the Credit Card Industry in Turkey

The current Turkish government is very pro western and secular, however its divided religious loyalties, issues surrounding Greek sovereignty rights and fundamentalist groups threaten the expected 5 year stability of this administration. Government involvement in banking The Turkish Government has a history of involvement in banking affairs which is of concern to international investors. The Turkish state owns and finances a number of its banks and provides artificial stability to the banking system through state funded initiatives. The Government has also tailored wages in line with inflation rates e. g. minimum wages rates. With recent IMF intervention the long term plan for Turkey is still not absolutely clear. EU Membership The Turkish Government is pro EU membership and this is potentially the biggest paradigm shift on the horizon for Turkey’s financial system, this factor is further dealt with as a key driver. Economic • Interest Rates Low interest rates in Turkey fuel loan take-up and have caused increase in credit card issue. Historically higher interest rates led to more widespread loan default and meant that less switching occurred as consumers were “tied” to provider.

Economic growth in Turkey, with higher levels of middle and upper income, urban dwelling professionals and better access to continuing education has undoubtedly increased credit card take-up. (This could also be construed as a social factor). • Global financial crisis The effects of the global financial crisis will have a major effect on banking restrictions to lending and credit availability in Turkey. Turkey’s export markets will be likely affected by the ongoing crisis which has a major effect on GDP which in turn affects spending power. Social • Higher standard of living

Higher standards of living among consumers have a beneficial knock on effect for credit cards issuers. In Turkey 7. 5% of GDP is invested back into education thus consumers are more financial savvy. • Urban/Rural Divide Urban dwellers have a much higher likelihood of credit card use given their potential for access of issue and probability of a regular wage earning role. As the economy develops Turks are increasingly moving off the land from poorly paying seasonal work to the cities that offer a better chance of regular income and personal development. Technology • E –Commerce

Worth in excess of 2 billion euro to the economy and with 16 million people accessing the internet E-Commerce is a huge growth area and potential distribution channel for the credit card industry. It is also a medium for information driven purchasing through advertising potential and its access is furthered through telephone technology integration. • SMART Cards The security afforded to the credit card industry through use of SMART cards has a beneficial affect on usage through; 1. Increased level of merchants accepting the facility 2. Security for use in Internet Cafes (here large numbers access the internet) 3.

Security of service has become a battleground for competition among issuers Coupled with the above technologies, the explosion in EPOS facilities mean more access to products and services through credit card use, homogenising the myriad of potential transactions and benefiting both consumer and merchant. ATM’s also have further facilities to enhance the benefits of using plastic such as bill pay, mobile kiosks etc. Legal • Intervention of Government/Key official Institutions There have been widespread changes in the law in Turkey affecting the credit card industry such as; 1. Restriction on credit card limits . Illegality of altering terms without informing consumer 3. Increases in minimum payment required 4. The Central Bank’s lowering of the interest rate cap 5. Loosening of the frameworks around mergers and acquisitions All of these interventions alter the attractiveness of the market for the credit card industry, which was historically fraught with lack of regulation and anti-consumer practises. Identify the 4 KEY DRIVERS FACING THE CREDIT CARD SECTOR 1. Technological Advances 2. State Intervention in Financial Affairs 3. EU membership 4. Rural-Urban Migration Technological Advances

The rapidly advancing technology in the field of mobile payment will have a lasting effect on the credit card industry. Companies that can stay ahead of the game with new technologies in security, risk management and will be best placed to benefit from increased A physical “credit card” is really only a vehicle to hold a magnetic strip containing coded information. In terms of technology this is already quite dated; • Already systems are designed to “swipe” a card on a merchant’s mobile phone, this will allow for a myriad of services which will no longer require cash transaction e. g. street traders. Advances in retina scanning technology are also at an advanced level and it is envisaged that the future of mobile payments may be through facial recognition or retina scanning. • Other technology such as what is used in “The Baja Beach Club in Barcelona” where they inject a rice-size “VeriChip” RFID device into the wrist or upper arm of its patrons whom pay by swiping their arm – adapted from http://www. creditcards. com/credit-card-news/credit-cards-of-the-distant-future State Intervention The level of further state intervention in Turkey’s financial affairs will be a key driver in Turkey’s future credit card success or decline.

As we have seen, moves by the government to regulate the industry have impacted on the potential earnings of the banks through lowering interest rates. In turn this type of regulation has stabilised the markets and led to economic growth which impacts positively on numbers of consumers available to the sector. Whether the current “Republican Democracy” in Turkey will be in power going forward is obviously of importance to this argument. With elections due in 2011 the future of state intervention in banking affairs is unclear. EU Membership

Turkey becoming a full member of the EU will be another key driver in the credit card industry. EU entry will mean the freeing of trade and access to a further 500 million consumers. It is most likely that Turkey would be a more attractive market for global companies, of interest here, financial organisations who would be attracted by the large numbers of “unbanked” consumers and those who see Turkey strategically as the gateway to Eastern markets. The credit card market would likely become much more competitive with new entrants who would most likely look to merge with/acquire existing indigenous banks.

Rural-Urban Migration According to the case study the majority of people in the rural areas of Turkey tend not to be credit card users. As the economy improves larger numbers of rural people (especially male) will likely move towards the larger urban centres to participate in the industrial or service sectors. This in turn leads to greater numbers with the potential to use credit cards, in turn offering greater numbers of potential consumers to the sector. SECTION 2 – Porters 5 Forces 2. Use the five forces framework to identify the forces affecting the Turkish credit card sector a.

