What Western Banks Can Learn From Emerging Markets
SnapScan to revolutionise S.African banking [Source: http://www.youtube.com/watch?v=8UI4eXAFp-c]
You don't find as many merchant banks today as you would even a generation ago. The point of the merchant bank of old was that Western firms could scour the emerging markets and the Third World to find economic opportunities that, with the right amount of capital and Western know-how, could flourish into profitable enterprises.
How the global economy has changed! Instead of Western bankers applying their monetary rules and economic guidelines to other regions, it's the emerging economies that are giving the Western firms a lesson or two in banking. Frankly, I think the reason that there are generally fewer old-line merchant banks around today is because banks in the emerging economies are becoming innovative and technological powerhouses that can attract and invest capital quite well by themselves.
To see how radically the banking sector is changing, take a trip to Kenya. There you will find an entire national economy embracing a digital currency over a mobile payment system. About a decade ago, the nationalized phone company of Kenya, known by the formal name of Kenyan Posts & Telecommunications, evolved into the publicly traded company Safaricom. About five years later, the executives at Safaricom introduced a product that would disrupt both banking and telecommunications in one fell swoop. This marvelous innovation is known as M-pesa. The idea behind it is that any Kenyan with a mobile phone (in other words, just about every Kenyan!) could take old, paper shillings and transfer their value onto the SIM cards in their phones. Those digital payment units became known as M-pesas. With the creation of this mobile currency, you don't need to have a bank account. You don't need to carry around or store shillings. You can simply transfer M-pesas from one mobile phone to another in order to pay for groceries, taxi rides, clothing, utilities, and even doctors' bills.
I think the success of the M-pesa is a great example of reverse innovation, where innovations from emerging markets gain appreciation or even become disruptive in advanced markets. Reverse innovation is also permeating other industry segments. In the healthcare space, for example, GE has developed a handheld ultrasound scanner to cater to the rural markets. The device, available in the Chinese market at an affordable cost, is now being marketed in developed European nations and the US.
For me, M-pesa also stands as a lesson on the shortcomings of legacy systems. Enterprises and their customers can become so beholden to a legacy system that despite the rapid change and innovation around them, they will plod on with their legacy technology in the hopes that the world will stop changing. The truth is: if a product is superior, accessible and affordable, consumers across the globe will accept it. The origin of the innovation, developed countries or emerging nations, is of least significance.
One of the things that large, Western retailers are wrestling with is how to expand into the emerging markets. Those markets are where most of the globe's financial growth will be in the coming generation. The Western firms are beginning to learn that to do business in the East, you have to think of banking not in the traditional sense but as an innovative part of a greater digital communications system. People will pay for goods and services with mobile currency, but they will also track their financial holdings and even use those same mobile phones to make orders and analyze distribution networks for their growing businesses.
Banks in the West would do well to make sure their consumer-focused computing and software platforms run seamlessly in any global market. If these banks don't start looking eastward, they're going to miss out on a lot of opportunities. So will the Western retailers and CPGs with similar expansion plans.
In that spirit, I leave you with this story: Few enterprises flex such economic strength and prestige as do Goldman Sachs and UBS. Recently, both Western banks used their impressive array of technology analytics and world-renowned economists to predict the winner of the Brazil-Germany semi-final in the World Cup. Both of these banks, in what was seen as a lighthearted public relations display, chose Brazil to win the game. (Germany won.)
Economists at Goldman Sachs reportedly analyzed 14,000 past soccer matches. It turned out that they were correctly able to predict the outcome of just 38 percent of the "group stage" matches. The mantle of what region runs the global economy is truly evolving. What works in one region doesn't necessarily ensure success in another.