By Claude Sassoulas, Managing Director of Europe and Americas, Tata Communications
The on-going economic turmoil in Europe has seen financial sector companies experiencing increasing pressure to find alternative opportunities for new revenue streams. Consequently, many are looking beyond the crisis-hit mature economies and turning to emerging markets to remain afloat, recognising that these markets have the potential to drive global economic growth in the foreseeable future.
A report by the World Economic Forum (WEF) highlighted the untapped potential of emerging markets stating that “financial service providers worldwide should look to developing countries as the source of long-term business growth and shareholder return.” Some companies such as HSBC are already making the most of the opportunities offered by emerging markets. In 2012, HSBC bank reported double-digit growth in its emerging market business, which offset a fall in earnings from investment banking. So how can financial sector businesses ensure that they don’t get left behind? Can developed countries learn from those further afield that are bucking the trend in today’s challenging climate?
A study into emerging markets by Tata Communications called the Connected World reflects WEF’s report, highlighting the growing influence of developing economies on the global financial sector. The Connected World report explored the key barriers for investment in emerging markets, and senior decision makers’ attitudes towards the opportunities offered by developing economies. It surveyed 1,600 business leaders globally, 20% of whom work in senior roles in the financial sector in emerging and developed markets. The findings challenge some of the preconceived ideas and attitudes regarding BRICs and other emerging economies, and draws attention to the huge opportunities that these markets hold when it comes to safeguarding the growth of the global economy as the uncertainty across markets lingers on.
Drivers for investment
Those financial sector organisations that were quick off the mark in investing in emerging markets are benefiting from the growth in these regions. According to the Connected World report, 40% of financial sector organisations are already operating in emerging markets, and 42% of these businesses are looking into investing in these markets. These organisations expect to increase their investment in these regions by 20%-40% between 2012 and 2013.
Perhaps unsurprisingly, the significant opportunities for growth was one of the top reasons for financial organisations looking to invest in emerging markets (78%) followed by the need to keep up with competition (46%) and the current global economic climate (42%). Crucially, only a quarter of respondents cited the comparatively cheaper cost of operating in those markets as a driver – gone are those days where developing markets were seen just as a source for cheap labour.
The surge in interest in emerging markets is completely redefining the global financial sector landscape, whereby these regions are now becoming hot beds for innovation. Looking into the markets that are perceived both as most progressive and offering the most opportunities for growth, China came on top, with 34%, followed closely by India with 32%. Perhaps surprisingly, considering the buzz around the BRICs, Brazil (11%) and Russia (1%) were at the bottom of the list.
It is clear that those seeking to operate in these different markets need to be innovative and rethink their business models in order to appeal to these new target markets successfully. Local emerging market financial sector organisations are themselves shunning traditional models and practices offered by developed economies, and looking for new and innovative business practices.This is highlighted in the Connected World report with 82% of respondents from emerging markets stating they are looking to other emerging markets rather than developed markets for growth lessons and best practice. Still, when compared to the financial services products offered in developed countries, emerging markets have relatively low penetration rates. There are undeveloped areas with plenty of opportunities for innovation through new services. In particular, in areas such as consumer financial services, SME financing and corporate bonds, there is untapped potential for growth compared with some oversaturated mature economies.
Pushing beyond the barriers
Regardless of which market companies move into, it’s crucial that decision makers fully appreciate the unique challenges of each market in order to maximise return on investment. Each market will have its own unique cultural, political and regulatory conditions that organisations will need to acclimatise and adapt to.
The majority of Connected World respondents felt that government regulation, established competition, finding skilled staff and the lack of a reliable or secure communication infrastructure were the most critical barriers for investment in a new emerging market. Additionally, over half of respondents associated emerging economies with political instability and corruption, which would prevent them from entering a new emerging market altogether.
The ability to easily communicate and transact globally was also a significant concern, with 38% of respondents stating that the lack of this infrastructure would prevent them from entering a new market altogether. The importance of having access to high-speed Internet connectivity and the latest communications technologies reflects the increasingly connected society we live in and our expectation to be able to work effectively wherever, whenever and however we want. Recognising that a communication infrastructure plays a key role in businesses looking to create a truly global presence, the telecommunications industry has invested heavily in bringing the digital infrastructure of emerging markets on a level playing field with mature markets. Tata Communications, for example, has recently completed the world’s first wholly-owned sub-sea network ring to circle the globe and has also invested large amounts in infrastructure for South Africa via its subsidiary, Neotel. In some instances, such as mobile communications and 4G, emerging markets have even leap frogged ahead of regions such as Europe altogether, because of the lack of legacy technologies that can sometimes hold more mature markets back. Therefore, when moving into a new market, businesses need to ensure that their organisation is truly global, with all cogs of the machine, regardless of location, working and communicating effectively together.
Despite the cultural and regulatory differences, the untapped opportunities that emerging markets offer far outweigh any barriers. More and more, the traditional views of developing economies are being challenged, and the assumption that globalisation is being driven by the west is being turned on its head. Consumers in emerging markets are becoming more influential than some of their counterparts in developed markets; and alongside this, there is a growing middle class with more disposable income and a desire for global and connected financial services, as well as the huge potential market in untapped rural areas.
Although there is a huge financial incentive for mature market companies to move into fast-growing but more volatile emerging markets, success is only possible if companies are willing to adopt a more flexible approach. As the double dip recession continues to bite in the UK, the time has come for financial sector organisations to challenge any preconceived ideas they might have about emerging markets and to grab the growth opportunities offered with both hands. Those who seek to understand both the opportunities and challenges, invest smartly, and recognise the importance of these markets in mitigating the impact of the economic turmoil, will truly reap the rewards.
About the Connected World survey
Tata Communications commissioned leading business research company, Vanson Bourne, to conduct an online study of business leaders in the Middle East, South Africa, Hong Kong, Singapore, India, China, France, Germany, the USA and the UK. In total, 1,600 business leaders were interviewed from the C-suite to manager level across 10 sectors (financial services, manufacturing, business and professional services, IT/ technology, healthcare, retail, transport/ travel, telecommunications, utilities, media and entertainment). The survey was conducted in January and February 2012.
Bank of England’s Haldane says inflation “tiger” is prowling
By Andy Bruce and David Milliken
LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.
In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.
“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.
He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.
Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.
Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.
But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.
Haldane’s comments put him at the most hawkish end among the nine members of the MPC.
Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.
“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.
(Editing by Larry King and John Stonestreet)
Bitcoin slumps 6%, heads for worst week since March
By Ritvik Carvalho
LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.
The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.
The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.
“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.
Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.
Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.
(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)
Britain sets out blueprint to keep fintech ‘crown’ after Brexit
By Huw Jones
LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.
Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.
The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.
Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.
The review recommends more flexible listing rules for fintechs to catch up with New York.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” Swinburne said.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)
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