Late adopters leapfrog ahead of the west

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Modernisation of the financial sector often tops developing countries’ agendas when they implement an economic reform programme – unsurprisingly, given the fundamental importance of a robust financial infrastructure.

The past decade has seen several developing countries implement financial reform programmes and invest in the technology infrastructure of banking, payments and capital markets.

Many of these projects are in conjunction with bodies such as the World Bank and the International Monetary Fund, or schemes such as the Financial Sector Reform and Strengthening (FIRST) initiative, which provides technical assistance grants to support the public sector in emerging economies to create a robust and diverse financial sector.

“As developing countries move from a state-driven to a market-oriented economy, they realise that in a bid to compete against the forces of globalisation it is essential to transform their financial infrastructure from a manual to an automated set up,” says Michael Jansen, director of financial industry for HP, the technology solutions provider.

HP has worked with several financial institutions in emerging markets, such as the Budapest Stock Exchange, Central Bank of Macedonia and Central Bank of Oman, to assist them in deploying technology.

In many developing economies, stock exchanges are moving from an opaque floor-based trading process to an electronic trading environment, says Jansen. In the process, they are deploying sophisticated risk management tools and automating their clearing and settlement systems. Banks are also automating their core banking systems and creating centralised banking systems, he notes.

Additionally, with the growing realisation of the benefits of a seamless payments infrastructure, several developing economies have implemented Real Time Gross Settlement (RTGS) payments systems to enable the transfer and settlement of funds between banks on a real-time basis.

Such technology has a powerful impact on an economy. Countries such as Sri Lanka, India and Botswana, which have already deployed RTGS systems, have experienced remarkable improvements in operational efficiency and controlled the credit, liquidity and settlement risks that market participants otherwise faced in the earlier manual processing model.

India, which in the past decade has also seen its equity trading environment become completely electronic, has experienced an exponential growth in business volumes and activity. Today, in terms of sheer number of transactions, the National Stock Exchange of India (NSE), the leading stock exchange in the country, ranks number three worldwide, behind the New York Stock Exchange and NASDAQ.

“By implementing state-of-the-art infrastructure, developing economies send out a message to foreign investors that they are conforming to international transparency and openness norms, which results in an increase in foreign investment,” states N.G. Subramaniam, head of the banking practice at technology service provider Tata Consultancy Services (TCS). The vendor’s electronic trading solution is deployed at the NSE in India and it has also provided depository solutions in countries such as Russia, the Philippines and South Africa.

Along with lifting the international visibility of the country, upgrading the technology infrastructure helps improve transparency levels and reduces overall systemic risk.

Sunny Banerjea, of IBM Business Consulting Services, has found that prior to reforms, most developing economies suffer from a lack of understanding of basic information management principles. “Consequently, management of risk is very poor. Either there are very few regulations in place or the regulations are too stringent, which does not allow the financial sector to flourish. Additionally, banking systems are highly manual and paper driven, and there is hardly any focus on understanding customers and their requirements,” he said.

Implementation of technology therefore has a much greater impact than it had in developed economies. In fact, being late adopters benefits financial institutions in developing countries as they “leapfrog” ahead of the west. Unlike their western counterparts, they are not saddled with legacy systems, moving instead directly from a manual or semi-automated mode to a completely electronic environment furnished with the latest tools.

It means banks in eastern Europe, Russia, Africa and Asia, for instance, have the latest core banking solutions, while several leading banks in mature economies are still trying to resolve problems created by data silos and outdated technology systems.

Along with the benefits, however, come the challenges: inadequate networking and communication infrastructure; workforce issues ranging from labour unions to a lack of experienced personnel in project management. Training is also a burden as market participants have to be educated both on the benefits of technology and how to use it.

One of the biggest challenges however, is gaining consensus among market participants on the new processes being implemented, says N.G. Subramaniam of TCS.

“New technology entails new processes and procedures. Getting everyone to sign up to the same processes is not very easy.”

Sunny Banerjea of IBM agrees: “The process of financial reform starts first and foremost with the regulatory authorities and policy makers creating a prudential framework. Once those processes are in place, then a scaleable technology solution needs to be implemented. However, it is the first step that is the biggest challenge.”

Technology, he says, is just a tool and is readily available today, but if the policy framework is flawed, then even the best technology will fail. Giving the example of Russia and Brazil, Mr Banerjea says that in both countries the system failed despite financial institutions deploying high end technology because the government bodies were not following the right policies.

India, on the other hand, he offers as a good example of a developing economy that has seen macroeconomic and fiscal policies working in tandem with technology upgrading.

“The mantra for a successful transformation of an inefficiency-ridden financial sector to a sophisticated vibrant arena in emerging countries is for government along with other public bodies to have the motivation to bring change. They need to establish a robust macroeconomic framework that incorporates risk management systems and insurance procedures.

“The private sector can then take the baton and focus on implementing these processes and appropriate technology solutions. It is only then that true benefits of technology will accrue to the economy.”

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