Banking in Emerging Economies:

Trends and Technology

Thought Paper

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Banking in emerging economies:

trends and technology
It is rather ironic that it took a global financial
crisis of massive proportions for emerging market
banks to unleash their potentials. Although
banking institutions from all over the world
were impacted by the crisis, those in emerging
markets were hurt less thanks to a combination
of prudent banking and capital management
practices, the existence of huge unbanked
markets which continued to fuel growth, and a
relatively healthy macroeconomic situation.

Emerging market banks, which were already

growing faster than their developed world
counterparts prior to the crisis, have picked up
the pace further in the last few years. 8 of the
worlds 25 largest banks by market capitalization
come from emerging markets; and together,
emerging
market
banks
accounted
for
approximately one third of both global banking
revenues and profits in 2010.

Changing landscape of banks IT systems

Technology has played a major role in the
development of the banking sector in emerging
markets. A well known technology analyst
firm predicts that emerging economies in Asia
will increase their spending on retail banking
technology by 8.3% in 2012, to cross US$ 10
billion by the end of the year. A factor in the
favor of emerging market financial institutions
is that they are not burdened by vast legacy
systems (unlike banks in developed nations),
which has enabled them to adopt modern
IT systems and easily integrate the same
with existing infrastructure. This is reflected in
the number of new Core Banking System
implementations in the markets of Africa, Latin
America, East Europe and Asia. Not surprisingly,
almost all core banking service providers have
shifted their focus from the debt ridden western
economies to these emerging markets.
The new IT systems have helped emerging
market banks achieve scalability and mitigate
the limitations of their erstwhile solutions. For
example, they have dismantled IT system silos
by integrating the banks existing applications
to provide a 360 degree view of customers
encompassing their products, preferences,
relationships and transaction history and thereby

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Thought Paper

enable customer facing bank executives to serve

and cross-sell more efficiently.
The Central Banks in emerging markets have
also automated various processes and transactions.
For instance, the Reserve Bank of India has
successfully adopted Real Time Gross Settlement
(RTGS), which is now the fastest system of
money transfer within the banking channel and is
available at over 72,000 bank branches across India.

Mobile leads the pack

Of the various trends and technologies in the
emerging markets banking landscape, mobile
banking is unarguably the front-runner. Thanks
to their reach, ease and capabilities, mobile
devices have outperformed the e space, to
achieve a penetration of more than 50% even in
countries with per capita GDP as low as $5000.
In fact, 75% of global mobile subscribers are
located in emerging markets.
With the telecom sector flourishing in developing
countries such as China and India, banks in
these regions are moving to tap this extensive
mobile coverage to make their services more
inclusive. This has all the makings of a winwin situation: banks can now reach out to the

millions of unbanked mobile subscribers in

far flung areas (where it is unviable to set up
expensive branch infrastructure), using a low
cost mobile delivery platform. The iPhone and
Android platforms have given a new definition
to plug and play third party applications. Many
banks in emerging markets have launched their
mobile applications using which their customers
can transact

The need of the hour is closer collaboration

between banks and telecom service providers
and a supportive regulatory environment
that enables these players to benefit even as
they serve the basic banking needs of vast
unbanked regions.

Cloud computing
Banking and financial services institutions in
emerging markets stand to benefit exponentially
from cloud computing. Cloud computing has
made even expensive technology infrastructure
accessible to smaller institutions by way of a
pay-per-use business model. A research firm
claims that this model cuts costs by as much as
30% when the IT infrastructure is managed by
specialist IT vendors.
One of the leading IT vendors in the cloud
computing space recently announced a deal
with an Indian Public Sector Bank to extend
their banking services in 5,500 unbanked/underbanked areas, and expand their reach to over
3.5 million customers in the next three years.
The applications will be hosted on cloud
computing technologies, which create an
easy-to-access,
highly-secured
environment
that provides reliable world-class infrastructure
and application services in a cost-effective and
efficient manner. The same IT vendor has tied up
with rural and co-operative banks in India to help
them automate and integrate their processes
pertaining to deposits and loans, for a fixed
monthly fee for each service outlet. It already serves
nearly 2,000 bank branches through this model.
Encouraged by the success of cloud computing,
more and more IT companies dealing in banking
products are putting their core banking solutions
on the cloud.

Importance of prudent regulations

Warren Buffet remarked once Only when the
tide goes out do you discover whos been
swimming naked.. The financial crisis has

demonstrated the amplification of Pro-cyclic

effects as financial firms acting in individual
prudent manner collectively shaped systemic
break-down. It triggered a strong response from
regulatory authorities worldwide, who devised
policy tools for countercyclical capital requirements
to limit the leverage and excessive liquidity
in the system. The financial crisis highlighted
the need to intertwine macro and microprudential instruments.
Once criticized for their conservative approach,
the regulatory agencies in emerging economies
stood vindicated when their defensive policies
came to the rescue of their financial institutions,
even as those in the west paid the price for
espousing excessive liquidity and risky financial
instruments. Asia has been remarkable for
keeping credit growth in check and managing
its asset prices. The Reserve Bank of India has
been acknowledged worldwide for its pragmatic
approach to banking regulation.

