The growth of southern hemisphere economies and trade along South-South routes is no longer news. However the nature of that trade, and its impact on the types of products and services that financial institutions need to provide, opens up opportunities for innovation. Consultancy firm Celent asks who could lead this innovation
Today, three of the top five banks in the world by market cap are Chinese and by 2050, 19 of the top 30 economies by GDP will be countries that we currently describe as ’emerging’. We are embarking on an extraordinary new phase of economic development dominated by the new superpowers of Asia and the Southern hemisphere. For many people familiar with a US or European-dominated world, this is an uncomfortable idea. It is an idea, however, that we need to get used to.
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Debate at Sibos 2012 pointed at perhaps subtle, but nonetheless significant, shifts in demand. Whereas in developed economies, SME’s share of trade is diminishing, the opposite is true in Asia. Chinese SMEs account for 78% of Chinese exports. The United Nations World Investment Report calculates that there are now around 21,500 multinationals based in the emerging world.
Furthermore, we are witnessing massive growth in open account. According to Boston Consulting Group, open account related financing and service revenues will grow by a near factor of 3 by 2020.
Supply chains are also changing shape. Today, the world’s biggest multinationals are becoming increasingly happy to do their research and development in emerging markets with companies like Cisco and Visa Inc. already building their second global headquarters in South East Asia. We are witnessing the formation of new south-south economic connections which will radically change the nature of global economic activity.
So how can banks in developed economies, familiar with the requirements of their locally-HQ’d multi-nationals, ensure their relevance to the very different needs of the fast-growth markets?
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By GlobalDataAt Sibos 2004 Heidi Miller challenged the industry:
– Why do we seem to make our products so complex and difficult to use?
– How do we expect to help our customers become more efficient, when we are not efficient ourselves?
– Why is it that so many of the successful innovations in our industry are pioneered by non-banks?
– If the internet is ubiquitous and free, why should we pay SWIFT for messaging?
The industry all nodded sagely in agreement, but what have we actually changed since then? That raises a very important question.
If the industry, traditionally predominantly western banks, is raising these questions about services and systems that it owns and runs, are we confident that these payments services will continue to dominate? Will innovators along the fast-growth trade routes find a better way? History has many examples of dominant incumbents not adapting to the new world quickly enough.
Change doesn’t happen overnight
There is something of a conundrum; not much happens quickly in the world of payments. While banks are struggling with old legacy systems and decades old payments networks, new entrants don’t have those challenges and are moving much faster. The boards of many banks must wonder where and how they failed to spot and act on the opportunity.
One of the reasons for the slow reaction of financial services providers to these emerging payment trends is the emerging role of regulators. With one regulator for every 300 people employed in finance, the UK financial services sector is one of the heaviest regulated markets. Such a burden is unlikely to foster the speed and growth of innovation needed to stay abreast of fast-changing market opportunities; and may give the competitive advantage to agile innovators in the developing countries.
So what should be done?
Payments can no longer be viewed as an isolated market or service. The new business problem that needs addressing is the efficient, open, secure access to all elements of a trade cycle. This includes financial services such as e-invoicing and factoring, but going further still, into insurance and re-insurance and transaction archiving. Therefore establishing open technical standards that are not ruled by the partisan interests of national states will be of paramount importance for easing international payments. Without finality, security, and transparency nothing else works. So the greater value and profit opportunity may lie in these adjacent spaces.
South-south trade is the missing link in the global economy and perhaps the catalyst for a change in broader payments services. If more comprehensive services are adopted, then we may be on the verge of an economic revolution. The southern silk road will radically alter the dynamics of the global economy in the years ahead. The economic centre of gravity is about to undergo a major shift. It is inevitable that new financial models will evolve. Someone or something will emerge to serve the burgeoning needs of this market. The question is whether the networks of today can evolve to become the networks of tomorrow.
