Capco Institute Blog

I joined the analyst program at Citi right out of college in 2008. My timing could not have been worse. Sandwiched between markets that were crashing around me and a company that symbolized everything that was wrong with the financial system, I had a ringside view of history in the making.

Contrary to popular sentiment, I consider myself lucky to have spent the last couple of years on Wall Street as I saw firsthand how the global banking industry recalibrated its strategy from one that went gaga over supposedly “risk-free” instruments” to one that emphasized opportunities in less glamorous areas such as transaction processing and emerging market economies.

Emerging markets, though volatile and dependent on more than just the fundamentals, present new growth markets, dynamic economies and a new class of consumers. Citi had the advantage of being on the forefront of this shift – it was already well established in several markets long before it was deemed cool. In fact, at a March 2012 financial services conference, then CEO Vikram Pandit termed this change in direction as “returning Citi to its historical strengths of facilitating international trade and capital flows, providing consumers with financial services in the world’s top cities, and helping companies build their businesses around the world.”

Citi research pointed out that developed economies were headed into a long period of economic stagnation with governments tightening their belts and adopting austerity measures. We are already seeing this in play all over Europe. Parallels can be drawn from Japan’s “lost decade,” when the government burst its asset bubble created by cheap credit, leading to economic stagnation.

In accordance with this change in direction, Citi research pointed out several trends in which emerging markets presented a new source of revenue. Major indicators included: growing trade volumes due to arbitrage opportunities, an expanding middle class, increased consumer demand due to urbanization and the demand for more channels to receive banking services, particularly mobile.

From a consumer perspective, all this research shows that as emerging market economies grow and incomes increase, people will need services. Consumers are likely to turn to financial services organizations for advice on how to save, spend, distribute and grow their money.

From an institutional perspective, growing economies will look to expand and build their brands via acquisitions. We have already seen major acquisitions by Indian firms such as Tata of Jaguar-Land Rover¹. CNOOC’s attempt to buy Nexen is another sign of China’s dominance². And Renaissance Capital, Russia’s largest investment bank, has rapidly scaled up in Africa through joint ventures and operations in that continent to capitalize on the huge flow of deals driven by Africa’s commodity boom³.

From a product perspective, new customers mean more demand. And products need to be tailored to specific economies and consumers. For example, insurance is a rapidly growing industry in emerging market economies. The Indian insurance industry is slated to grow by 14 percent annually through 2015 due to skyrocketing demand in the face of increasing awareness and more open operations in that industry⁴. Indonesia’s 90 percent Muslim population (approximately 250 million) is far more comfortable using Islamic banking products to grow their businesses as opposed to more conventional methods⁵. At a high level, people joining the ranks of the middle class simply want a place to bank.

From an opportunity standpoint, banks and financial services institutions that cater to these new consumers will need help setting up scalable systems. Herein lies the opportunity for niche players that know how emerging market economies work and what systems drive them. Several global consulting firms are already knee-deep in these markets, vying for business for everything from advising on building out services to scaling operations to providing a global perspective to tomorrow’s crop of Fortune 500 companies.

Three areas of immediate opportunity exist for financial services companies. First, help micro, small and medium enterprises. As emerging economies grow, so will these companies. Independent consulting firms (ICFs) can position themselves as advisers and facilitators to help small and medium companies overcome growing pains by suggesting, implementing and building systems that help these enterprises move money around. From a bank’s perspective, an ICF can use its expertise and help build out practices that facilitate new business flow. By placing themselves between the bank and the growing enterprise, ICFs have a unique opportunity to double dip into revenues as these companies grow and their banking partners scale operations to accommodate rising needs. Citi dedicated an entire strategy to emerging market companies, whereby the bank helped them develop today and offered financial assistance in the hopes that when the companies eventually expanded and joined the big leagues, they would return the favor by keeping Citi as their banker of choice.

Second, build out channel strategies for financial services. Big chunks of the populace in emerging markets do not use any banking services. This is a huge opportunity for banks to bring these people under their umbrella. Unfortunately, due to tight regulations and customer restrictions, banks haven’t had much success in this space. Instead, this need is being fulfilled by mobile network operators (MNOs). For example, a service like Vodacom’s M-PESA in Kenya may facilitate mobile money transfers, but it still needs a bank at the back end to help complete transactions. Here again, the opportunity for ICFs is twofold. They can act as an adviser to MNOs in setting up connections with bank processing systems as well as work with banks to encourage partnerships. This space has grown to include retailers of all sizes that act as virtual branches for customers. North America is still behind in the retail space due to regulatory hurdles.

Third, help emerging market economies build out their capital markets infrastructure. Many of these economies are growing due to conservative strategies and cash reserves. However, to truly distinguish themselves on a global scale, they need to tap into other financial markets. Corporate bonds may be the instrument of choice for such activities. Financial services consulting firms can use their deep knowledge and experience in this space to help these economies build out their infrastructure.

All in all, North American and Western markets present numerous opportunities in making operations more efficient. Emerging markets present an opportunity for financial services institutions to build out relationships, companies and markets from scratch. It’s a high-risk, high-reward game but one worth exploring as the balance of power shifts to the East.

How is your organization taking advantage of opportunities in emerging market economies? Join the discussion.

¹“Tata buys Jaguar in £1.15bn deal,” BBC News, March 26, 2008
²“Government approves CNOOC-Nexen and Petronas-Progress takeover bids,” Postmedia News, December 7, 2012
³“RenCap steps up Africa push,” Emerging Markets, May 25, 2010
⁴India Brand Equity Foundation, February 2012
⁵“Indonesia’s pious Muslims boost Islamic finance,” BBC News, December 4, 2012