Emerging markets: New consumers, new banks

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Often using new technology, banks are serving emerging market consumers in innovative ways.

In developed markets, the financial crisis has driven radical changes in consumer financial services. But in emerging markets, too, growing populations, rising income levels and the legacy of structural reform are driving personal finance firms to innovate – from insurance companies in India to personal loan providers in Latin America.

In developing countries, the challenges facing banks tend to be poor infrastructure and security, or incomes that are rising but are still low.

M-Pesa, the mobile money transfer firm started in Kenya, is one example of a way of extending financial services affordably to people on low incomes in remote areas. But innovation is not just occurring in banking for those on the lowest incomes, or in microfinance.

In South Africa, African Bank and Capitec have built a branch network more targeted towards South Africa’s growing black middle class than the services provided by the country’s older banks. Given the lack of land title in the townships, they rely on sophisticated evaluation of a customer’s cashflow, rather than collateral (as is usually the case in South Africa).

The Russian internet-only bank and credit card firm Tinkoff judges its customers’ character and creditworthiness in distinctive ways, for example, by looking at the length of their email address (longer is better), or at the amount of time customers spend filling in the online application form.

As an internet-only bank, Tinkoff is particularly well suited to a country that is large but well connected by telecommunications. Tinkoff even has its own courier firm to access communities beyond the networks of such companies as DHL and FedEx. Couriers double up as sales agents, and almost two-thirds of Tinkoff’s clients are in cities with fewer than 200,000 inhabitants (for most Russian banks the reverse is true).

Sometimes, however, these firms’ greatest advantage is also a weakness. Their business models are sometimes so specific to an individual market that it would be difficult to export.

Capitec, for example, could find consumers rising up the income scale amid challenging security conditions further north in Africa. But the rest of the continent lacks the information technology infrastructure that Capitec relies on to lower security and other costs by getting rid of cash and back offices from branches.

Russia’s demographic of consumers who are well connected to the internet but far apart geographically is also unusual – as its average income, which is relatively high in emerging market terms, allows Russians even in rural areas to own computers.

A business model tailored to the environment shelters these firms from competition from foreign firms and older banks. But their country-specific model means that when they reach a certain stage of development, they might have to focus on competing for traditional banking clients, and with banks that have lower funding costs.