Turkey debate: Digital revolution opens new horizons for Turkish financial innovators

By:
Published on:

Turkey’s economy has been slow to go digital but increasing smartphone penetration is offering unparalleled growth opportunities for banks, mobile operators, e-commerce platforms and a host of new generation players. Striking a balance between competition and collaboration will be key as aspiring innovators face up to the challenges posed by big data, regulation and security.


Turkey debate November 2015

Learn about the debate participants


Executive summary
• Consumers well disposed to new technology

• Big east/west divide in financial infrastructure

• E-commerce is small but growing

• Greater use of data is increasing sales opportunities

• Older generation starting to participate

• Mobile users now outnumber online at Akbank

Euromoney How important is direct banking as a source of growth and profitability for banks in Turkey?


Orkun Oğuz (OO), executive VP, direct banking, AkbankOO, Akbank In the early days, the main purpose of online banking, and digital in general, was generating cost efficiencies by moving transactions to digital channels and serving customer needs outside of branches. With the introduction of mobile, that trend has been more or less completed. Today 85% of financial transactions in Turkey take place outside branches, and if you include actions such as checking credit card statements or account balances then the proportion goes up to 95%. Our focus now is on how to use digital to add to the bottom line in terms of profits and revenues. Currently for the simplest products, such as cash loans on credit cards, around 90% of sales are via digital channels, while for more typical retail banking products such as general purpose loans, overdraft facilities, credit card issuance and insurance the figure is around 30%. This means that, in addition to our 900 physical branches, we already have the equivalent of another 300 to 400 virtual branches. Forecasts suggest that in two or three years, 50% of basic retail banking products will be sold through digital channels.

Euromoney Is there anything banks can do to accelerate this trend?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank There are three main factors at play here. Consumer behaviour is less of an issue in Turkey than in other countries as consumers are well disposed towards new technology but in terms of mobile penetration we still have a long way to go to catch up with developed countries. Smartphone penetration in Turkey is around 40%, compared with close to 60% to 80% in more advanced markets. On the regulatory side, the waiving of the requirement for a physical signature on loan applications last year created huge opportunities for us. We can now issue a wide variety of loans either online or over the phone and we will soon be able to do the same with investment and insurance products. The two areas where physical banking is still required are know-your-client and deposits. We would like to see easing of the regulations on these areas as well.

Euromoney What are the main regulatory hurdles facing telecoms providers in Turkey when it comes to financial services?

Emre Kanaat (EK), head of consumer services, Vodafone TurkeyEK, Vodafone The scope of financial regulation was widened to include non-traditional players for the first time in June. This is still a very new concept, so we are working to understand it and ensure that we comply with it. Our expectation is that the requirements for non-traditional players will be less onerous than those for banks, because these newcomers will be focused only on low-risk areas such as money transfers, collections and e-money activities. It is important that the regulation is not so burdensome that it prevents new players from entering the market or discourages investment in technology infrastructure. We believe there should be a balance between the investment required to run our businesses and the additional investment required by the regulatory body. The government could also do more to encourage the development of the industry through incentives or tax breaks. Overall, however, we are happy that the sector is now regulated as we know that well-structured and well-managed industries grow faster.

Euromoney Is Vodafone considering introducing its M-Pesa money transfer service in Turkey?

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone Turkey is an interesting case in that there are two different worlds within one country. Western Turkey has a very advanced banking system with highly sophisticated financial products. In the east, financial infrastructure is very limited and the unbanked or underbanked population is very high. We therefore have different products for the two regions. In the west, we offer our customers a digital wallet solution. In the east, M-Pesa might be more suitable and we are looking at introducing it there.

Euromoney Do you see telecoms operators as complementary to traditional banks or as competition?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank I don’t think any company, whether it’s a start-up or a large bank such as ourselves, can really grow today without collaborating with different players. Larger companies are limited in their innovation capacity and have a more conservative culture, so I am a big believer in open innovation and collaboration. At the moment, we work closely with the telecoms operators. If they start offering services such as money transfer then we may compete with them. I expect we will collaborate with them when it makes sense for both sides and compete in other areas, and the consumer will reap the benefit.

