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The Cybermoney Revolution - Technology, Consolidation And Deregulation Are Transforming Puerto Rico’s Banking Industry As It Enjoys The Best Times Ever

From ‘brick and mortar’ to ‘click and mortar’ - bank visits may slip as ATM and online transactions soar


August 24, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.

Nineteen ninety-nine total assets of $107 billion and net income of $822 million say it is the best of times for Puerto Rico’s banking industry.

Technological innovation, consolidation, and deregulation will insure they continue to be well into the 21st century.

For at least three years now, almost every newspaper or magazine has been warning the worldwide industry of the demise of traditional retail banking at the hands of the technological changes.

And while news of the demise of the traditional brick and mortar, full-service bank branches may be grossly exaggerated, banking in Puerto Rico already has a new face. "Only 24% of all Banco Popular transactions were made via electronic systems 20 years ago; today that number has grown to 76%," David Chafey, senior executive vice president of Banco Popular, told CARIBBEAN BUSINESS in an exclusive interview.

"The implications of these figures are important, because the implementation of technological advances brings new productive efficiency to the financial operations of the industry in general," Chafey added.

Technology is the driving force behind cost efficiency in the banking industry. According to industry experts, the average cost of a full service branch transaction is about $1.07, while the cost of a telephone transaction is 54 cents, an Automated Teller Machine (ATM) transaction is 27 cents, and an online transaction costs as little as 1.5 cents.

"In Puerto Rico, customer acceptance of the ATM system has been impressive since its implementation ," Chafey said. The number of ATMs owned by Banco Popular in Puerto Rico grew by an astonishing 1,373.3% to 442 in 1999, compared to 30 in 1983. Other banks own some 560 ATMs for a total of approximately 1,000 ATMs on the island.

"Nowadays, an average customer makes approximately six or seven transactions through the ATM system every month," Chafey added.

In fact, the number of ATM transactions through Banco Popular’s electronic delivery systems rose by a shocking 26,466.7% to 159.4 million in 1999, in comparison to 600,000 in 1983. In other words, the average number of ATM monthly transactions was 13.3 million during 1999, as compared to only 50,000 in 1983.

As of July 2000, Banco Popular had approximately 22,000 points of sale (POS) terminals in about 18,500 participating commercial establishments throughout the island.

"Puerto Rico is perhaps the only jurisdiction of the U.S. were the debit card is used more at points of sale for the acquisition of products and services than for the withdrawal of funds at ATMs. Over 95% of all ATM transactions are made for cash withdrawal," Chafey said.


If customer acceptance of ATM transactions is any indication, then newer forms of electronic banking promise to be a success in Puerto Rico.

For the last two years, traditional brick-and-mortar banks have exalted their online services offered through the Internet. Nearly all banks in Puerto Rico have established a company website, but only six banks so far offer interactive banking services through the Internet. These are Banco Bilbao Vizcaya (BBV), Banco Popular, Banco Santander, Citibank, R&G Premier Bank, and Oriental Bank & Trust.

These banks offer many traditional banking services online, including 24-hour access to savings and checking accounts and wire transfers. They also offer ATM cards, credit cards and direct-deposit services. At the present time, loans are not yet available over the Internet, but that too, will come with time.

Other island banks, including Westernbank and FirstBank will soon launch their online services.

"The most recent development in electronic banking is online bill payment services," said Victor Galan, president of the Puerto Rico Bankers Association and CEO of R-G Financial Corp. "Customers are able to pay bills, such as electricity, water, telephone, credit cards, loans, and so forth, without even typing in the company’s name, or remittance amount. This is a significant development in banking," Galan told CARIBBEAN BUSINESS in a recent interview.

Banco Popular, Citibank, Banco Santander, and R-G Premier Bank are the four local banks now providing this payment service on the web.

Online banking is cheap, which means customer’s benefit from very low fees, or none at all. Besides being paperless, online banking requires no brick-and-mortar branches, no secure vaults, no tellers, and no managers, all adding up to significant cost savings.

