Chile's 'lean & mean' banks

28.08.2003 By: Adapted from

Chilean commercial banks have proved that world-class cost efficiency is indeed possible in emerging markets. With only 15 million inhabitants, Chile is one of Latin America?s least populous countries, but in 2001 its five biggest banks boasted an average cost-to-income ratio of 59%, far better than the five biggest in Brazil and better even than much larger banks in the United States (exhibit). Chile?s largest private institutions?Banco Santander and Banco Santiago (which merged in 2002 and are owned by Spain?s Santander Central Hispano) and Banco de Chile?have made remarkable gains: they cut their average cost-to-income ratio from the moderate level of 65.1% in 1995 to a world-class 54.1% in 2002, largely by reducing their costs.

Chilean banks have been pursuing cost efficiency through innovative branch formats, extensive outsourcing, and lean operating processes. These three levers are by no means unique, but banks in Chile have shown how to adapt them to serve the low-income segments of emerging markets. To suit local realities, the banks have radically transformed their traditional branch networks; the new formats include specialized no-frills offices where they extend high-interest credit to the lower-income market. For basic transactions, they use Servipag?a bill-payment network that came into existence partly as a response to a Chilean law obliging banks to provide clients and nonclients alike with services such as utility-bill payments, tax collection, and check cashing. By delegating these payments to a specialist network with spartan kiosks and basement offices staffed by clerks who lack full banking qualifications, financial institutions have reduced their personnel and infrastructure costs. More than 20% of all monetary transactions that were once handled by branch tellers now go through this external channel, at half the previous expense.

Outsourcing has also proved a powerful solution in dealing with another daunting local challenge?check processing. Time-consuming and bounce-prone checks, still common in Latin America as a result of high credit card fees and interest rates, are a nightmare for back offices. Chilean banks have a major scale disadvantage: they process only some 25 million checks a month as compared, for example, with Brazil?s banks, which process 440 million a month. But by using two check-processing specialists with highly standardized systems, banks in Chile are moving toward the scale advantage of their Brazilian counterparts: unit costs have fallen drastically because an outsourcer can handle three to six times the capacity of any one Chilean bank. Some institutions have outsourced almost half of their operations, including purchasing, credit card processing, money transport, data-center management, and software development and maintenance.

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