Euromoney What about working with even less traditional players?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank All banks, including ourselves, are currently trying to develop programmes to work with start-ups. At the same time, it’s important to remember that even in the most developed markets fintech is still tiny. There are some very successful start ups such as Lending Club but even the total person-to-person (P2P) lending volume has around 1% share of the total US loans market. So at this stage it is more about collaboration and learning how to work with fintechs. In future they may pose more of a threat to banks, particularly in areas such as P2P payments/lending that are subject to less regulation, but I don’t think they will put banks out of business. We may be slightly behind the curve in terms of innovation but at some point we will collaborate with these firms, or buy into them, and find a way to grow in these areas as well. For example, at Akbank we have already launched several products in these areas.

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone The case for telecoms operators in financial services is very clear. According to the World Bank, 2.5 billion people worldwide don’t have access to financial services but mobile subscription is around six billion. That means there is a huge opportunity for banks and telecom operators to co-operate to reach that unbanked and underbanked population. Rather than competing, I think we will work together to tap into that huge potential.

Euromoney Are Turkey’s banks providing the type of products and services needed to facilitate e-commerce development?

Kutay Konakcı (KK), head of CRM, hepsiburada.comKK, hepsiburada.com We are currently very limited in terms of payment methods. More than 95% of our transactions are on credit cards and I can’t see that changing in the near future as so far there are not really any viable alternatives. This also means that the recent regulatory restrictions on credit card lending have had a major impact on our business. Payments is a major barrier to growth in e-retail in Turkey at present and there is not much we can do about it from our side. We are just waiting for a new solution from the banks.

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank This is something we are working on. In future, we see Akbank opening up its services more and more through the open banking and application programming interface (API) model. We are looking at launching a loan product called “instalment without a card” that our e-commerce partners could integrate into their site or mobile app. For the moment, however, the market remains tiny compared with credit cards. So although we as banks should be more creative in offering financial solutions, the e-commerce companies need to work with us on this. For them, it’s 95% of their business. For banks, it’s probably less than 1% of total loans so it can easily get overlooked. That’s why the collaborative environment is crucial.

Euromoney Presumably banking and payments are not the main things that are holding back e-commerce in Turkey. Why is it still relatively underdeveloped?

Onur Erbay (OE), general manager, Hopi

OE, Hopi It is true that we still have a long way to go in Turkey. Internet penetration is around 55%, compared with 80% in developed countries, and only 30% of internet users make e-commerce transactions. E-commerce accounts for just 1.6% of retail turnover in Turkey, against 12% in the UK and 5% in Poland. However, in the next few years we will see e-commerce businesses scaling up rapidly and becoming more relevant. At the same time, offline retailers will focus more on e-commerce, which will help to develop the market.

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com There are three main issues for e-commerce players in Turkey: trust, customer behaviour and logistics. E-commerce is still relatively new to Turkey and customers don’t fully trust it, particularly when it comes to payments. They don’t like giving their credit card details to online companies. Turkish consumers also want to know who they are dealing with, so a lot of our branding involves educating them about our company. In terms of customer behaviour, Turkish consumers still prefer going to the malls at the weekend. We are trying to change that but big marketing campaigns cost money, which erodes what are already fairly slim margins. Finally, there is urgent need of modernization in the logistics and shipping sectors in Turkey.

Onur Erbay (OE), general manager, Hopi

OE, Hopi E-commerce in Turkey is small compared with developed markets but it grew by around 35% last year so we are making progress. Initially it was only about electronics but it has since broadened to include fashion, home items and now potentially groceries. The challenge is to define a new customer journey and supporting infrastructure around each new product category.

Euromoney If consumers in Turkey are struggling to trust e-commerce platforms, who do they trust? Banks?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank We have good trust levels from Turkish consumers. Banks may not be liked as much as Google or Apple but customers trust us with their money – and they are right to do so. Protecting customer data and transactions is the core of our business. Having such good customer trust gives us a competitive advantage when dealing with consumers.

Euromoney So Turkish consumers are not concerned about security with digital banking?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank It is a concern but it is becoming less so. Some consumers are still nervous but the younger generation tend to be comfortable with digital in all aspects of their lives. Turkish banks and regulators have also done a lot of work both on educating consumers about digital and ensuring that security standards are sufficiently stringent. Striking a balance between security and delivering a good customer experience can be challenging, though. When we look at our conversion rates, the biggest drop happens in the log-in process. Customers want to feel secure but they don’t like complex processes.

