THE banking sector enters 2015 knowing that interest rates are likely to stay depressed for a while. Cut-off yields on fresh Pakistan Investment Bonds have fallen nearly 200 basis points during the past two months, against a reduction of only 50bps in the discount rate in mid-November.

Given the banks’ heavy dependence on government debt papers, industry executives, regulators and analysts have all admitted that banks need to increase their lending to the private sector if they are to sustain the record levels of profits seen during 2014.

However, in addition to increasing their lending, banks are also likely to give renewed attention to the non-interest based side of their business.

Online banking offers financial institutions a largely untapped and profitable business opportunity: millions of young, educated customers who like their electrical gadgets as much as they abhor standing in lines at their local bank branches

Apart from capital gains, dividend income and ‘other income’ — which largely depends on swings in equity prices and derivative transactions gone right — non-core income derives from the fees and commissions that banks charge on a wide range of services.

For the nine months ending September 30 (9MCY14), the cumulative non-mark-up income of the banking industry totalled Rs118.4bn — a 14.7pc increase from the same period last year. The largest share of this income — around Rs51.9bn — came from ‘fees, commission and brokerage income’.

Nonetheless, banks’ cumulative non-interest income formed only 17.6pc of their total core income of over Rs671.2bn during the period. However, non-core income often makes the difference in whether a bank’s after-tax earnings are able to cross the prior year’s level or not. It also provides a cushion for any potential slippages in core income, or from the impact of higher core expenses or provisions.

And under this segment, banks with sophisticated and consumer-friendly online and branchless banking networks are able to rake in millions of rupees in fees from transactions a year.

With growing internet and smart phone penetration and a general improvement in urban lifestyles, online banking offers financial institutions a largely untapped and profitable business opportunity: millions of young, educated customers who like their electrical gadgets as much as they abhor standing in lines at their local bank branches.

Perhaps foreseeing the immense potential for growth of this segment — as well as the potential for fraud and other unlawful activities — the SBP is reportedly soon going to issue draft regulations for internet banking.

A look at the websites of the 26 operational state-owned and local private banks showed that 20 of them currently offer online/electronic banking facilities.

However, none of the state-owned banks do so. Sindh Bank, while not providing electronic banking services, allows its customers to conduct some basic transactions, like checking their account balance etc., through text messages.

Virtually all the 20 banks provide online banking services for free. However, some allow only those customers with debit cards to open these accounts; bank generally charge a relatively nominal annual fee for debit cards. Instead, they make the bulk of the money through various charges, like the interbank fund transfer (IBFT) fee, that are applied on money transfers.

Two private banks stand out in terms of having well-tuned, customer-friendly and secure online banking operations that supplement the core side of their business. The first is UBL, which, apart from allowing accountholders to conduct plain vanilla transactions like paying utility bills and transferring funds to others through Netbanking, also makes it possible for them to directly purchase units of mutual funds operated by its asset management subsidiary, UBL Fund Managers.

The bank also allows accountholders wanting to take part in initial public offerings (IPO) to directly apply for shares through its ‘e-IPO’ feature, and the funds are automatically debited from the customers’ accounts.

For 9MCY14, UBL earned a sizable Rs8.4bn in non-interest income, an increase of around 16pc from 9MCY13. According to its presentation for investors, ‘general banking service charges’ fetched the bank Rs1.35bn, while commissions from the home remittance business earned it almost Rs1.1bn, a rise of 30pc from last year.

The other is Standard Chartered Bank Pakistan (SCBP). During 9MCY14, the bank earned over Rs5.6bn in income from this segment, a 26.8pc improvement from last year. Of this, Rs2.7bn came from banking fees and commissions.

In an e-mail exchange with this writer in late September, Mr Najam Siddiqi, then the bank’s acting CEO, had remarked that SCBP recognised the “global trends where client preference is continuously shifting towards digital channels as compared to a uni-dimensional brick-and-mortar setups,” and that the bank “has employed an integrated multi-channel strategy, investing heavily in the digital space”.

He added that “today, we are the market leaders in IBFT transactions through digital channels. Our digital channel growth has been one of the fastest in the industry, with our digital transactions now accounting for a majority of transactions at the bank.”

Habib Bank Ltd launched a much improved online banking platform around a month back amid much fanfare, while MCB Bank also started offering the service to its clients from this year.

Published in Dawn, Economic & Business, December 29th, 2014