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By M. Isi Eromosele
Emerging markets offer a possible solution to the growth
problem of financial services companies, but only if financial institutions can
adapt their business models to operate profitably in these new and largely
uncharted territories by 2015.
As emerging markets mature, they could provide western
financial institutions with tremendous growth opportunities. But success is by
no means guaranteed. Financial institutions that wish to capitalize on these
markets should do much more than just show up.
Demand for financial services in emerging markets is being
driven by rapid increases in Gross Domestic Product (GDP ),
disposable income, and personal savings. China
and India are
the most obvious destinations for institutions in search of growth. Both
countries have enormous populations with growing middle classes and steadily rising incomes.
By 2015, the middle classes in India
and China are
each expected to be larger than the entire US
population. These increasingly affluent segments could be extremely lucrative
for financial services firms, and will likely be key to industry growth for
many years to come.
Although emerging markets such as Brazil ,
Russia , India
and China
present huge opportunities for growth, there are no guarantees of success. The
keys to success should be understanding and catering to local needs, and, as
always, carefully leveraging the details of execution.
Particularly, financial services firms are likely to need a
proven and repeatable model for exporting business processes and systems into
new markets, combining a firm’s best existing practices with new practices from
the outside. In most cases, existing business models are designed for mature
western markets with high wealth, low growth dynamics, versus the high growth,
low wealth emerging markets.
This is likely to require a different operating model. There
are three options for market entry strategies – acquisitions, joint ventures
and organic growth. Much is already known of acquisitions and joint ventures,
less so around organic growth.
However, acquisitions can be expensive and governments will likely protect their best financial institutions from external market forces, meaning organic
growth is likely to become a more common, if unknown, market entry tool for global financial institutions.
There are five phases to organic entry into emerging markets:
- Market sizing of potential opportunities based on their relative growth rates and potential fit with the business areas of the financial institution.
- Critical to success is achieving the right blend of local and international management skills and understanding the importance of local culture.
- Governmental relationships when entering an emerging market are critical – how can this access be gained?
- An infrastructure has to be built beyond the initial beach-head into the country – how easy is it to replicate the business model from a domestic market?
Financial services, as with the world economy, are entering
a new era of more international markets. The major challenge for financial
services leaders is to reshape the profile of their business.
Which is the best portfolio of markets most likely to
generate sustainable profitability for the business? Enacting this transition
is hugely difficult and high risky, but should enable financial institutions to
grow and prosper beyond 2015.
Financial services firms will likely need a proven and
repeatable model for exporting business processes and systems into new markets, combining a
firm’s best existing practices with new practices and cultures from the market
countries..
In most cases, existing business models are designed for
mature western markets with relatively wealthy clientele. But in emerging
economies, firms are likely to be dealing with a much larger number of
customers – most of whom are less wealthy. This will require the creation of a different
operating model.
M. Isi Eromosele is the President |
Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control © 2012 Oseme Group
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