Plastic Money A secure way of payment

Oct 29 - Nov 04, 2007

United Bank Limited is one of the largest commercial bank in the country. With almost 46 years of good standing to its valued clients, it has stood the test of time, producing assets of over Rs. 300 billion. UBL offers services through a wide network of over 1000 domestic branches all over Pakistan and 15 overseas branches as part of its global network.

Introduction of Consumer Banking division was one such initiative which has given substantial boost to the image of UBL. The bank is now on a steady course aiming at redefining customer experience and taking consumer banking to the next level. The bank over the last 3 years has launched many successful consumer products, of which UBL Credit Card is the most innovative. We met Mr. A. Hamid Farid, Business Manager-Cards of UBL and talked to him about various issues regarding this subject.

PAGE: Tell me a bit about yourself, your association with UBL and your qualification in this regard. How long have you been serving this organization?

AHM: In addition to an MBA from CBM I have also completed my MS in Media and Communication from University of Nates (France). Previously I worked in the marketing divisions for IBM Pakistan and Lexmark France and then joined UBL right after its privatization. Being associated with the bank since the last three and a half years, I have also been the head of its credit cards business since last one and a half years.

PAGE: Banks have introduced many modes of credit oriented activities like chip credit card, auto loan, etc. what other areas consumer banking industry of Pakistan is using to facilitate consumer financing?

AHM: Rising consumption in Pakistan's economy is a direct sign of the economic growth and stimulation. In my opinion productivity will come hand in hand with the increased consumption in our economy. In order to facilitate the rising trends of consumerism that are in the intermediary stage, but hold great promise in the future, consumer banks are offering innovative consumer financing solutions under cut throat competition. Besides chip credit card and auto loan, banks are offering home loan, auto loan, secured running finance unsecured running finance and personal loan at highly competitive rates. Consumer banking industry has become more active in the last 5 years.

PAGE: What basically is the chip credit card?

AHM: A chip credit card has globally proven to be the most secure way of conducting credit card based transactions. It is a high tech feature which provides value added benefits and guarantees financial security while conducting transactions both within Pakistan and around the world. The chip based technology enables customers to avail a wide range of exclusive benefits and innovative loyalty rewards. These rewards are instant and automated, being linked to the stored value in the chip. There are three chip credit card issuing banks in the industry at the moment and UBL was the 1st one to launch chip cards in Pakistan. However contact less card is the future of the industry, which can be used just by just by flashing it near the terminal, that is, without swiping or dipping. This product can be very useful at places where there is a long queue and quick transactions are required, for example at super stores or petrol stations.

PAGE: If we look towards the demand and supply graph of the country, the gap is widened up, how much do you think plastic money is facilitating to bridge in this gap?

AHM: As mentioned before, the growth in our economy has led to the increasing consumption trends, resulting in the widening of demand supply gap. However, as the people of the country become more educated, they have realized the benefits and conveniences of using plastic money as a mode of payment. At the moment less than 1% population of the country is using plastic money in Pakistan, therefore one can not put complete blame of inflation and price hike on it. Inflation in basic food items, which is 11% at the moment, is not directly linked to the plastic money or consumer financing. However demand in consumer durables has been affected by consumer finance products including plastic money. For example sales of cars in Pakistan has quadrupled in the last 5 years, as now anyone earning a salary of around 20,000 rupees per month can afford a brand new car. Same affect can be seen in the white good (air conditioners, refrigerators, deep freezers, etc.) as well as other electronic items like mobile phones, computers, etc.

Developed countries facing rampant consumerism find plastic money to be the most efficient and acceptable mode of payment. Following in the footsteps of these nations, I foresee a tremendous growth in the use of plastic money in the near future, as it provides consumers the convenience of spending and the opportunity to enjoy higher standard of living than possible ever before.

PAGE: How strong is the consumer demand for this plastic money, do you think less of savings on consumer part is also a reason to boost this growth?

AHM: The consumers have found plastic money as the most convenient mode of payment as it is secure, it provides peace of mind. In addition to providing convenience, they also provide benefits in the form of rewards and discounts. It is these factors that encourage the growth in demand for plastic money. I feel that it is the growth in the use of plastic money that has led to a decrease in savings rather than vice versa. However as the State Bank has increased the interest rates this year the trend of saving is increasing now.

PAGE: There is a rising trend of default on the part of customers, how banks are tackling this situation and how are they managing this risk? The rate of interest charge on the credit oriented activities especially on credit cards is too high in comparison with other countries round the world which is also one of the reasons for rising defaults.

AHM: The rising default trend is an industry wide phenomenon. Although credit waves usually have a devastated impact on businesses, a number of measures can be taken to control it. These include tightening approval criteria and ensuring a correct collection system. The rise in interest rates industry is purely because of the fact that interest rates were raised by the State Bank. The State Bank raised the interest rates in order to control inflation but in my view that would not be resulting in the reduction of inflation of basic food items as they are not mostly purchased with those consumer finance products.

PAGE: What is the probable default rate in consumer credit oriented activities?

AHM: General industry default rate is 8-10% for the year 2007 and mostly because of the sudden rise in the interest rates in all consumer banking products industry wide. For example, if someone was using multiple products (credit card, personal loan & auto loan) since 2005, in 2007 he/she would be required to pay twice the amount as monthly installments. This coupled with inflation would make it impossible for him/her to manage his/her finances. Therefore he/she would end up defaulting, being unable to pay rather than being unwilling to pay.

PAGE: Now talking of interest rates set by State Bank, what is the consumer banking industry's stance on interest rates? We have seen fluctuation in the growth rate and interest rates.

AHM: The shift in cost of funds as set by the State Bank of Pakistan has led to an increase in interest rates in banks countrywide. This can been seen in products such as auto loans which saw an interest rate increase over the last two years from an average of 8 to 16% and credit cards from an average of 30 to 36%. However, with high default rates it is becoming very difficult for the banks to grow and make expected profit.

PAGE: How much rising inflation is hitting consumer financing and how would you justify that a consumer using these facilities is prudent enough in doing so?

AHM: A general rise in the interest rates has led consumers to become more prudent and saving conscious. In addition, rising inflation has led consumer durables to become more expensive for the customers. These trends have led to a general decline in the acquisitions of all consumer products in the industry. It can also be said that the average industry decline in new acquisitions of consumer finance products has been 50-60% in the current year compared to 2005. In 2008, mostly banks would be focusing on consolidation of their consumer assets.

PAGE: What is the set profit margin in consumer financing for consumer banks?

AHM: The general average consumer financing profit margin is around 5 to 6% of the consumer banking industry all products combined, however it is also linked with the default rates. As the default rate rises the profit margin diminishes, sometimes leading to loss rather than profit, which is the current status of the consumer banking industry.

PAGE: How do you see the growth of banking sector amidst all the competition around?

AHM: Even though consumer banking has expanded very much in the last 2-3 years, profits are shrinking due to the overall credit wave. Increase in inflation and cost of funds predict that the coming two years will apply immense pressure on the banking sector.

PAGE: Lastly, tell me which bank is going be a market leader in years to come?

AHM: The coming years will see even more competition in the banking industry. However, it can be safely said that any organization that remains sensitive to customers' needs will see itself as a market leader in the years to come.