Financial innovation
Global banks entering emerging markets have
understood their diverse demographics and
recognized their unique needs and expectations.
The traditional approach of flogging strippeddown models and products taken from
developed markets no longer works in the
emerging world. Hence banks have started
to establish new hubs of innovation and
experimentation locally in emerging markets,
catering to their ground realities.
A reverse innovation trend of taking innovations
and experiments from emerging markets to

Thought Paper

03

the developed world has been set in motion. A

good example is that of Deutsche Bank, which
was finding it hard to compete on costs with its
local rivals in emerging markets, who typically
enjoyed a 30-50% advantage in cost/income
ratio. In Mumbai, Deutsche Bank moved all
back office activities to a separate hub in North

Mumbai where compensation costs were one

quarter of those in its erstwhile plush South
Mumbai location. The Bank then replicated this
approach by moving its US equity research arm
from New York to Florida, where wage rates
were comparatively low.

Structural change
Emerging markets are slowly opening their
doors to foreign and private banks by ushering
in privatization. In a few economies of Eastern
Europe, market forces are deciding the destiny
of state-run banks; in others like India and China,
the state is deciding their fate. There is clear
evidence that privatization of banks coupled
with the entry of foreign banks has had an
overall positive effect on the banking system.
Not only has it helped to improve the efficiency
of Public Sector Banks by intensifying competition,
but it has also benefited customers through wider
credit and better services.
Central Banks in emerging economies are playing
a key role in encouraging the consolidation of
the banking sector. According to a World Bank
study, foreign banks have continued unabated
acquisitions and mergers with local banks
thereby controlling over half of the banking
system assets in Argentina, Chile, Czech Republic,
Hungary, Poland and Mexico. One reason why
the authorities are interested in consolidation is
so that they can resolve the problems of financial
distress by mediating the sale of troubled
institutions to private banks.

Banks in emerging economies prefer less

leverage than their western peers
At the peak of the financial break-down in 2008,
banks in the US and Europe had pushed their
leverage ratios expressed as Tier 1 Capital as
a proportion of total adjusted assets from
a level of X20 to a very high X40. A few large
banks had pumped their assets to a level of X60
to X100 compared to their equity.
Banks and consumers in emerging markets
are typically much less leveraged than their

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Thought Paper

developed-market peers, as they did not indulge

excessively in exotic financial products based
on excessive leverage. Once again taking the
example of China and India, banks in these
emerging economies have realized the wisdom
of maintaining low leverage. On the one hand
it has given them more options to deploy their
funds and on the other, it has put them in a
comfortable position of capital adequacy. The
strategies of all banks in these markets are based
on growth, and not leverage. This is in contrast
with western markets where the buildup of
excessive leverage within the system eventually
burst the financial bubble.

Financial inclusion
The capital cost of infrastructure, the risk of
high NPAs in rural areas, shortage of resources,
weak delivery models, and lack of suitable
products have deterred banks from entering
rural markets in a big way.High operational
costs coupled with expensive technology have
made it both complex and unprofitable to run a
rural banking business. This has unfortunately
deprived those most in need of financial
services. It is imperative for financial institutions
to come out with leaner operating models,
tailored product offerings, and cheaper
technology in order to break this impasse and do
profitable business.
IT service providers have sensed this opportunity,
and have amended their product strategies
to serve the needs of emerging market banks,
especially rural and small co-operative banks,
which have much scope for growth. They have
come up with low-cost and simplified versions
of their core banking software, in the form of a

bank-in-a-box solution that can be implemented

quickly. This has helped financial institutions
deliver end-to-end services at an affordable cost
to low-income groups in regions where banking
services are not fully operational.

South Africas banks have set an excellent

example by developing many innovative and
customized products for such markets, and are
using the mobile and postal network to spread
financial inclusion.

Conclusion
Emerging markets are here to stay. With changing
landscape, Onus now lies on emerging markets
to step up and spearhead the positive financial
developments. Larger sections who missed the
train last time need to be benefited this time.

The growth has to be inclusive. Though the

challenge is trade-off between fast growth and
risk it brings along, the answer lies in Buddhas
prolific teaching of Middle Path

References
1. diggthis.qapacity.com/digg-this/7780/
seven-emerging-technology-trends-that-willimpact-banking/

8. www.sopheon.com/NEWSEVENTS/inKNOW
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ArticleID/185/CBModuleId/2658/Default.aspx

2. www.financialexpress.com/news/tcs-tobring-the-power-of-cloud-computing-tosmbs/660685/

9. s i t e r e s o u r c e s . w o r l d b a n k . o r g / I N T F R /
Resources/consolidation2.pdf

3. www.tcs.com/news_events/press_releases/
Pages/Indian-Bank-TCS-Financial-InclusionSolution.aspx
4. articles.economictimes.indiatimes.com/201006-10/news/28411361_1_n-chandrasekarancore-banking-software-tcs
5. blog.nielsen.com/nielsenwire/global/goingglobal-means-going-mobile-in-emergingmarkets/
6. s i t e r e s o u r c e s . w o r l d b a n k . o r g / I N T F R /
Resources/consolidation2.pdf

10. www.worldbank.org/financialcrisis/pdf/
levrage-ratio-web.pdf
11. economicsofimperialism.blogspot.com/
2011/08/bank-profits-leverage.html
12. The Changing Role of Emerging Market Banks,
October 25th 2011, http://www.voxeu.org/
index.php?q=node/7128
13. Retail Banking IT Spending on the Rise Amid
Economic Turmoil, January 16, 2012,
14. ovum.com/press_releases/retail-banking--itspending-on-the-rise-amid-economic-turmoil

7. www.infosys.com/building-tomorrowsenterprise/Documents/emerging-economies.pdf

Varun Goyal
Sr. Consultant Finacle, Infosys

Thought Paper

05

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