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3 Hot Banking Markets Beyond the Obvious

When it comes to identifying potential geographic markets for growth and investment, banks have been focusing on the prominent BRIC nations: Brazil, Russia, India and China. While these four countries are attractive to financial services organizations seeking new opportunities to grow, global financial services growth opportunities need not be limited to the BRICs. BS&T explores growth beyond the BRICs, with snapshots of other hot banking markets in Latin America, Hong Kong and South Korea

When it comes to identifying potential geographic markets for growth and investment, banks and technology companies alike have been focusing on the prominent BRIC nations: Brazil, Russia, India and China. While these four dominant countries have populations, economies, infrastructures and cultures that are attractive to financial services organizations seeking new opportunities to grow beyond their local bases, it may be increasingly difficult for outside players to differentiate themselves as the competition accelerates.

Fortunately, global financial services growth opportunities need not be limited to the BRICs -- there are other strong markets in these regions where both local and foreign banks are making investments in everything from core systems to payments infrastructure to mobile platforms in order to capitalize on underserved customer segments (whether the truly unbanked or a growing middle/upper class). None of these markets promise opportunity without risk, however, and the winning players will have to balance their investments in growth with a strong capability to address local regulatory and security complexities. BS&T explores growth beyond the BRICs with snapshots of other hot banking markets in Latin America, Hong Kong and South Korea, and Central and Eastern Europe.

Latin America

1. Latin American Banks Tap Mobile to Bridge Service Gaps

With a history of financial crisis behind them, financial institutions in Latin America are accustomed to coping with economic turmoil. As it turns out, the 2009 recession and financial crisis had less impact on the Latin American nations than on many other countries, and many banks in the region are now looking to capitalize on the weaknesses of their European and U.S.-based competitors that are scaling back global operations.

"Latin American financial conditions in general are very strong," reports Rene Salazar, Mexico City-based director for Latin America, the Caribbean and Canada, Fiserv International. "They have been preparing themselves for crisis cycles -- maybe even better than some of the European banks."

Obviously such a large region is very diverse, with as many differences as similarities. However, according to a 2011 regional update from the World Bank, common challenges include a large number of poor people, an "historic" infrastructure gap and a need to invest in human capital to stimulate competitiveness. Those extremes may represent the key to banks' growth strategies in Latin America, suggests Salazar.

"The underbanked and unbanked markets represent a large opportunity in Latin America," he says. "It's rather difficult to serve that market, but when financial institutions find the right balance between the services offered and the fees associated with them, as well as the risk management [and regulatory considerations] ... the results have been extraordinary."

A key area of investment for institutions trying to reach this market is in mobile banking and related applications. Pyramid Research forecasts that mobile banking usage in Latin America will grow from the current estimated 18 million mobile banking users to more than 140 million by 2015. According to a recent report from Deloitte, "Going mobile may increase banks' opportunities to unlock the inherent potential of the region. Through mobile banking, innovative leaders in this space can capitalize on growing income and widespread mobile ownership to drive new revenue streams, boost operational efficiencies and enhance customer experience."

There's also an opportunity to develop more targeted and profitable banking products for the large middle class customer segment in many Latin American markets. Banks traditionally have tried to attract these customers by offering very low rates, Fiserv's Salazar relates. "The challenge is to retain those customers," he says, since they are liable to switch banks again when the rates inevitably go up. This is starting to drive bank interest in CRM tools and other solutions that can improve customer experience and loyalty, he reports.

Online banking is extremely popular in Latin America -- Brazil and Argentina reportedly have the highest percentage of online banking activity in the world. Unfortunately, this also means that occurrences of cybercrime and hacks are on the rise. In January hackers affiliated with the Anonymous collective successfully launched denial-of-services attacks on a number of Brazilian banks, including Banco de Brasil, Banco Bradesco, HSBC and Itau Unibanco Banco Multiplo.

In general, Latin America is considered to be a haven for cybercrime operations and the creation of malware, according to a report from BS&T sibling brand Dark Reading, which notes that one out of 20 machines in Brazil was infected with some kind of banking Trojan last year. Accordingly, risk and compliance is another focus of IT-related investment by Latin American banks, especially around the areas of anti-money laundering, fraud prevention and PCI compliance, Salazar says. --Kathy Burger

Next Page: Hong Kong, South Korea Catch the Orient Express

Hong Kong

2. Hong Kong Banking Investment Continues to Boom, and South Korea Is on the Move

Even as global bank IT spending remains stagnant throughout much of the world, investment in IT infrastructure in the Asia-Pacific region continues to boom. According to research from Boston-based Celent, tech spending by banks in the region will grow 6 percent in 2012, reaching $59.4 billion, and the growth is expected to continue, with IT spending hitting a total of $62.3 billion in 2013.

While not every part of the Asia-Pacific region is expected to see huge growth, Celent reports that Hong Kong and South Korea, in particular, are banking hotspots. In fact, the research and advisory firm estimates banking profit in the Hong Kong market will attain 22 percent growth this year.

Hong Kong is benefitting from the surging overall wholesale banking sector in China. According to McKinsey & Co., China's wholesale banking market is expected to grow at an annual rate of more than 10 percent over the next five years.

