A crowded retail market: Competition gets more intense as banks expand access and services

Despite its relatively small size, retail banking in Mongolia has emerged as a key battleground for larger lenders in recent years. With some 77.7% of Mongolians holding an independently-obtained bank account in 2012, according to the World Bank, thanks to previous governments’ policies of cash handouts, the adult market is near saturated. The density of account holders in fact leads Malaysia (66.2%), China (63.8%), Russia (48.2%) and Kazakhstan (42.1%), trailing only South Korea (93%) among regional peers.

COMPETITIVE MARKET: Intense competition between leading banks since 2010 has spurred traditionally corporate banks such as Trade and Development Bank (TDB) and Golomt Bank to expand their retail presence in urban areas, while traditional retail banks such as Khan Bank and XacBank have driven innovation in alternative distribution channels, payment systems and fee revenue. While retail banking has traditionally been concentrated overwhelmingly in three major cities, expanding access nationwide could drive medium-term growth in the segment. As corporate lending has begun to slow in 2012, retail services have only become more important to banks’ growth. The establishment of a private sector, credit information bureau in 2012 provides key infrastructure for retail credit growth and reducing the costs attributed to lending.

BRANCHING OUT: With branches in virtually every soum (district) and nearly half of all branches (488 of 1075) as recently as 2009, Khan Bank remains the leading force on the retail market. Since the last banking crisis, however, competition has been growing more acute, with Khan Bank’s share of banked households dropping significantly in the aftermath of the crisis, according to bank officials.

Savings Bank’s takeover of Mongol Post Bank has given its network the scale necessary to compete with Khan Bank’s 512 branches; Savings Bank had 488 branches in 2012, up from 318 in 2009. Yet insufficient capital and the necessity to restructure the bank since the 2010 merger have made Savings Bank a “sleeping giant”, with bankers expecting strong competition from the lender starting in 2014.

In the meantime, however, the retail segment is becoming considerably more crowded.

XacBank has carved a profitable niche in rural areas in particular, where some 70% of its borrowers are based. Developing its branch network from 78 pre-crisis to 91 in 2012, the lender’s share of outstanding loans grew from 7.55% in 2009 to 9.58% by the end of 2011. Meanwhile, the two leading corporate banks, Golomt Bank and TDB, have expanded their networks in both the capital and major provincial towns including Erdenet and Darkhan, with the former’s growing from 59 to 89 between 2009 and 2012 and the latter’s rising from 28 to 47.

The two have also introduced weekend opening hours, a departure for corporate lenders.

However, building branches will only go so far and banks have sought to develop both payment systems and alternative distribution channels. “We see 100 branches as enough for a retail bank on this market; it is hard to see how more would be profitable,”

H. Amar, the managing director of Tenger Financial Group, the owner of XacBank, told OBG.

PUSHING PLASTIC: Payment systems have been developing rapidly over the past decade, with both magnetic stripe and pin cards in circulation. The overwhelming majority (over 98%) were debit cards, although banks like Khan Bank have announced plans to aggressively market credit cards from 2013. Card-issuing banks can handle Visa, MasterCard, JCB Card and China Union Pay card types, but cards in circulation are mainly of the first two types. The Bank of Mongolia’s (BoM) Resolution 440 of August 2009 standardised card issuance and regulates the clearing and settlement system, accordingly, A domestic inter-bank market was established by the BoM back in 1997, when Mongolia also joined the SWIFT network. This clearing and settlement mechanism allowed banks to settle batch payments twice daily. With assistance from the World Bank, the BoM established the Switch Clearing Centre (SCC) and upgraded the IT infrastructure for its inter-bank market in early 2006, which allowed banks to monitor liquidity in real-time.

HIGH & LOW: The 2006 reform also separated clearings for low- and high-value transactions. The SCC handles low-value payments through its Financial Intermediary Network, while the separate Banksuljee, a real-time gross settlement system (RTGS) for high-value payments, was established in May 2009.

