Richard A. Lumb of Accenture’s Financial Services
Ever since a Venetian merchant named Marco Polo returned from his epic journey across Asia in the late 13th century, generations of Western traders and financiers have been drawn by the fortunes to be made in the emerging world. That is certainly true today, with 53 percent of the profits for the world’s top 15 global banks now coming from emerging economies – up from less than 20 percent a decade ago.
While many Western financial firms are still shoring up their operations four years after the financial crisis hit, their emerging market rivals have hardly skipped a beat. Not only are they moving aggressively to defend their turf at home, they are beginning to advance into developed markets.
It will be no surprise in the coming years to see large South American institutions moving head first into Europe or Chinese firms buying significant positions in the United States. If such mergers come to pass, they won’t be one-off events. Rather, they will mark the beginning of a quiet fight for domination in the global financial sector.
For the incumbents, attack may be the best defence. Slower economic growth and tougher regulations have cut the average return on equity for European banks to 9 per cent versus the industry average of 26 per cent before the financial crisis. That makes emerging markets – where the profits of major institutions have grown 20 per cent to 30 per cent annually over the past five years – look highly attractive. Indeed, the largest banks, insurers and capital markets firms from the west may have little choice but to forge ahead in these growth markets.
But generating profits from EMs comes with its own challenges: In addition to the ever-present political risks, the underlying infrastructure is largely still under construction and requires major investments. And winning market share from domestic players—particularly in retail banking – won’t be easy.
European and American institutions will have to make tough strategic bets on the markets where they will compete – and sidestep or divest from those where they can’t, as HSBC made clear this month. Such thinking recently led several Western firms to close their retail banking operations in Russia, where there are more than 1,000 banks and roughly half of the assets are held by state-owned institutions. Some will have a much stronger hand to play in corporate and investment banking.
Western institutions also should look beyond the Brics to markets like Indonesia, Turkey, and Mexico, where incomes are rising, the percentage of households with financial accounts is still very low, and the playing field is relatively level and open. Cell phone penetration rates are high as well, so Western firms can use mobile-banking technologies to reach new customers without costly branch networks.
In some cases, they will need to cede control and strike local partnerships to more quickly gain market share. Citibank did exactly this in Africa: By partnering with Zain, a Kuwaiti wireless service provider, it is able to provide mobile finance even to remote villages.
Most Western financial firms historically organized their businesses around products rather than customers. To win in the emerging markets, that will have to change. For many, this will mean phasing out the disparate 1970s and 1980s-era technologies they’ve amassed through mergers in exchange for state-of-the-art systems that are nimbler, more efficient and easier to centralize. BBVA and Santander, which bring in roughly half their revenues from emerging markets, are famous for such customer orientation.
To be sure, the competition in these growth markets will be fierce. Emerging financial players have built low-cost operating models and displayed real ingenuity at meeting the needs of their markets: In Brazil, Banco Bradesco launched a fleet of “floating” branches to serve customers along the Amazon. Banco do Brasil launched a remote mobile payment service in 2008, well before top US banks did so in the US
But Western financial services firms possess many competitive advantages – particularly at the high end of the market – with sophisticated asset management, corporate banking and business services that their emerging rivals will be challenged to match. Strong financial brands can also be the proverbial “tip of the spear.” For example, UBS already carries great cachet for wealth management in Asia-Pacific, and the top investment banking brands are well known and respected among the world’s elite.
Up to now, the emerging market institutions have mainly been following their corporate customers and expatriates abroad. Soon they will also want to stake a claim in what remain the world’s wealthiest and most stable markets.
With the Chinese government urging its banks to “go out” into the world, in January the Industrial and Commercial Bank of China responded by acquiring 80 per cent ownership of the Bank of East Asia USA, including branches in Los Angeles and New York. Banco de Brasil last month announced its first acquisition of a US bank and pledged to add 400,000 US customers within five years.
After the acquisitions of Western industrials, the expansion of emerging markets institutions is logical. In terms of market capitalization, the world’s three largest banks today are Chinese and fully half of the world’s largest institutions are based in Asia or Latin America.
Beyond having war chests for acquisitions, these institutions also have demographic advantages. For example, the fast-growing, and notably underbanked, US Hispanic population may prefer Latin American institutions. By 2050, Hispanics will make up roughly one-third of the US population—up from one-sixth today. These consumers will welcome the idea of having financial accounts that are accessible to relatives in their native countries.
For financial services firms in the West, the message here is clearly “game on.” For those in emerging markets, the question is where and how they’ll play.
Banking file, beyondbrics
Richard A. Lumb is group chief executive of Accenture’s Financial Services operating group.