If you think this reality makes the traditional banker nervous, you’re right. The future of banking, like the future of all economic activity, will depend on cost-effectiveness brought about by technology.

End of the branch?

"Many analysts comment on what is happening to the traditional banking distribution channels with the coming Internet age and the relatively easy access of banking services through personal computers. The fact is, branches will be part of the industry for many years to come," Chafey said.

"The number of bank branches in the U.S. was less than 50,000 only 10 years ago. Nowadays that number has risen more than 20% to approximately 64,000 branches. The Puerto Rico experience is parallel. Take Banco Popular for example, in 1991 we had 161 brick-and-mortar locations, today that number has increased more than 20% to 200 branches," he added.

"The implication of these figures is consumers still prefer a more direct or personal interaction for many of their transactions. Traditional branches continue to be the place were customers feel comfortable and secure," Chafey said.

"However, all these electronic alternatives, such as teller machines, direct deposits, dealer-based financing, telephone, and Internet banking, have provided an enormous convenience to customers," he added.

Years ago people were talking about a "cash less society," first when checking accounts were introduced and again when credit and debit cards appeared for the first time in the market. Many analysts agree that neither of these products come close to substituting for the others. The reality is that the number of products and services available to customers has increased significantly over the last decades.

According to Chafey, for many customers, the use of their savings and check books are a fundamental part of their financial history, but there is a great acceptance today of the electronic alternatives, as evidenced by the number of transactions conducted through ATMs, via the phone-banking service, at points of sales (POS), and the Internet.

Bank customers, it appears, can look forward to having the best of both worlds--spreading electronic banking for convenience and the continued presence of their personal banker at the neighborhood branch.

In general, technology should make banking services more personal, not less personal, giving the industry the capacity to segment and target the market to as small as one customer.

"In the next five to 10 years, our banking habits will change as new technologies are incorporated into the banking system. The banking industry is moving from the traditional brick-and-mortar delivery system to the high-tech delivery system, or ‘click and mortar’," Chafey added.

Rock-solid industry

In the meantime, local banks are doing quite well. Doral Financial Corp. recently made it to the Fortune magazine list of 100 fastest growing companies in the U.S. Doral’s current trajectory has placed it in a league with such well-known brands as Dell and Visa.

"The banking industry in Puerto Rico is currently passing through the best moment in its history," Galan said.

Last year, assets (land, buildings, machinery, etc.) of local commercial banks grew by 37.4% to $46.7 billion, when compared to $34.0 billion in 1998. "This is the highest growth rate ever registered during the last five years," Galan indicated. Total assets in the financial system, including commercial banks, international banks, financing, leasing, and mortgage corporations, are estimated at $107 billion in 1999, as compared to $93.4 billion in 1998.

Net income or profits for commercial banks swelled by 26.6% to $438 million in 1999, compared to $346 in 1998. Meanwhile, net income or profits for the financial system as a whole, rose from $671 million in 1998 to $822 million in 1999.

Total loans in commercial banks rose by 15.1% to $27.5 billion in 1999, in comparison to $23.9 billion registered in 1998. From 1998 to 1999, commercial loans and mortgage loans were the two areas that registered the highest growth rates with annual rate of 27.0% and 12.4%, respectively.

"According to federal and local regulatory agencies, the banking industry is well capitalized," said Galan.

Capitalization generally refers to the total value of the assets belonging to a business less the sum of its liabilities. Commercial banks on the island registered approximately $3 billion in capital in 1999, for a growth rate of 3.6%, as compared to 1998. "This level is more than sufficient to justify the level of assets in the system," Galan said.

"The 1999 results suggest that Puerto Rico has one of the most advanced, diversified, and sophisticated banking industry in the Americas. Despite the limited local market, the approximately 700 branches, 1,000 automatic teller machines, and over 30,000 POS terminals located throughout the island are proof of that dynamism," Galan explained.