The SCC also established the Inter-bank Payment Card Centralised Network in January 2010 in conjunction with six of the largest banks. The RTGS system has significantly reduced inter-bank settlement and counterparty risk, while at the same time increasing the liquidity requirements for banks. Fees charged for the use of the SCC have never covered operating costs, and the BoM subsidises the body. This support has risen from MNT18m ($12,600) in 2007 to MNT81m ($56,700) in 2009, for instance. In contrast, a fee of MNT150 ($0.11) per transaction for use of Banksuljee has insured that system’s viability.

PAYMENT OPTIONS: The number of active cards has risen from 476,200 in 2009 to more than 2m in 2012, according to Khan Bank, which holds roughly 1m of those. Rapid growth in the market saw Khan Bank’s card fee revenue to triple in 2011, and the bank expected another doubling of profit in 2012. Given these returns, banks have competed aggressively in this space. Golomt Bank has distributed cards with free bus travel to students over the past five years to a total of 300,000 students by 2012 for instance, while Savings Bank gives out free cards to account holders who are government employees.

Banking infrastructure has expanded rapidly since the installing of Mongolia’s first ATM in 2001, with the number of ATMs growing from 292 in 2009 to roughly 700 by the beginning of 2012. Card handling fees are set at MNT100 ($0.07) for in-bank card use and MNT500 ($0.35) for cards issued by other banks. Banks have been building up their ATM networks, led by Khan Bank’s installing 50 new ATMs in 2012 to reach 310 by December 2012, some 47% of the total. XacBank is also investing in new ATMs as a means of handling simple transactions such as deposits, withdrawals and bill payments, expecting to grow its network of 40 in 2012 to 100 by the end of 2013. TDB and Golomt Bank each boast networks of over 100 ATMs, while Savings Bank has trailed in terms of its reach due to a lack of capital. A growing number of businesses have installed point of sale (PoS) equipment, with the number of PoS growing rapidly from 3750 in 2009, according to the BoM. Khan Bank installed an additional 1000 PoS in 2012, bringing its total to 4000, while Golomt Bank and TDB have 1700 each. The volume of PoS transactions through Khan Bank’s network went from an average of 6000 daily in January 2012 to 12,000 by September.

GOING MOBILE: Initial forays into mobile banking started with Khan Bank’s platform in 2007. XacBank and Mongol Post followed with their own platforms in 2008, while telecoms operator MobiCom launched its own service, “Mobifinance”, in 2010.

The Financial Regulatory Committee (FRC) passed a new regulation on “e-money” in December 2011, which established liquidity floors for e-money operators and capped the value of e-transactions at MNT300,000 ($210) per time and MNT500,000 ($350) per day. While the BoM had originally stood in favour of a bank-centric approach to mobile banking, the FRC took the lead in passing new regulations and providing for non-bank participants.

A total of nine commercial banks have either launched their own platform or participated in third-party schemes like MobiCom’s by 2012, according to the FRC. Initially through an SMS-based system for simple transactions, the banking services have migrated to full-service apps for smartphones, with institutions like Savings Bank leading the way in such services. More urban banks like Golomt Bank and TDB have also rolled out their own platforms to diversify banking channels and reduce the strain on their limited branch networks. “Mongolia’s full mobile phone coverage presents an attractive medium to acquire new customers as well as cut operating costs, especially if you consider the country’s sheer size and the young, technologically-savvy, population,” Randolph Koppa, the president of TDB, told OBG.

Savings Bank allows customers to use their mobiles to perform a variety of transactions, either via SMS or dedicated avenues on smartphones and tablets. MobiCom’s platform is more rudimentary, allowing only its clients to transfer airtime, funds and carry out transactions with a limited number of vendors. Mobifinance and XacBank’s “Amar” (meaning “easy”) service target Mongolia’s substantial semi-nomadic herder segment, traditionally difficult to reach but with increasing access to mobile phones. With 60,000 active clients by the end of 2010, Amar allows users of any operator to make deposits and withdrawals using their cell phone through a network of authorised agents. Khan Bank estimates it holds the largest mobile banking market share, with 200,000 users as of September 2012, having been the first bank to launch a dedicated mobile banking service.