Specifically, says Bruno Piers de Raveschoot, general manager, Asia-Pacific, and VP of risk strategy at New York-based NICE Actimize, Hong Kong banking is being lifted by an increase in capital market activities and wealth management. He points to the region's uptick in IPO activity, as well. Hong Kong raised $22 billion via 110 IPOs in 2011, second only to the United States, which raised $26.4 billion.

"The growth of wealth management comes from the massive investment from mainland China and other Asian sources reaching more than $1 billion in 2010 seeking quality services and stimulating tax environments," de Raveschoot says, adding, "There are no taxes on dividends and capital gains [in Hong Kong]."

Illustrating the massive growth in the region, de Raveschoot says, Hong Kong is the second richest city in the world, behind Singapore. Hong Kong has 624,000 millionaires, representing 8.8 percent of its 7.1 million inhabitants. (Millionaires comprise 11.4 percent of Singapore's population, according to de Raveschoot.)

To meet the new demand for financial services, local banks in Hong Kong and throughout China are investing heavily in their IT infrastructure, according to McKinsey, which says many banks are seeking to upgrade their core banking systems and to improve their transaction-processing skills. Further, McKinsey reports, domestic banks in China continue to focus on treasury services to drive growth. China Industrial Bank, for example, built a platform that provides a range of services for smaller banks, from IT platform outsourcing to settlement and wealth management product sales.

The McKinsey study notes that foreign banks have an opportunity to grow their market share in China by building integrated wholesale franchises that combine a presence in local securities, commodities and financial futures. One unnamed global bank is investing heavily in building a large energy and commodity team, leveraging its global strength in the sector, according to McKinsey.

The reason for the economic boom in South Korea is a bit different, notes NICE Actimize's de Raveschoot, as it arises from industrial, large equipment, produce and IT infrastructure manufacturers such as Samsung and Daewoo. "The financial boom is the result of the need for corporate financing in large projects," he explains.

U.S. banks are expanding operations in both regions, but more so in Hong Kong, "due to language and culture factors," de Raveschoot notes. Interestingly, the growth in both of these regions is not due to less-stringent regulation, he notes. Both markets, de Raveschoot says, enforce strict anti-money laundering and market surveillance rules; and Hong Kong is one of the few countries in the world where market abuse is a criminal offense. --Bryan Yurcan

Next Page: Central and Eastern European Banks Add New Charm to the Old World

3. Central and Eastern European Banks Invest in IT to Improve Data Management, Customer Service

Although momentum in Central and Eastern Europe (CEE) has slowed due to the continuing financial crisis, banks in emerging areas of the CEE region still managed to realize some growth over the past couple of years, and they will continue to see growth in the near future, according to Vienna-based Raiffeisen Research's CEE Banking Sector Report. The report, which was published in October 2011, indicates that the long-term growth outlook for the banking sector in the CEE is strongest in six markets in particular: Russia, Poland, the Czech Republic, Romania, Slovakia and Albania. These six areas are likely to remain high-growth markets in which loan and asset growth is likely to outpace growth in gross domestic product (GDP), said Raiffeisen Research, which is a division of Raiffeisen Bank International Group (Vienna).

In order to keep up with the growth and stay competitive, banks in the CEE are making major technology investments to modernize infrastructure, streamline operations and keep up with innovations in digital channels. According to London-based analyst firm Ovum, IT spending for retail banks in the CEE region will increase 21 percent and reach $3.6 billion by 2015.

Late in 2011, Armonk, N.Y.-based IBM announced several contracts with banks in CEE countries that are good examples of such technology investments:

  • Raiffeisen Bank Romania recently signed a contract with IBM for a new IT infrastructure that will help the institution rethink business processes and improve operational efficiency. According to the Bucharest-based arm of Raiffeisen Bank International (about US$4.4 billion in assets), the investment is part of its effort to increase its competitive advantage and improve customer service.
  • Central and Eastern Europe
  • In Poland, IBM is providing Warsaw-based PKO Bank Polski (US$56 billion in assets), the oldest and largest bank in the country, with four zEnterprise mainframe servers to help improve the performance and efficiency of the bank's systems and improve customer service. The bank also is using IBM software to help integrate critical business processes and improve data management.
  • In the Ukraine, IBM signed a five-year agreement with Kiev-based Pravex Bank, which has more than a million customers in the country, to provide technology and facility management services for the bank's new data center in Kiev. The goal of the deal is to help automate banking processes, improve customer service, and support the rollout of online and mobile banking services, according to IBM. More recently, one of the country's biggest banks, Kiev-based PJSC Ukrsotsbank (US$5 billion in assets), signed a 10-year agreement to outsource its IT systems and processes to IBM.
  • In Russia, IBM was involved in designing and launching a new software architecture at Moscow-based Sberbank (US$293 billion in assets), the country's largest lender. The new system integrated the bank's IT infrastructure to enable faster decision making and better data management, as well as unify delivery through different channels and reduce credit risk, according to a news release announcing the deal. --Olivia LaBarre

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