The collapse, decline and diminution of established top-tier Western players might well have cleared a passable path to global realignment, giving way to a new era in which emerging market banks dominate the banking landscape.
Even before the crisis fully unfolded, banks hailing from burgeoning regional economies were the success story of The Banker’s Top 1000 rankings, with 184 banks in the Top 1000 of 2008 hailing from Asia, accompanied by the fast rise of Russian players, among others.
It is the staggering technological capabilities of many banks in these regions that have led some well-placed market watchers to predict the movement of regional banking players into Western markets.
| Andreas Andreades, CEO of core banking systems provider Temenos – which has a strong presence in many emerging market regions – is one such individual. Taking into consideration the cost structure, strong technological capability and ambition to grow market-share, he says, many emerging market banks will be positioned to make the westward jump in the foreseeable future. “I believe that in the next 10 years, we’re going to see regional banks really moving into more mature markets,” he adds. |
Proof points
There is a growing body of evidence to suggest that this thesis may prove correct. Certainly, technology appetites in these regions are extremely strong. Spending on IT in Asia-Pacific, Latin America, west Asia, Africa and eastern Europe is due to hit $1300bn by 2011, reports IT analyst Gartner. Perhaps more tellingly, many major banking vendors are now making these regions a priority.
IBM, bastion of the banking technology providers, is making what it believes is a “safe” and “big bet” by accelerating its investment in these markets, says David Zimmerman, the company’s global solutions executive. By the second quarter of 2008, the Chinese, Mexican and Indian markets accounted for some 18% of IBM’s geographic revenue, an increase representing 21% growth on the same period last year. Meanwhile, the contribution of the Brazil, Russia, India and China (BRIC) group as a whole to IBM’s revenue grew 31% in this period. Indian IT firms Tata Consultancy Services, Infosys Technologies and Wipro – all strong banking players – are also making these regions a priority. The money, it seems, will be found in these regions.
The benefits of investment so far are also clear to see. In recent years, many banks based in emerging regions, in particular Asia-Pacific countries including India, China, Taiwan, Thailand and Korea, have competed or initiated projects to replace their core systems, and in turn rationalise their IT estates.
Research firm Datamonitor notes, for example, that in 2007 some 50% of Asia-Pacific banks began investing in projects to reduce the costs of running core systems, and to rationalise their systems architecture.
As IT analyst Gartner notes, new core technologies have evolved highly agile component-based architectures, which are frequently inexpensive to operate and easy to integrate.
Meanwhile, nearly all of the top retail banks in the US and Europe are still operating core systems from the 1960s, based on creaking mainframe technology. Frequently, this is attached to a chaotic IT estate of some 600 surrounding applications or more, rendering the core systems environment not only inflexible but quite often untouchable.
Tangled web
Take HSBC, for example. Like many of its peers, the bank had grown by acquisition. By 2001, its retail IT resources had become “locked into maintenance and long-running projects”, says Andy Givens, the then head of IT for mainland Europe at HSBC. In total, some 90% of the IT team’s time was occupied by maintaining the tangled – and in many instances invisible – web of applications that has become so characteristic of top-tier Western retail banks. The prevailing regime constrained the IT team’s ability to execute change, says Mr Givens.
When implementing a new system, for example, it “would take a couple of bounces to go in, rather than going in smoothly first time”, he explains. In order to address these issues, the bank subsequently undertook a world-class transformation programme in conjunction with Micro Focus. A key component of this involved addressing how the bank managed its vast portfolio of applications across multiple platforms.
But HSBC is exceptional. Many Western banks, deterred by the risk and cost, have been reluctant to rationalise their core systems. From 2005 to 2007, it was widely anticipated that a large number of banks in developed markets would begin or complete a core banking implementation but, distracted by revenue growth, such projects never received the necessary investment.
“Every year for the past ten years, analysts have announced that this is the year legacy is to be switched off,” adds Ian Benn, managing director of payment services at Fidelity National Information Services, but it has not yet come to pass.
The upshot is a large maintenance bill, believed to account for some 70% of banks’ IT budgets, although Hedi Ezzouaoui, director, financial markets, worldwide financial services at Hewlett-Packard, believes the true figure is probably greater.
Production line
More worryingly, however, this cumbersome legacy edifice represents a fundamental obstacle to business agility, obscuring the bank’s view of the customer and stymieing fast and cheap product innovation, says Amit Dua, head of sales, EMEA, Finacle, Infosys Technologies. “I know by talking to them that fine-tuning a product costs upward of £10m ($17m),” says Mr Dua.
By contrast, emerging market banks are making staggering strides in this respect. Industrial Bank of Korea is a shining example. The bank has shrunk its product development cycle to less than one day, allowing it to launch 168 products in six months, translating into $120m in new revenue and, equally important, $3bn in new deposits, says IBM’s Mr Zimmerman.
Likewise, Mr Andreades attributes the meteoric rise up the league tables in 2005-06 of First Gulf Bank to its core banking overhaul. Although Temenos provided the system, the United Arab Emirates bank has attested on several occasions that it would not have been able to capitalise on the benign UAE economic environment, had it not been able to expand rapidly into new product lines underpinned by a flexible core banking system.