BEYOND THE BANKS: While the first and most successful microfinance venture has since become XacBank, the number of non-bank financial institutions (NBFIs) has grown considerably since the late 1990s although they remain very small, accounting for just 2% of the financial sector’s lending, while savings and credit cooperatives (SCCs) account for another 1%. Barred from collecting deposits, NBFIs clear transactions through settlement mechanisms of commercial banks. Even the dispersed rural population of herders has participated, with the number of herders holding active loans growing from 0.5% in 2000 to 72% by 2007, according to the World Bank, although NBFIs have remained concentrated in Ulaanbaatar and the main urban centres.

The establishment of the FRC as an independent regulator for securities, insurance and NBFIs was an important first step in cleaning up the sector, causing the number of NBFIs to drop to 117 in 2008 before rebounding to 192 in 2011 with roughly 137,000 clients, according to the BoM, alongside 170 SCCs covering 27,000 clients. Only 80 NBFIs engage in lending, primarily to micro-businesses, while the rest focus on currency exchange. The five largest NBFIs – Credit Mongol, Sar Shine International, New Found, Vision Fund and Trans Trade – account for a third of assets and loans in the sector.

Credit Mongol is the successor to the EU’s small and medium-sized enterprises business development project in 2000 and operates 11 branches, while Net Capital was founded privately in 2008. Offering monthly interest rates between double and triple of those by commercial banks on fully collateralised loans, according to Khan Bank, these NBFIs have nonetheless been able to capture a growing niche in the market as banks scaled down lending.

Lending by NBFIs more than tripled between 2007 and 2011 to MNT108bn ($75.6m), while total assets (of which half are held by the 10 largest NBFIs) reached around MNT189bn ($132.3m) by September 2011. “NBFIs have benefitted from commercial banks’ liquidity squeeze in 2012 by ramping up their lending,” S. Batzaya, the director of business development at Khan Bank, told OBG.

BETTER CREDIT INFORMATION: The BoM’s credit bureau, established in 1996 and computerised in 2001, covers just a small share of the market and only includes data from banks, not from private businesses. The European Bank for Reconstruction and Development estimated in 2011 that Mongolia trailed its emerging European and Central Asian peers in the efficiency of its credit information system, with a mere 19% of its adult population rated by the bureau.

A culture of fickle borrowers defaulting on their loans is, however, gradually changing, according to Mongolian bankers. “Bank clients’ culture is evolving, they are increasingly concerned about their credit rating and the establishment of a private credit bureau should support this,” Batzaya told OBG.

Central to this evolution was the Grand Khural’s enactment of a new law in 2011 allowing private credit bureaux to operate. A group of 13 banks started work on such an entity in 2007, providing $1m in start-up funding for the Credit Information Bureau through the Mongolian Bankers’ Association and using software from US-based Dun & Bradstreet. While the bureau provided only negative information on defaulters in the early part of 2012, the Mongolia Bankers Association insists the system is being expanded to include positive data to build a more accurate picture of borrowers. The establishment of the credit bureau and a reform that allows borrowers to consult their credit information were cited as factors underpinning Mongolia’s improvement in the World Bank’s 2013 “Ease of Doing Business” ranking, making it one of the world’s top 10 reformers. Yet expanding the non-mandatory information system to all bank clients will be a crucial step to building a more efficient system in the long term.

OTHER INCOME STREAMS: Recent developments in the retail banking market have underpinned banks’ hopes of driving fee-based income, just as their net interest margins have narrowed and their ability to lend has fallen. “Banks’ fee-based revenue will continue to grow as customers seek more and better services. They have already demonstrated their willingness to pay,” Amar told OBG.

More aggressive sales of credit cards from 2013, the multiplication of bancassurance deals and the launch of new leasing offers point towards new revenue streams becoming increasingly available in the sector. While the overall size of the market will remain small, retail is set to become a key battleground for banks, which should see further innovation in products and distribution over the medium term.