A well-known technology analyst firm predicts that emerging economies in Asia will keep increasing their spending on retail banking technology through 2013, pretty much like the last year. A factor in the favour of emerging market financial institutions is that they are not burdened by vast legacy systems (unlike banks in developed nations), which has enabled them to adopt modern IT systems and easily integrate the same with existing infrastructure. This is reflected in the number of new Core Banking System (CBS) implementations in the markets of Africa, Latin America, East Europe and Asia.

The central banks in emerging markets have also automated various processes and transactions. For instance, the Reserve Bank of India (RBI) has successfully adopted real-time gross settlement (RTGS), which is now the fastest system of money transfer and is available at over 72,000 bank branches across India.

The banking and financial services institutions in emerging markets will also benefit exponentially from cloud computing. A research firm claims that this model cuts costs by as much as 30% when the IT infrastructure is managed by specialist IT vendors.

One of the leading IT vendors in the cloud computing space recently announced a deal with an Indian public sector bank to extend their banking services in 5,500 unbanked/under-banked areas, and expand their reach to over 3.5 million customers in the next three years. The same IT vendor has tied up with rural and cooperative banks in India to help them automate and integrate their processes. It already serves nearly 2,000 bank branches through this model.

Warren Buffet remarked once, “Only when the tide goes out do you discover who's been swimming naked.” The financial crisis has demonstrated the amplification of procyclical effects as financial firms acting in individual prudent manner collectively shaped systemic breakdown.

Once criticised for their conservative approach, the regulatory agencies in emerging economies stood vindicated when their defensive policies came to the rescue of their financial institutions, even as those in the west paid the price for espousing excessive liquidity and risky financial instruments. Asia has been remarkable for keeping credit growth in check and managing its asset prices. The RBI has been acknowledged worldwide for its pragmatic approach to banking regulation.

Global banks entering emerging markets have understood their diverse demographics and recognised their unique needs and expectations. The traditional approach of flogging stripped-down models and products – taken from developed markets – no longer works in the emerging world.

A reverse innovation trend of taking innovations and experiments from emerging markets to the developed world has been set in motion. A good example is that of Deutsche Bank, which was finding it hard to compete on costs with its local rivals in emerging markets, who typically enjoyed a 30-50% advantage in cost/income ratio. In Mumbai, Deutsche Bank moved all back office activities to a separate hub in north Mumbai where compensation costs were one quarter of those in its erstwhile plush south Mumbai location. The bank then replicated this approach by moving its US equity research arm from New York to Florida, where wage rates were comparatively low.

Emerging markets are slowly opening their doors to foreign and private banks by ushering in privatisation. In a few economies of Eastern Europe, market forces are deciding the destiny of state-run banks; in others like India and China, the state is deciding their fate.

According to a World Bank study, foreign banks have continued unabated acquisitions and mergers with local banks thereby controlling over half of the banking system assets in Argentina, Chile, Czech Republic, Hungary, Poland and Mexico. One reason why the authorities are interested in consolidation is so that they can resolve the problems of financial distress by mediating the sale of troubled institutions to private banks.

Banks and consumers in emerging markets are typically much less leveraged than their developed-market peers, as they did not indulge excessively in exotic financial products based on excessive leverage. Once again taking the example of China and India, banks in these emerging economies have realised the wisdom of maintaining low leverage which puts them in a comfortable position of capital adequacy. The strategies of all banks in these markets are based on growth, and not leverage unlike their western peers.

The capital cost of infrastructure, the risk of high non-performing assets (NPAs) in rural areas, shortage of resources, weak delivery models, expensive technology platforms and lack of suitable products have deterred banks from entering rural markets in a big way. This has unfortunately deprived those most in need of financial services. It is imperative for financial institutions to come out with leaner operating models, tailored product offerings, and cheaper technology in order to break this impasse and do profitable business.

IT service providers have sensed this opportunity, and have amended their product strategies to serve the needs of emerging market banks, especially rural and small cooperative banks, which have much scope for growth by offering bank-in-a-box solutions.

South Africa’s banks have set an excellent example by developing many innovative and customised products for such markets, and are using the mobile and postal network to spread financial inclusion.

Emerging markets are here to stay. With changing landscape, onus now lies on emerging markets to step up and spearhead the positive financial developments. Larger sections that missed the train last time need to be benefited this time. The growth has to be inclusive. Though the challenge is trade-off between fast growth and risk it brings along, the answer lies in Buddha’s prolific teaching of ‘Middle Path’

(Goyal is senior consultant- Finacle with Infosys Technologies)