Euromoney What about telecoms operators? Are they liked and trusted by Turkish consumers?

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone Over the past few years, consumer behaviour has changed dramatically. Mobile is not just a source of information, it’s an integrated part of people’s daily lives. They use it for shopping, communicating, learning and working. As telecoms operators, we are therefore a major and trusted part of people’s lives. We also serve as the bridge between consumers and e-commerce companies, so as we integrate our smartphone tariffs and increase the penetration of mobile internet for our subscriber base it will drive growth in e-commerce. The introduction of 4.5G in Turkey next April will also support the development of e-commerce.

Euromoney Are consumers in Turkey currently reaching e-commerce platforms through internet or mobile?

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com It is changing. We are seeing huge growth in mobile traffic, which in August exceeded our desktop traffic for the first time. Overall, this is clearly good for e-commerce. The only problem is that conversion rates from mobile are much lower than from desktop. People are browsing on mobile and finishing their purchases on desktop.

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone Case studies from Japan and Singapore show that standardized payment gateways or payment systems are very important in e-commerce. However, because of the competitive nature of the market, it’s very difficult to bring different players together to create that type of system. If we could manage to do so, perhaps under the leadership of the banks, it could provide a valuable boost to conversion rates.

Euromoney What are the main challenges Hopi faces as a mobile-only platform?

Onur Erbay (OE), general manager, Hopi

OE, Hopi Trust will always be an issue on mobile and banks will always have an advantage in this respect. As consumers get more familiar with technology and customer experiences improve, however, trust in other institutions should improve. People are already comfortable about sharing huge amounts of data with firms such as Facebook or WhatsApp. We launched Hopi six months ago and our app has already been downloaded by 2.5 million customers, half of whom have actually been to a store and used our product. This means around 1 million people have used a QR code for the first time, which demonstrates that a well-designed customer experience can decrease the hurdles to the deployment of new technology.

Euromoney How does Hopi’s business model work?

Onur Erbay (OE), general manager, Hopi

OE, Hopi We are a mobile coalition platform that currently brings together around 40 brands. When customers shop with those merchants they show their QR code and earn loyalty points. The most important aspect of our platform, though, is the opportunities it offers for personalization. Our merchants include travel agencies, airlines and booking companies as well as fashion, home and grocery retailers. We therefore have a unique opportunity to understand the behaviour of our customers and offer them personalized cross-category, cross-merchant campaigns.

Euromoney How important is personalization for more traditional e-commerce players and for banks?

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com We also have a wide range of product categories, from fashion and groceries to electronics and home items. We like to say you can buy anything you can think of on hepsiburada.com, and in order to expand our range still further we have this year introduced a marketplace platform. We expect half of our business to come via that platform within two years. We also believe very strongly in the value of personalization and we are working to develop that.

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank Banks have an advantage in this respect because we have been collecting customer data for years, mainly through credit cards, and we have always put a lot of effort into working out how to leverage that data. We are now facing a new challenge in the form of dealing with big data. At present, this comes mainly from consumer behaviour on our mobile and internet banking platforms. However, we are increasingly interested in what our customers do outside our domain and how they come to us. A large proportion of our marketing budget goes on performance marketing. We want to be the top result for search terms such as credit cards or loans and we want to maximize click-through ratios. If consumers look at our products and don’t fill out an application, we want to retarget them with advertising on the next e-commerce sites they visit. What we are working on is combining the huge amounts of external digital data we now have access to with the type of well-identified, structured data that we have always had.

This is where the biggest opportunities lie and we are already doing well in this area. Our mobile customers use our app roughly every two days, so if we can make the right offer to them when they log in we can massively increase our sales capability. For example, we can detect if customers are approaching their credit card limit and offer them an increase, or offer them an overdraft if they have a low balance. Take-up on this type of targeted offer is excellent at 30% to 40%.

Euromoney Are there opportunities for banks to use digital to develop even closer tie-ups with retailers?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank Banks and retailers have worked together closely in Turkey for years through coalition credit card programmes. Those programmes have been limited by the introduction of new regulations on credit cards but we are now looking to use the experience we gained from that collaboration with retailers on new digital platforms. When consumers use Hopi or hepsiburada.com to make a purchase, we want to be there to make the customer experience better by offering them a loan. When we know that consumers have been looking at big ticket items, we want to suggest a loan when they come back to our platform. At least at the beginning we don’t need more data from the retailers, we already have plenty of that. What we need to do is leverage the digital data we have.

