Three Reasons Financial Services Innovation is Moving to Emerging Markets

19 August 2010.

Let me embark on a limb and make a prediction; innovation in financial providers will increasingly move to rising markets as the ‘developed’ world is constantly on the grapple with Too Big In order to Fail banks that need to maintain the payment of large amounts of profit to their ‘talent’ (a third or a half of profits being ‘invested’ this way is not uncommon), in marketplaces that are stagnant or declining.

Emerging market banks have the opposite challenge. Described in business terms, we would talk about capturing growing rapidly markets segments, particularly those huge low income markets exactly where financial services may have been entirely informal in the past. My colleague David talked about some of this particular in his excellent article upon new strategies to capture rising middle classes yesterday.

It is true that one of my friends (a former bank who shall remain anonymous!) said rather unkindly that actually rising market banks are envious of their TBTF brethren and want to grow themselves into the too-big-to-fail/ backstop-me-and-give-me-cheap-unlimited-finance category in the next crisis. But look, I’m an optimist, so I shall choose to believe that instead they have used recent lessons to coronary heart and they are out to build much more sustainable businesses.

So let us concentrate on the present. What they are doing right now is innovating, and in particular, re-thinking financial and using technology to bring new financial services to rapidly growing markets. Yes, western visitors, you heard that correct. Focusing on bringing new services in order to customers, not using citizen money to stay alive, and never on how to continue to pay outsize bonuses while cutting credit lines to small businesses and households.

I happen to be thinking more this subject recently, both due to my personal involvement with Economy Watch, and through my work at my day job in internet marketing. There I have been working with Standard Chartered Bank around the launch of their new on the internet, mobile and internet banking support, Breeze by Standard Chartered.

Standard Chartered is listed in the UK, but has only focused on emerging markets for the last 150 years or so. It is not well-known as a result, but that postioning now seems prescient.

This is surely the time for someone like Standard Chartered to sparkle. To the best of my knowledge, it has avoided the amazing trading/ derivatives shenanigans that have afflicted Walls St. It focused on entry and community banking, enshrined in its new positioning tagline, Here For Good. And it is now looking to play on the world stage, greatest embodied perhaps in its new deal to sponsor the t shirts of that global (albeit troubled) icon, Liverpool FC.

One of the very first things you notice about their new Breeze platform is that it appears like it has been developed in Silicon Area. The interface looks more like something from mint.org than it does a financial institution, and yet it has been developed in Singapore. It is also home to a world first, the e-cheque or e-check (depending on whether you want real English or Americanish). This service allows you to sign a cheque electronically on your computer or iPhone. Regular Chartered (or SCB for short) will then instantly print and mail which cheque for you. Millions of clients rely on cheques out of necessity, which type of innovation can turn what’s been a peripheral service such as mobile banking into their new standard operating process.

Indeed, a report just out through Juniper Research states that there is going to be 150m mobile banking users globally by 2011. Personally, I believe this number is understated because it is focusing on mobile phone users who log in to an internet banking support.

Mobile banking has been turned on its head by services that allow mobile phone users to transfer money using their phones on your own. This service is growing rapidly in emerging markets and started in Kenya, most notably through the M-Pesa service.

The key insight here is that’s it much easier for less affluent people to get a mobile phone accounts than a bank account. A traditional credit score score will say that these types of billions of people are not worthy associated with credit and therefore can’t get a bank account. But if they prepay for mobile phone credits, then in fact their credit is golden. (Don’t forget which credit rating agencies are part of the reason for the Financial Crisis using a business model that is questionable at best.)

M-Pesa allows mobile phone users to transmit and receive money using their cell phone accounts. They can even transact with individuals who don’t hold cell phones using a system of nearby agents who fulfill the ‘Last Mile’. Now that is innovation in its finest form, simultaneously bringing necessary service to those previously omitted while unlocking new markets.

And that’s the reason it seems clear to me that innovation is leaving the traditional centers of the US, Europe as well as Japan, and moving in order to countries previously on the outside. In case you missed it, the three reasons are:

1.     Western banks are focused on preserving as well as extending the wealth of their own employees, and their ‘innovations’, such as High Frequency Trading, are increasingly focused on these economically useless uses

2.     Innovation in emerging financial markets are focused on unlocking access to new markets using the latest technology as enablers

3.     This particular innovation provides true economic value. It gives services to people who previously didn’t have it, and helps to create wealth for enterprises in the process

Now, if that is not a rallying cry with regard to responsible banking, I don’t know what is.

Keith Timimi

EconomyWatch.com Contributor

Qais Consulting Chairman