Hyper-speed to market also reduces the burden on market research, says Jeremy Badman, partner in the strategic IT and operations practice at Oliver Wyman. This means emerging market players can quickly imitate competitor products, try products out in discrete locations and take greater risks. Core flexibility and speed also allow these banks to customise existing products cheaply, and move with the marketplace. To this extent, banks operating on these platforms are better able to act like modern retailers, with strong segmentation and marketing capability.
Channel revolution
But product innovation is still only part of the emerging market story: technology, as a distribution method, is just as (if not more) important. Again, the emerging market leaders are storming ahead when it comes to channel innovation.
Mobile technology, of course, has reached its zenith in emerging markets, giving life to a remittance boom across Africa and India. Thailand’s third largest bank, Siam Commercial Bank, offers mobile banking and payments. The Industrial and Commercial Bank of China, meanwhile, has just released a mobile banking service that can perform most online banking services, including more than 60 sub-functions.
Turkey’s second largest bank, Akbank, also offers SMS-based lending on mortgages, cars and general purpose credit. Underpinned by an advanced analytics engine that helps the bank automate and streamline origination decisions and improve customer service, this SMS-lending channel accounted for some 40% of the bank’s loan applications by mid-2006.
In fact, where the increasingly important role of technology in product distribution is concerned, rising star Akbank is a case in point. Last year, the bank rolled out a new ATM network through which both Akbank and non-Akbank customers can apply for a loan or credit card, which is issued within the hour at the machine.
The network has allowed Akbank to leverage demand for high-margin credit products in mid-to-high income areas, both fixed and transient, that it would not be able to reach otherwise, for 5% of the cost of running a branch. These locations include business fairs, concerts, and even on beaches, says Halit Yildiz, executive vice-president, retail credits, at Akbank.
The Turkish institution is only one of a slew of banks operating in emerging markets that have developed vastly superior functionality to that of Western banking operators. This allows them to distribute a range of products, both their own and others’, in ways unfamiliar to the staid developed markets.
SCB, for example, has turned its ATM network into an online, real-time booking channel, offering online reservation and payment for tuition courses, and payment for airline tickets. Contrast this with the UK, where mobile top-up remains the height of ATM innovation.
Business remodelling
But what, if anything, does this superior capability mean for the emerging banks’ businesses as a whole?
In its studies, IBM has found that business model innovation generates as much as 5% more operating margin growth – as a compound annual growth rate over five years – as product innovation. This suggests that emerging market banks using innovative technology infrastructures to re-engineer the retail banking business model as a whole – rather than focusing on the products per se – are better positioned to grow, and grow quickly.
Akbank’s performance for 2008 seems to bear this out. Its total assets have grown by 18% – much of which is due to the development of its lending portfolio, which grew by 23.4% to date – against sector growth of 20%. The bank’s non-performing loan rate, at 2.7% for 2008, is also well below that of its peers. This suggests that the bank’s strategic move to use its distribution network to target lower-risk demographics has proved successful.
Elsewhere in Russia, Brazil and Asia, banks are adopting a similar approach to their distribution models. Many are going further than Akbank and teaming up with infrastructure providers, such as transport operators and high-street retailers, in order to sell financial products. These include small pre-approved loans, at the point of sale, using a hosted web-based application run by the bank. This strategy allows the banks to double their retail distribution network by leveraging off existing retail infrastructures, with only a minimal investment in web-based software.
Into the breach?
Armed with technology spend, and unafraid to use it, many banks in emerging markets are evidently leading the way on IT innovation, achieving low-operating costs and driving out new retail banking business models. Even so, is any of this really enough to propel some of these pioneers into the Western markets over the decade to come?
Infosys’ Mr Dua believes so. He cites the case of India’s second largest player, ICICI Bank. Having cut its teeth on the extremely low-income end of the Indian population, ICICI has developed a high-tech, low-cost operating model. “If ICICI can use its underlying technology to serve every segment of the Indian market at a price point that is profitable and at an infrastructure cost that’s sensible to the bank, what is to stop it from doing the same thing in Western markets and using the same infrastructure?” asks Mr Dua.
The answer, he says, is not very much. In 2003, the bank entered the UK market through an aggressively priced online savings product originally targeted at the expatriate Indian population. Much to the bank’s surprise, most of the product’s British customers are from non-Indian backgrounds. The bank now offers the product in Canada, and is planning to do the same in Spain and Germany. Importantly, ICICI can use India as its technology hub, meaning it is close to achieving a 33% cost/income ratio, says Deepak Varghese, head of retail and private banking for ICICI UK.
But Martin Dolan, CEO of channel banking software provider CR2, speaks for many sceptics when he doubts how repeatable the ICICI story might be. “If you break into a developed market, the cost of entry will outbalance your cost advantage in manufacturing” at least for some time, he says. Furthermore, he says, in Western markets, where banking products have become commoditised, it is difficult to discover a point of critical differentiation, rather, it is trust, brand loyalty and customer experience that count in the battle for market share.
In the latter regard, the emerging market players seem to have grasped the principles of customer experience.
Building a brand and trust, however, will certainly be more difficult. But as established brands crumble and banking enters a new era, the innovation demonstrated by the upstarts in emerging markets might yet lead them to surprise the doubters.