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone This may be an area in which we can help both banks and merchants because telecoms operators are a very good source of big data. Mobile is at the centre of consumers’ lives and they carry it in their pocket, so we always know where they are, what they are doing and who they are calling. We have unlimited data. The big question is how to use it, because it’s a very sensitive and personal issue. First of all, we have to be sure that we are in compliance with the regulations, which include data protection. After that we need to obtain customers’ consent to analyze their data and turn it into information that can be useful for our business partners. It is interesting to note here that, while it is often said that consumers are disturbed by mobile advertising, that is not what we are hearing from our customers. They tell us that if we use their data to deliver the deal they are looking for, they are happy to receive mobile advertising. So maybe this will be the next growth area for e-commerce or even traditional commerce.

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com Everybody thinks that they already have enough information but I would disagree. I believe every participant in this discussion has different information and that sharing this can be valuable. For example, what I can provide that others can’t is data on propensity.

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank I agree that in order to get a full picture of the consumer requires input from many parties, particularly telecom operators. The challenge, though, is to get useful point actions from that big data. Sometimes using it requires so much effort that it’s not worth it, if for example it’s only going to result in selling a low-margin product such as travel insurance. What we need to do is find profitable ways to leverage big data without hurting the customer experience.

Euromoney Is there a risk for banks that making use of big data could erode customer trust?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank This is something we have always been very careful about. We have worked with hundreds of retailers through credit card programmes but we have always been very selective about which groups we target with offers. We also have internal limits on how many messages or phone calls any customer can receive from Akbank. Certain customers are targets for large numbers of retailers, which means that based on propensity models they could get messages every day and it would still be worth it. The danger is that then trust is disturbed and messages from banks and retailers are ignored, which in the long term hurts their bottom line. The return on marketing investment decreases sharply when too many messages are sent and we are now starting to see the same thing with notifications. We are therefore very careful about this.

When a customer gets a notification from Akbank, it either has to be about something that is central to their financial well-being – for example, a reminder of a missed payment or a tax deadline – or, if it’s for marketing, it has to be on a very selective basis. Other companies are rushing into notification in the same way that they rushed into SMS and overburdening customers, and what will happen is that those consumers will simply switch their notifications off. For us, the watchword is caution. Until we feel very clever, we will be very prudent to ensure that we are not destroying customer value.

Onur Erbay (OE), general manager, Hopi

OE, Hopi I agree that it’s not only about the quantity of messages and notifications but also about analysing their effectiveness, in terms of time of sending, the direct message, the communication inside the message, the offer involved and the assumed conversion rate. It’s very easy to turn off push notifications and to uninstall an app, so we need to be very careful about optimizing these communication channels.

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com This is a problem everyone is dealing with worldwide, not just in Turkey. It’s all about the timing, frequency and content of the message, and the better you do the propensity model, the better the results. I also believe it’s important to give the choice back to the customers and let them define their own preferences rather than doing it all for them. That is what we are working on at the moment.

Euromoney The younger generation is clearly more comfortable with digital services. Do you wait for them to grow up or is it possible to educate the older generation?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank For certain types of products and usage, older consumers are as comfortable with digital as young ones. At the same time, there are clearly things we can do with regard to selling specific products online. Price is the most effective lever here. If we offer better rates on e-deposits we see migration to them from middle-aged or even older clients. Without that pricing incentive it’s more difficult. The fact that millions of customers still come into our branches every month gives us an opportunity, however, and we are educating our staff about mobile technology so that they can teach our customers how to use it. With the younger generation, of course, it’s entirely different. They don’t consider any banking channels except mobile. They aren’t mobile-first, they are mobile-only.

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone By the time Turks reach the age of 15, mobile penetration is more or less 100%. These consumers start by buying smartphones and once they have them they use them for everything from communications to shopping. For the older generation, switching to a smartphone is often the start of their digital education. This is why increasing smartphone penetration is key to developing the digital economy.

Onur Erbay (OE), general manager, Hopi

OE, Hopi The older generation is more affluent so you can’t ignore them, but they react to different messages and advertising media from the younger generation. Young people are more receptive to digital advertising or word of mouth via social media but, as the take-up of Hopi has shown, if you define the right customer experience around mobile then the older generation will participate.