A factor that has changed the face of local banking is consolidation within the industry.

"Ten years ago the local banking industry was highly fragmented with many small banks. Nowadays the market conditions are different and consolidation in the industry has resulted in the reduction of the number of banks operating in the island," Joseph O’Neill, Commissioner of Financial Institutions, told CARIBBEAN BUSINESS in an exclusive interview.

The number of banks operating in Puerto Rico decreased from more than 30 in 1989 to 15 today. The trend is similar to that experienced in the U.S. as the whole where the number of banks has shrunk from 14,000 to 8,000 during the same period.

"This has been the tendency worldwide, and Puerto Rico was no exception. The only way a small bank could survive under the prevalent market conditions is by concentrating on a specific segment of the industry, which is very difficult to accomplish given the strong competition in the industry," O’Neill added.

That is why nearly all-banking institutions were looking for some form of financial modernization. For years banks have sought access to a broader range of financial products with which to compete, especially in the insurance and securities areas.

Financial supermarkets

Those efforts got a boost on Nov. 12, 1999 when President Bill Clinton signed the Gramm-Leach-Bliley Act into law. The legislation represents the most sweeping reform of financial services regulation in the last 60 years. It repeals the Glass-Steagall Act of Depression-era restrictions and permits the creation of new financial service holding companies that can offer a full range of financial products.

The legislation eliminates legal barriers to affiliations among banks, securities firms, insurance companies, and other financial services companies. This historic measure allows for one-stop shopping for financial services, with banking, insurance and securities activities all available under one roof.

The local legislature has enacted four bills to conform local law with the new federal regulations. The bills are awaiting Gov. Pedro Rossello’s signature.

Local players had already been making their moves in anticipation of the more liberal regulatory environment.

Last month, Banco Popular became the first local bank to engage in the insurance business in Puerto Rico following Popular’s acquisition of local insurance company R&B Insurance Agency Inc.

In January 2000, Santander Securities, an affiliate of Banco Santander Puerto Rico, acquired Merrill Lynch’s $2.7 billion securities portfolio to become the island’s second-largest brokerage house.

The same month, FirstBank and PaineWebber entered a strategic alliance to offer brokerage services at the banks’ 42 branches island wide.

In addition, Citibank and Salomon Smith Barney reached similar agreements to sell securities at 12 of that bank’s local facilities.

Other banks, such as Banco Santander Puerto Rico and BBV are expected to enter the insurance business also.

"We expect to engage in the insurance industry during the third quarter of this year," said Jose Ramon Gonzalez de Castejon, executive vice president of Banco Santander Puerto Rico.

Meanwhile, BBV officials made their intentions to enter the insurance business public this year by introducing insurance agencies inside branches throughout the island.

"Permission to sell insurance will strengthen the banking industry. Banks will be marketing a product included in all financial plans. Adding that diversity into the insurance market will decrease the risk taken by banks and the cost of these products," said Jose Enrique Fernandez, chairman and CEO of Oriental Financial Group.

Fernandez added Oriental would aggressively pursue opportunities in insurance distribution and Internet banking.

The Gramm-Leach-Bliley Act and the local conforming legislation create new opportunities for financial supermarkets consisting of affiliated banking, securities, and insurance institutions. This in turn, provides an environment that can benefit consumers by enhancing competition, expanding the array of available financial products, increasing the efficiency of the institutions providing those products, and reducing costs.

"The inclusion of the banking sector into the insurance and securities business will bring about a revolution, because it will force a change in the way the process of distribution, sales, and other banking services are offered to customers," O’Neill said. "In addition, it is possible that in the near future, the absolute segregation that exists between the commerce and banking sector will eventually disappear."

O'Neill also expects significant participation of the banking industry in the mutual fund industry in the years to come.

This Caribbean Business article appears courtesy of Casiano Communications.
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