The report is based on a survey of more than 50 leading financial services institutions and over 9,000 retail banking customers in emerging markets. The report identifies three challenges for banks looking to emerging markets as a growth opportunity:
- Tougher regulation: Regulators in the emerging markets are moving to catch up with, or in some cases get ahead of, regulators in developed markets. Eighty-two percent of survey respondents in established markets, 81% in transitional markets and 66% in frontier markets expect the volume of regulation their banks face to increase in the next 12 months.
- Increasing costs: The average operating expense for 50 leading emerging market banks has risen 81% in last four years from US$3.6b in 2009 to US$6.5b in 2013, driven by increased funding, labor and investment costs.
- Intensifying competition: New entrants to the market, including foreign banks and non-banks, are intensifying levels of competition. Seventy-one percent of customers in the markets we surveyed now have relationships with multiple banking providers. And 79% of this year’s respondents said they were experiencing competition for deposits as an industry challenge, compared to 65% last year.
Jan Bellens, EY’s Global Banking & Capital Markets Emerging Markets Leader, says:
“Success in these emerging markets is not straightforward, but there is great potential for those banks that get it right. In order to be successful in the long-term, banks must focus on designing the right business model and developing strong execution capabilities – learning and adapting from what banks have done well and not-so-well in both developed and other emerging countries.”
To overcome the challenges successfully, banks must think beyond immediate fixes and plan to invest in the following three areas:
- Investing in technology: EY estimates that bank credit to the private sector in the 11 markets studied will grow from around US$3.5t in 2013 to US$5.1t in 2018, triggering a need for significant investment in technology across emerging markets. Banks must invest in IT to provide new, low-cost ways to reach customers in markets with limited infrastructure, better assess credit risks, build enduring customer relationships and improve operations.
- Investing in people: Despite the growing cost pressure, the war on (capable) talent in the emerging markets continues, with 44% of bankers expecting headcount to grow, especially in business lines that are experiencing especially high-growth or involve more intensive levels of customer service, such as premium and private banking. With banks needing to invest in both the front and the back office, employee-led innovation and efficiency programs are key to delivering new services profitably.
- Building partnerships: Banks can plug skills and capacity gaps through collaboration with companies in other industries such as telecoms and technology, as well as other financial institutions. This will be essential for banks looking to expand rapidly into new markets, products and services.
The report focuses on 11 rapid growth markets defined as being at either a frontier, established or transitional stage of maturity. The report defines the three stages of maturity as:
- Frontier: Per capita GDP below US$2,000, the point at which deposit and savings products appear. Nascent capital markets with depth under 50% of GDP. (Kenya, Nigeria, Vietnam)
- Transitional: These markets lie between the other two groups. At least 30% of the population typically has bank accounts and the capital markets are further developed. (Colombia, Egypt, Indonesia)
- Established: These markets have exceeded US$8,000 per capita GDP, the point at which credit products become established. Capital market depth of over 125% of GDP. (Chile, Malaysia, Mexico, Turkey, South Africa)
Each market presents its own unique challenges, but there are specific areas that international, regional and domestic banks can address now through strategic investments.
According to Steven Lewis, Lead Global Banking Analyst at EY:
“Domestic banks in these markets are already starting to strengthen risk management and improve capital and business efficiency, which will underpin profitable growth. However, if they want to keep pace with the growth of their customers, as businesses expand overseas and personal wealth in these markets increases, they will need to find ways to overcome skill and capability gaps or risk losing these customers to larger global players.”
Notes to editors
Read the full report to understand how banks can seize the opportunities that emerging markets present and take a closer look at the trends outlined in the survey by visiting ey.com/bankingbeyondbrics
About the EY Global Banking & Capital Markets Center
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