Once disadvantaged by poor infrastructure, emerging markets are now bypassingthe old legacy systems and moving to the latest technology – giving them the edge on their global competitors.Dan Barnes reports.
Emerging markets are providing fertile ground for the growth of new technologies and banking is reaping the benefits from this new source of innovation. Historically, a lack of infrastructure has limited countries wishing to take advantage of the latest industry. This is no longer true – while developed markets are bogged down by the legacies of revolution after revolution, the new kids on the block are seeing IT transform business with relative ease.
There is even the potential for banks within these markets to challenge their peers from more established areas. ‘Leap-frogging’ is the term that refers to jumping ahead of the competition by avoiding intermediate technology developments and using the tried-and-tested systems and models that a mature market has settled on. One example would be the use of wireless and satellite communications in countries that have never invested in fixed line communications and are now avoiding the costs and difficulties associated with maintaining them.
In the cash handling and distribution business, cutting edge technologies are becoming obligatory in regions where a good business case is needed to meet the costs of replacing the incumbent IT.
Robbery risk
For example, South American banks were experiencing difficulties with the distribution of cash to coffee plantation workers. In countries such as Colombia, many agricultural workers live and work in rural areas. Traditionally, these workers have had to travel to a central point to sell their crops and then return to their place of work and residence with cash, where they would be a target for armed robbers.
One solution to reducing the risk of robbery would be to automate cash distribution closer to the areas of work/residence via ATMs, with appropriately secure identification procedures. However, there is a trade-off between the cost implications of distributing and maintaining an established cash collection method such as a cards network within the country and the long-term reduction in theft and other crime.
Technology provider NCR began to look at biometrics as a way to increase security without raising long-term costs. The solution it came up with involved identification via a fingerprint scanner and social security number that read the print beneath the surface of the skin (the immediate surface layer comprising dead cells) while checking that the person was still attached to the finger and very much alive.
Mark Grossi, chief technology officer at NCR, explains that the company developed the system with as little intrusiveness as possible. “Everyone has a social security number within Colombia so we used that as a unique identifier combined with the fingerprint,” he says. “An advantage we had in Colombia is that the government has a database of every citizen’s fingerprints so we didn’t have to collect that data separately.” The trial project has grown into a real success story. “We started off with about 100 ATMs and we’re now up to about 480 on the whole network – it’s the first full biometric ATM network in the world.”
Within Europe developments in the payments area – particularly regarding clearing cycles and cross border payments – are causing a stir. “There’s a sea of change in Europe that we haven’t seen for a long time” says Nicola Toombs UK banking director at Oracle. “Change has been quite slow with a predominant attitude of ‘It wasn’t broken so why do we need to fix it?’”
RBI goes real time
Meanwhile, the Reserve Bank of India is due to go live this year with real-time settlement of electronic payments (whereas in the UK, the reduction of the clearing cycle from three days to one will not occur for at least another two years as mandated by the Department of Trade and Industry).
In India, the consumer using the Reserve Bank’s system – whether an individual citizen or a small business – will see instant value occurring at no additional cost, whereas a consumer in the UK would be charged for the same service using the CHAPS clearing system. For banks, the real benefit is found in the ability to manage liquidity and exposure to operational risk.
“UK banks don’t fundamentally have that in place today,” says Ms Toombs. “In these banks, there are multiple payment products – cheque, standing orders, direct debits – that have grown up over a period of time. What has happened in emerging markets is such instruments have not been developed. Banks don’t have the cost of supporting the legacy systems that deal with the paper clearing process, for example.”
The real difference can be seen when banks from developed markets move into emerging markets and challenge the existing players. The core banking market has been populated by multinational banks buying systems for their international banking divisions, whose motivation is to keep up with the local banks.
Andreas Andreades, CEO of core system provider Temenos, says: “In Western economies, core banking is founded on COBOL-based mainframes that meet basic processing requirements but often not much else. What banks in emerging economies have realised is that they can get some advantage over the more global banks that are entering their marketplace, through having lower cost bases.”
This is not the prime driver when considering the purchase of new technologies, he says. “The challenge is predominantly in offering new products and services. It is about market share and growth, not cost containment or optimisation of operations. It is purely a question of who will get there fastest.”
He cites the example of Industrial Bank of Korea (Korea’s sixth largest bank), which deployed a Temenos core system last year. “After launching one product last year they have already made the cost of the entire project – between $50m–$70m. They generated $1bn worth of deposits. When you have a customer it is easier to generate revenue and it is easier to retain a customer than to get one so the race is on.”
Larger but slower
It is worth considering that Gruppo Santander is already designing structured products for distribution via Abbey National. A significant part of this ability is to design technologies that can support such a function. If banks based in emerging central and eastern European regions became significantly more efficient than western European banks, products being offered across Europe – as the FSAP (Financial Services Action Plan) intends – could lead to those banks with the latest technology presenting a threat to the larger but slower banks.
IBM has had a presence in developing regions for many years – for example, it has been in China since the 1930s – but has only been in the software business since 1995. Deborah Magid, strategy director of strategic alliances at IBM, says that the interest in emerging markets seems to be based around open source technologies. These are seen as the future for the IT industry as they create standards, simplifying system integration that has been a problem for business for so long.
What is astonishing is the appetite: “In emerging markets we have had 35,000 registrations a month via our online developer network. This is what happens when the Chinese government tells students that they need computer literacy skills,” she notes.
Those in the technology game in what are referred to as developed markets should pay attention – progress is constant, it is only the speed that changes.
