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<p class="hsbcSizeText02"> 'Banking innovations and innovative banking'<br> Speech by Mr Vincent Cheng, Chairman<br> The Hongkong and Shanghai Banking Corporation Limited<br> Asia Pacific Bankers' Club, Beijing<br> 3 November 2006 </p>

3 November 2006
'Banking innovations and innovative banking'
Speech by Mr Vincent Cheng, Chairman
The Hongkong and Shanghai Banking Corporation Limited
Asia Pacific Bankers' Club, Beijing


Good morning everyone. I have been asked to speak about excelling through banking innovation. Therefore it seems only fitting that I talk about what is undoubtedly the greatest banking innovation to date.

That said, if I was to do a quick survey of bankers - perhaps even the bankers in this very room! - if I was to do a quick survey and ask different bankers about the greatest banking innovation to date, I would expect to hear several different answers.

I would expect many to be quite general and say that advances in technology are the greatest banking innovation to date. After all, technological innovations have changed the way banks and their customers interact. Our customers can now obtain information about products and services quickly, compare prices instantly and switch suppliers easily. Meanwhile, many banks are reconfiguring internal structures to allow customers to access financial services wherever, whenever and however they wish.

Advances in technology have also lowered entry barriers to our business. Allowing non-traditional competitors to offer financial services without having the need for a traditional physical branch network. As a result, banks - large and small, domestic and foreign, traditional and virtual - are being forced to invest significant sums to develop even more new technology just to remain competitive.

As an international bank, HSBC has some advantages in this respect. We, for example, run our own worldwide network. Some 368,000 kilometers of fibre optic cable that is self managed. This network runs at about one-seventh of the cost of using a public carrier. It is totally owned and managed by HSBC, carrying only data on behalf of our customers. And it allows us to take data across the world and return it in a second and a half.

We also have the ability to consolidate back office functions and process transactions across borders to optimise cost savings. Likewise, because IT development could be done in any location, anywhere the appropriate skills exist, we can develop our systems and software wherever the productivity advantages are greatest.

Just an aside. In terms of overall IT budget, HSBC will have spent at a Group level some US$4.8 billion this year. It is also worth noting that half of this spend is on running the shop on IT operations. The rest has been spent on innovation and new deployment of technology.

Back to my list. A second potential answer to what is the greatest banking innovation to date would be the ability to serve customers through multiple delivery channels.

It was not all that long ago, for example, that our customers would visit our branches during set hours. Today, customers can access banking services 24 hours a day, seven days a week and they can do so in person, over their phone, online, and in some places through their televisions. In the UK we are even working with British Telecom to convert some payphones so on one side of the booth there will be a public telephone and on the other side an ATM.

To be successful in this e-world, banks need to provide and effectively manage a wide variety of distribution channels, including high-quality, fast and secure online services. In 2005, for example, HSBC processed some 15 billion customer transactions during the year. That is roughly equivalent to 475 transactions each and every second. Of those transactions, some 13 billion or 412 per second were done electronically.

Against this backdrop, we recognise that there will be and in fact already are a growing number of customers who want things instantly. They are products of the age of instant gratification. In terms of their online habits, they can be a fickle group. They are always looking for the next cool web site, a more powerful search engine or a better e-offering. They switch allegiances with the click of a mouse.

At the other end of the spectrum, we must also continue to serve customers who want to come to a branch and deal with a real person directly. Some don't have an ATM card and don't want one. Others are concerned about privacy and security. Many simply prefer to be able to discuss their financial service requirements face-to-face.

Given this range of customers and the diversity of their needs, we have to be able to deliver competitive products through multiple channels.

There are others, meanwhile, who would probably cite one single delivery channel as the greatest banking innovation to date. Namely, the internet.

I don't know about all of you, but I certainly remember the days - not that long ago - when analysts, the media and others were saying that big banks were dinosaurs. Our days were numbered, they predicted. The consensus was that internet-only banks would be able to offer high-interest and low-fee accounts, resulting in a mass migration of customers from banks weighed down by traditional branch networks. The assumption - by some at least - was that given a choice, people would prefer technology over humans. I recall HSBC being criticised for being too slow in rolling out e-banking products. According to some, we hadn't "awakened" to the potential of online banking.

Today, many of the big banks are excelling in providing online banking services, using their well-known brands to overcome security concerns and so-called 'first-mover' advantage. Today, HSBC has some 30 million internet banking customers around the world. To put this into perspective, this is almost equivalent to the entire population of Canada never having to set foot in a bank branch - unless of course they want to.

Today, the internet is also helping us reach customers all over the world. We may have a physical presence in 76 countries and territories. However, our offshore banking division in Jersey has online customers who are resident in more countries and territories than the United Nations has member states.

Today, the internet is also helping us sell more products with less paperwork. HSBC customers seeking Term Deposits, for example, can choose the deposit time frame. They can review the interest rate and determine where the mature funds will be deposited. All without needing to sign or submit any paperwork. Meanwhile, customers seeking insurance products can also complete their transaction entirely online - from requesting a quote to choosing the level of cover to receiving a purchase completion notice- all without the need to issue any paper. Customers can even subscribe to IPOs online, including applying for loans to support their IPO subscription.

