Some banks in the emerging markets show a level of technological innovation that puts some institutions in the developed markets to shame. Parveen Bansal reports.
New regulatory requirements, a bear market and increased competition are some of the factors that are plaguing banks worldwide. But while banks in the developed markets are suffering the weight of the economic downturn and struggling to cut operating costs, their counterparts in the emerging markets are exploiting their ability to use new technology, unencumbered by the critical mass or sophistication of the existing customer base. Banks in the developed markets can learn from the successful strategies that emerging market banks are using to overcome the challenges they face in their countries.
While developed market banks generally find it a challenge to serve a large and varied customer base, emerging market banks’ customer acquisition strategies are clearer. Their strategy has been to divide the market into two main segments: those that are unsophisticated and have basic needs and those that are more sophisticated. Thus they are able to implement and apply technology in ways that are suitable to the different segments.
The Indian market is a prime example of this. The privatised banks are focused on acquiring a growing middle class, who are tech savvy and have more varied needs than the larger customer base of the older state banks.
Escaping legacy burdens
On the technical side, the advantage of the emerging markets banks is plain to see in the area of legacy systems replacement. These banks are having more success in escaping the burden of their legacy systems, partly through necessity and also because it is a practical option. Faced with more demanding customers and the threat of foreign competition, many banks in the emerging markets have been forced to invest in their core infrastructure, with the aim of offering improved service across multiple channels and enabling growth.
While banks in the developed markets continue to suffer from the high cost of operating complex infrastructures that were developed piecemeal over time, emerging market banks are racing ahead by implementing packaged core banking solutions that cater to the needs of their differing, and sometimes specific markets. The success of leading core banking solutions vendors, such as iFlex, Infosys and Temenos, especially in the emerging markets, is proof of the innovative advantage of the emerging market banks. According to Virginia Garcia of TowerGroup, it is relatively easy for emerging markets banks to implement new core systems because they have less complex infrastructures to change or replace.
The growth of the outsourcing model, taken up by developed market banks, to some key emerging markets (for technology, business process and call centres) has created a strong and expanding indigenous technology capability, into which the emerging market banks can tap. As well as outsourcing, banks and large technology companies – such as IBM, Hewlett Packard and Microsoft – have large investments in research and development in some key emerging markets, where it evidently spreads. This helps in the development of indigenous solutions, which emerging markets can sell to other markets – consider Infosys and iFlex as examples of solution providers from India, and EverSystems, provider of e-banking solutions from Brazil.
Open to change
Emerging market banks are not only ahead in the core banking game, but are also more open to innovation that enables them to overcome poor telecommunications infrastructure. They have to consider cost-effective alternative ways of offering banking products and services to their customers.
The take-up of mobile banking and payment services is higher in the emerging markets than in the developed markets. ABN Amro Bank India, for example, offers its customers mobile banking using the short message service (SMS) facility. Using only the SMS capability of their mobile equipment, customers are able to transfer funds securely. The bank also offers an innovative mobile phone-based payment solution called mpower. This allows its customers to check their balances online and make payments via SMS messages.
In terms of branch strategies, emerging market banks have different legacies and expectations compared with their developed market counterparts. It could be said that in the emerging markets there is less inclination to use the existing branch infrastructure to drive new sales. Alternative sales models, such as the use of direct sales agents, are more readily considered by the banks and more readily received by customers. The use of video conferencing in the people-less, self-service branches, which overcome cost and infrastructure issues, puts some emerging markets banks clearly ahead of banks in the developed markets. ABN Amro India and ICICI Bank have already implemented such facilities in India.
Other innovations
The varied use of smart cards is the main example of innovation in the payments arena. Using the smart card to replace mainframe-based account management, Nedcor Bank is able to offer banking and payment services to the unbanked, remote population in South Africa.
Banks in the emerging markets are also ahead in the game of micro-lending, in terms of recognising the market opportunity as well as technical ability, compared with their developed market counterparts. Similarly, innovative use of technology and wireless devices is enabling banks across Latin America to deliver micro-credit services. Sogebank (Haiti), Banco del Pichincha (Ecuador) and Banco ABN Amro Real (Brazil) are just a few of those working with non-profit organisation Accion International and the technology it offers to deliver micro-lending services. Accion has developed a loan analysis software application called PortaCredit for use with mobile handheld devices, which processes loan applications quickly.
Research and development
Apart from innovative use of technology that is available and accepted in the developed world, the emerging market banks can in some cases be said to be performing a research and development role. Guillermo Kopp of TowerGroup quotes a US banker who said: “We can experiment and test new approaches and technology in the emerging market branches because they have less of a critical mass to support compared with branches in the developed countries.”
Take for example the implementation of core banking solutions and web services based on the new Microsoft .Net platform. While there is still some contention about the scalability and robustness of this platform, Banco Azteca of Mexico has already completed the implementation of the core banking solution from Alnova Technologies on it, mainly because of the lower total cost of ownership. The core banking infrastructure was wholly based on Intel architecture, from point-of-sale systems to database servers.
Glimpse of the savvy
The examples given above are just a glimpse of the many innovative ways in which financial services institutions are using technology to offer banking services to their customers in a cost-effective way. With many considering the developed world to be ahead in all aspects, it is clear that a lot can be learned from emerging market
institutions.
Developed banks should keep a close eye on their emerging market counterparts and the opportunity for technical innovation or they risk being caught unaware by banks that are more tech-savvy.
