takes years to build reputation, to build trust. So you need to be clear and consistent in what you deliver, and understand fully what your brand stands for, and make sure you have the permission to be that in customer’s minds.

But also it’s a lot about culture within the company, within a bank. That eventually transpires out to customers. So it’s no surprise that with some of the best satisfaction, and we do satisfaction surveys and we track NPS, you get good reviews around customer relationships with their relationship manager, people in the branches, people at Citiphone, and so forth. We’ve invested a lot around the service culture, what we call ‘client excellence’ programs, values. So really the service to customers is linked to values that we want to articulate to our customers and it takes years.

Over the past couple of years we’ve trained 15,000 employees in the consumer bank itself. And there are all sorts of programs we do now for people we recruit. So it goes really from the recruitment phase all the way to training, recognising people, publicly and globally, people who go the extra mile for customers. Telling the stories of great client service. That, and the effort on culture, is ultimately what is going to make the difference. It’s a long haul.

Interviewer:
I was going to say, that’s an interesting point about time frame. This is going to take, how many years do you think? Many years? Decades?

Marc Luet:
Years. I don’t know whether it’s decades, but it’s years. Look, we started our client excellence program two years ago. I think we have another three years ahead of us before we start making it. It’s really the long haul and it’s entirely about values, culture, behaviours – from the teller in a branch, to the operators on the phone, to the team manager in operations, to senior management in regional staff. It really is a long haul type of effort.

Interviewer:
I’ll end with an interesting article I’ve read, actually announcement that was made a couple of months ago by one of the original architects of Citigroup in its current form, and one of the godfathers of big banking – Sandy Weill. He recently announced that he thinks big banks should be actually broken up again or certainly...

Marc Luet:
Yeah, I saw that.

Interviewer:
What’s your view on this? Do you agree with these sentiments, do you think it’s the end of the age of the universal big banks? Or do you think they have more life in them and there’s more time for them.

Marc Luet:
I don’t think it’s the end of big banks. I think Citi’s model delivers value across businesses. We’re in corporate banking and have relationships with large companies … the consumer business is tied to them because we service employees for a lot of these large companies in many of the emerging markets. My opinion is that Citi’s model makes sense. As Vikram [Pandit] has said, our mission is to enable progress for our clients in the real economy. I see it working every day.

Marc Luet will be speaking at our European Retail Banking Summit on December 4th in London. For more information click here.