All of which brings me to a fourth potential answer to what is the greatest banking innovation to date: enhanced security.

As well are all well aware, security is a big issue when it comes to delivery channels like internet banking. It is also quite often a misunderstood issue.

Recently, for example, HSBC ended up in the headlines in the UK after a group of academics announced they had discovered what they termed to be a glaring security loophole in our internet banking system. There was no evidence to suggest anyone had or even could successfully use this so-called loophole to access a customer's account.

While the mainstream media was quick to jump on the story, the more IT savvy media quickly realised the issue was nowhere near as serious as some suggested. Indeed, as the editor of Computing magazine online pointed out, the so-called flaw the academics were supposedly revealing was the equivalent of saying the windows in your home are vulnerable to burglars wielding baseball bats. In other words, as this editor went on to point, if you were a typical home PC user with little technical knowledge, the claim being made by the academics would probably reinforce certain fears about online security. However, anyone with any understanding of IT security would know better.

HSBC, for its part, deploys different security techniques in different markets for different customer segments. Techniques ranging from password-based access in much of the United States to Random Character Challenge in some sectors in the UK to token-based authentication in Hong Kong. Including, I might add, a version of the token specially designed for visually impaired customers to allow them to use the internet in the same way as other customers.

In each instance, we deploy various alternatives based on the market, the business, the regulators, and what the security risk assessment dictates. For example, deploying OTPs or one-time passwords has helped us to protect HSBC customers from phishing, the use of bogus Web sites or fake emails to obtain sensitive personal information.

Instead of revealing too much about HSBC's enhanced security features, let me get back to the question at hand. Namely, deciding what is the greatest banking innovation to date?

Clearly, there are several potentially worthy answers to this question. From the enhanced security measures I just discussed to advances in technology in general to the increased number of delivery channels to specific channels such as internet banking.

What is also clear, at least from my perspective, is that the greatest banking innovation to date is actually none of these aforementioned developments. Rather, I believe the greatest banking innovation to date is - without a doubt - the realisation that what banks do is no different from any other retail business.

In the past, bankers like me and you tended to think of ourselves as being somewhat special. We were the custodians of the capital. We typically based our relationships with customers on loyalty and longevity. We tended to be conservative. We also tended, as the old saying goes, to encourage deposits and discourage withdrawals. And we also tended to only compete against each other.

Today, banking has become much more competitive. And much more responsive to customers needs. Today many of us have come to realise that banks are just like any other business - that is any other retail business. We provide a product like any other retail business. Our product simply happens to be money. This change in attitude, I might add, has been a long time in coming.

Some banks may not have even reached this realisation just yet. But they will. In the meantime, more and more banks are modifying what they do and how they do it based on the realisation that they are indeed retail shops. They are changing their branches from transactional banking models to more proactive sales outlet models. They are modifying some branches to create bigger more comfortable outlets to better satisfy customers' changing lifestyles. They are building other outlets which are aimed at fulfilling on the most basic of needs. In HSBC's Premier centre in Brunei, we have even a massage chair in which our customers can relax!

More and more banks are also becoming more customer centric, offering specific types of services to specific types of customers. At HSBC, for example, we offer wealth management services and our Premier service to the more affluent individuals with the more sophisticated financial needs.

Meanwhile, for the mid-tier segment - perhaps younger people at an earlier stage in their career - we have the HSBC Advance service which provides them with one-stop financial management and an integrated account.

To further satisfy the needs of different customers we have also launched Amanah banking and Takaful insurance in markets like Malaysia. More and more banks are also using Customer Relationship Management Systems to reach out to individual customers with products and services tailored to their specific needs at specific times. They are realising that it is far more cost effective to retain existing customers than to acquire new ones. They are spending more time listening to their customers and then refining their service standards to meet or in an ideal world exceed customer expectations.

In fact, in closing, let me share one bit of market intelligence with you. Market intelligence which we picked up when we conducted a number of focus groups in a number of Asian markets.

One of our goals of this particular set of focus groups was to find out more about how customers tend to see their relationships with banks today. And also how customers would like to see such relationships evolve in the future. In other words, we wanted to be able to compare their perceptions with their desires.

What we found was that many customers describe their current relationship as still being somewhat distant, centering around financial management. Some see themselves as subservient to the bank. A few went as far as to describe their banks as "a legal loan shark." Many also noted, however, how much banks in Asia had changed and improved in recent years. They cited better technology, a wider range of products, better customer service, the targeting of products to the mass market rather than just top end customers.

When we asked about what would be an ideal relationship with their banks, the customers we surveyed talked about their banks becoming a friend and helper. Someone who could understand their needs. Others said ideally their banks would become trusted advisors. Some even said that in an ideal relationship, their bank would be their slave.

What this suggests is that while banks like yours and mine may be becoming more and more like retail shops, we still have a long way to go.