Lands of Opportunity
Faced with a slowdown in their deposit bases at home, some U.S. banks eventually will find they must start looking elsewhere for new customers -- even beyond the borders of the United States and the industrialized world. Emerging economies, such as those in China, India, Eastern Europe, Latin America and the Middle East, are an attractive option for American financial services institutions seeking further growth.
Many of these emerging markets -- where local financial services firms often lack the technology to keep pace in a modern, globalized world -- are ripe for the picking. The opportunities for U.S. banks with the right IT and know-how can be huge, provided they follow the appropriate strategy. But these ventures, of course, are not without inherent risks, and banks should proceed with caution before diving headlong into foreign waters, experts warn.
"Don't go into these markets without the right kinds of resources, platforms and expertise," says Steven Groppi, regional executive for New York-based JPMorgan Chase's (more than $1 trillion in assets) treasury services in Europe, the Middle East, Africa and Asia/Pacific. "You have to know the markets and the regulations. These regions are very rewarding but very complex. Emerging markets are growing at a tremendous pace. You have to really understand them before you go in."
Although many U.S. banks already have a presence in some emerging markets in some capacity, such as corporate or correspondent banking, experts agree that now is the right time to get in on the ground floor in these developing regions. Chris Gentle, the London-based director of Europe/financial services with Deloitte Research, says two things will serve as drivers for U.S. banks' overseas ambitions: "There are still some regulatory constraints in the U.S. around how you can grow your deposit base. Also, the growth rates being achieved in emerging markets are proving to be significantly higher, especially as you look ahead 10, 15 years. So if you don't move now, you might miss out."
According to AravindhV., a research analyst with Frost & Sullivan (San Antonio, Texas), many of the countries in these markets hunger for new technology. "These countries have been lagging behind developed countries for years," he says. "They want to upgrade their total IT infrastructure."
Safety in Numbers
To get their proverbial feet in the doors of these markets, for the most part, U.S. banks are partnering with local institutions. "Most U.S. banks are going in with either minor acquisitions or by partnering with local banks," relates Peter Nikonovich, managing director, financial services, with BearingPoint (McLean, Va.). "More banks are trying to partner with existing entities to share services, channels and product offerings." These alliances are a good, cost-effective way for banks to test the waters while incurring as little risk as possible, he adds.
Going it alone, on the other hand, can be a recipe for failure in emerging economies. "Going in with your own brand can be hazardous because there's a lack of awareness," says Frost & Sullivan's Aravindh. "You may have the latest technology, but they probably never heard of you. Partnering is the only way to enter these countries until you build brand awareness."
According to Bill Fitzgerald, managing director and head of application development for the global financial institutions area at Charlotte, N.C.-based Wachovia ($542 billion in assets), "As these emerging markets become more engaged in international trade and services, banks are looking to their correspondents to help them become better players at an international level."
Some insiders, however, warn that expansion opportunities are not so easily won. Howard Bascom, managing director of Bank of New York's ($103.6 billion in assets) global trade finance group, says cost is a big consideration for any U.S. bank with overseas ambitions in trade processing. "From a trade-processing standpoint, I don't know if now is the right time for banks that want to establish or increase their physical footprints because the cost of entry into new markets continues to go higher," he says. "We've done business internationally for over 100 years, so we have critical mass in many of these markets," Bascom continues. "But you have to look at the cost of capital, the cost of getting the expertise -- starting out new is hard."
Banks also need to keep in mind the bigger picture when planning a move into an emerging market, or any market for that matter. "Whether it's the right or wrong time, you have to look at a bank's philosophy," relates Chris Wilmot, managing director in global financial institutions and trade services with Wachovia. "We partner with banks and don't compete in their marketplace. We provide products and technology [to them]. You probably won't see Wachovia establish a retail market in emerging countries because that's not our strategy or philosophy."
In addition, the opportunities vary from country to country. In Eastern Europe, for instance, the window for entry already might be sliding shut on U.S. banks. The low-hanging fruit pretty much has been picked, according to Jeffrey Hale, chief marketing officer with Omaha-based e-payments solutions provider ACI. "A lot of Eastern European banks are getting snapped up as we speak by Western European banks. So the door might be closing."
"A number of Western European banks moved into these areas very fast," agrees Mike Blum, president, financial services, with customer management solutions provider Amdocs (Jersey City, N.J.). "You'd basically be coming in and competing with the likes of Deutsche Bank."
Another related dynamic to keep in mind is that the majority of banks with an international presence are Western European. "In 2005, European banks owned around two-thirds of the banking assets in the world," comments Deloitte's Gentle. "This presents a challenge to U.S. banks. How international can U.S. banks become, and how can European banks leverage their international presence to their favor [in emerging countries]?"
Hot Emerging Markets
This by no means indicates a lack of overall opportunity, however. Gentle indicates that four key countries in particular -- China, India, Russia and Brazil -- are wide open for American banks with the right strategy. Each, naturally, has its individual idiosyncrasies.
With the largest population of any nation and rapidly growing middle and upper classes, China could very well be the single largest market for Western banks, experts say, provided they play by the communist nation's rules. "China holds the biggest potential because of its market size," Gentle asserts. "There are four major banks in China and three have already come to market via IPO. By the end of 2007, China must open its financial markets, according to WTO rules. Also, the savings rates there are huge."
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