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com We can’t afford to ignore any demographic segment. The younger generation may be good with technology but they don’t have money, while the older generation are bad with technology but do have money. We need to find a way to reach every gender and age segment and create a unique, seamless experience for them across our different platforms.

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank I would also note that, while it’s true that smartphone penetration is crucial to digital development, to increase take-up of digital banking we will need help from partners such as Hopi and hepsiburada.com. In Turkey, people mainly use smartphones for communication and social media. We need to get them used to making transactions with them and the easiest way is via e-commerce or campaigns. After that first step they then move on to checking their credit card statements with mobile and finally to carrying out transactions through mobile banking. What is interesting is that today 50% of our new digital customers start with mobile. Originally consumers would start with online and then move to mobile but now half use mobile as their first digital tool. What is more, 50% of customers who move from online banking to mobile then drop online banking. In April, Akbank’s mobile users outnumbered online users for the first time.

We don’t mind if online usage goes down, in fact we expect to see these platforms converging. We are the first bank in Turkey to adopt an e-commerce-style model to offer loans through akbank.com rather than via either mobile or online specifically. We have fewer users than e-commerce sites but we still have 10 million unique visitors and we want to leverage that.

Euromoney Where will direct banking and e-commerce be in Turkey in five years’ time?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank By then at least half of all banking products will be sold via digital platforms. I also expect to see more solutions that combine offline and digital experiences, for example through the increased use of digital services in branches. We are piloting the use of video technology at three locations and consumer satisfaction has so far been good. In lending and payments, we will likely see start-ups and fintech becoming increasingly prominent, particularly on the SME side where Alibaba and Alipay-style solutions offer huge potential. Wearables will also pose a new challenge for banks and we are already trying to respond to that. We are the only bank in the world that has introduced a facility that enables customers to withdraw cash from ATMs via their Apple Watch.

Euromoney So you don’t see digital posing an existential threat to banks?

Orkun Oğuz (OO), executive VP, direct banking, Akbank

OO, Akbank On the contrary, we see it as an opportunity. One of the main hurdles banks face at the moment is a lack of customer affinity and digital gives us a chance to change this. Research shows that customers value digital-only banks and the digital parts of their banks more highly than the banks themselves. We therefore have a unique opportunity to build a new image as banks and become more liked by our customers. Digital also offers excellent cost-cutting opportunities at a time when Turkish banks’ revenues and profits have been eroded by competition and regulation. Finally, I would like to mention BKM Express, a joint platform offering mobile payment solutions by Interbank Card Centre. It is a good example of how banks can come together to offer a common solution to benefit customers. Of course, technology does require investment but it’s something that has to be done and overall digital will always be more cost-efficient than offline.

Emre Kanaat (EK), head of consumer services, Vodafone Turkey

EK, Vodafone E-commerce and m-commerce are strategic topics for us. We are developing our strategy globally and deploying our solutions in our local operations, so we are in a position to monitor different markets very closely. In developing countries especially, we have seen that services such as mobile payments can be transformational. In five years’ time, we think mobile will be the main platform for payment and commerce activities. We also expect to see features such as marketing, shopping, payments and loyalty activities consolidated in a single app. This is what will really drive growth. The challenge will be increasing penetration levels and changing customer behaviour.

Kutay Konakcı (KK), head of CRM, hepsiburada.com

KK, hepsiburada.com I believe we are all after the same thing – one platform, one wallet and one-click purchase. That is the direction we are headed in. In future, customers won’t need to shop for individual items, they will just subscribe and everything after that – payment, delivery etc – will be automatic.

Onur Erbay (OE), general manager, HopiOE, Hopi In future the type of access points will be irrelevant as everything we touch will be online, from dishwashers to fridges to offices. Today we are in a mobile world but the post-mobile world that is coming will make everything much faster and more convenient. Peer-to-peer apps will become much more prominent, while chat programmes such as Facebook Messenger are also trying to move into payments. There will also likely be interesting in-store experiences built around virtual reality. These are all exciting developments and we want to be part of them.

Further reading
Turkey flag-R-160x186
Turkey debate: Turkey works to bridge its funding gap (July 2014)
Turkey debate: Turkey looks towards global financial centre status (December 2013)