Graphically illustrate the five forces (see overleaf) b. Draw conclusions from the 5 forces analysis to explain; 1. How attractive the sector is I consider the Turkish credit card sector to be an attractive market for a large multinational e. g. BNP or Barclays to enter. From my analysis I have concluded that consumers are fragmented and suppliers are concentrated. Rivalry is high, yet only among 4 suppliers, considering rivalry in an industry such as haulage this must be considered attractive. Capital requirements of entry are high, but not on the scale of industries such as mining might be.

Economies of scale and experience exist, however for companies already in credit card markets in other countries by no means insurmountable. The threat of substitutes is relatively low as the credit card holds a relatively niche position. Product differentiation/loyalty is low among existing consumers; good offers would attract new business, as would strong internet presence. Turkey has; “40 percent of people who are bankable based on their socio-economic status and age in Turkey are still “unbanked,” having no accounts with any banks in Turkey “ (www. mckinsey. om/clientservice/… /Credit_Cards_in_Turkey. ashx) This data identifies a large section of the Turkish population who are potential consumers for a new entrant; therefore the market could potentially grow significantly for all players involved. 2. How the competitive forces are changing/may change The competitive forces are currently changing most notably in areas such as consumer access to information. More widespread access and use of the internet will drive further competition in the market through portals such as comparison websites, industry reviews etc.

This will ultimately increase bargaining power of consumers, leading to decreased profits for suppliers. EU accession would alter the competitive forces among the major players currently in the sector. Interest rates set by the ECB, participation in the single currency etc. would have a significant impact on the state financed banking institutions and would alter their relevance. One would suspect that in a free market system the Turkish government would relish the opportunity of divesting the burden to international organisations to increase competition.

With increased market stability and better financial education, consumer’s use of substitutes may extend to less expensive forms of credit such as personal loans. Coupled with better economic conditions consumer’s use of debit cards may also increase; given that currently lower income workers struggle to maintain a balance sufficient to cover their living costs. 3. How the sector may change to reflect changing forces The credit card sector can move more of its marketing budget toward E-Marketing and target new and younger consumers through this medium.

MBNA have used this marketing channel very successfully in the past. In order to combat increased uptake of personal loans and increased use of debit cards the credit card sector may look at collective lower interest rates, better offers through loyalty bonuses and customer kickbacks and better education of its customers as to how to better use their credit cards. In order for the credit card sector to prepare for increased competition post EU accession it may look to further differentiate its offerings to appeal to the Turkish people e. g. align the credit offering with cultural values or emotions.

It might be necessary to offer further services aligned to credit cards such as life insurance to augment and differentiate the offering. 3. Scenario Planning Scenario 1 “Renewed Political/Terrorist Violence in Turkey” In recent years, terrorist bombings – some with significant numbers of casualties -have struck religious, political, and business targets in a variety of locations in Turkey. The potential remains throughout Turkey for violence and terrorist actions both by transnational and indigenous terrorist organizations such as PKK, . Revolutionary People’s Liberation Party/Front (DHKP/C) and AlQa’ida. Adapted from http://www. eubusiness. com/europe/turkey/invest) Given Turkey’s increasing dependence on foreign direct investment a return to more concerted campaign of political violence would spell disaster for the credit card industry. Large financial corporations, especially US owned would be deterred from entering the market, or potentially pull out of the market thus decimating competition. Access to sources of international credit and lending would dry up therefore affecting consumer’s ability to purchase products and services on credit.

Turkey’s export market would potentially be destroyed as Western nations would deter from transacting in case monies were being skimmed to fund further terrorist activity. This would further lower the GDP of the country affecting the spending power of consumers in turn negating the need for credit cards. Further knock on effects of violence include the loss of capital Governments have available to invest in its economy, on education and infrastructure. Government capital would have to be spent on further military and security projects.

The tourism industry, a huge earner for Turkey would be decimated as travelers would fear the threat of violence. The black market economy would thrive under such conditions and regular banking functions would significantly cease with many consumers using cash/barter systems of attaining needs. With respect to the Credit card sector, this scenario would be highly detrimental to its future, as consumer confidence in the financial service sector would be decimated. The sector would have to pour vast resources into transaction security and marketing the brand safety and correct usage policies to consumers.

Default numbers would likely increase due to instability and escalating interest rates. Scenario 2 “Turkey Gains Full EU Membership” “The EU is committed to supporting Turkey in its path for membership. The initial objective of EU financial support towards Turkey was the extension of an area of peace, stability and prosperity within and beyond Europe. Once the Union accepted Turkey as a candidate, financial assistance began to focus on supporting Turkey in its preparation for EU membership” http://www. eubusiness. com/europe/turkey/funding A study on the EU (http://europa. eu/rapid/pressReleasesAction. o) reported the following economic benefits of a country joining the EU; 1. An average of 2. 15% increase in GDP 2.

Exchange rates for Turks travelling through Europe would be eliminated, as would the potential damaging effects exchange rate swings have on Turkish exports. I would assume that the credit card sector would become significantly more competitive in the light of EU membership therefore the sector would have to increase its marketing and branding spend, but would have a larger pool of consumers to choose from.