Goldman: Chinese or Indian Banks May Buy American Banks

I never thought I would see this in my lifetime but emerging market financial institutions from India or China may be able to buy out American banks due to the fallout from mortgage crisis, according to the latest Goldman Sachs report. The report by Goldman Sachs Group Inc says:

Further, we would not be surprised to see the first acquisition of a major US broker or commercial bank by an emerging market institution. While most US brokers and some US banks have broadened their geographic presence over the past decade, none has developed a truly robust Chinese or Indian offering. With these economies growing at multiples of the US, we would not be surprised to see a larger international bank attempt to gain access to the US financial services community through acquisition.

Add to the mortgage crisis, the rapid decline in value of US dollar against these currencies and the growth rates of these economies - the scenario begins to look much more plausible. Its a matter of when and not if.

So What?
The ownership of a company by a foreign institution, although sure to cause a ruckus with the likes of Lou Dobbs, is not a big deal. After all, even today banks like Citi have substantial foreign ownership from the likes of Saudi Kings and Princes. And emerging market banks like India's ICICI Bank have substantial foreign ownership - which means Americans own part of these institutions through a complex chain. But there is a big deal.

The Big Deal: Lower Cost Structure
The cost structures of these banks are much lower than that of their American counterparts. A few years ago, I met an executive from one of these banks at a banking conference event. The Indian bank was having trouble obtaining a license to operate in the US and he said to me that it was because American banks did not want competition in their home court.

A country such as India where cell phone calls cost a penny per minute, cell phones cost $25, cars are being designed for $2000 and employees still cost 1/3 to 1/10th of US counterparts - can deliver banking services at much lower costs.

First it was IT, now it may be the turn of banking. Telco and retail could very well be next. Clearwire-Reliance anyone?

Notes for the reader:

• Clearwire is a WiMax company in US that is struggling due to the break up of the Sprint deal.
• Reliance is India's largest conglomerate with a successful Telco business and market cap approaching $100 billion (yes with a B).
  
• ICICI Bank is India's largest bank.
• Goldman Sachs is one of the few large banks/brokers that has come out ahead through the mortgage fiasco.

Banking in Brazil - BRIC2.0 or Web2.0

I have been receiving these podcast alerts from Gartner and one of them caught my eye-"What Banks should know about Web2.0". The podcast available here talks about how Web2.0 will inevitably impact the banking industry. The analyst talks about how money will change hands in MySpace, how banks are using podcasts and that RSS feeds can be used to disseminate information. I am sceptical about the MySpace, don't much care for podcasting or its supposed impact on banking but agree that podcasting and RSS are useful technologies. Although it is hard to understand how this is specific to banking vs. retail or healthcare. The analyst then refers to CircleLending, a peer-to-peer lending enablement startup. A very interesting startup amongst the ranks of Zopa and Prosper.

By nicholasb (Creative Commons License)

Meanwhile in Brazil, HSBC seems to be everywhere. On my latest business trip to Mexico and Brazil, I saw HSBC truly dominate the marketing landscape in the two countries. And they seem to be doing well in India too with over 50% growth in profits. Citibank is probably the only other bank that has had so much success in its global strategy and its claim to be "the world's local bank" rings true. So how does this relate to Web2.0- it does not and that is the point. In my view, the future of banking is not Web2.0 but Brazil, Russia, India and China. I would like to coin the term BRIC2.0 and propose that more opportunity and growth is to be found by following the advice of CK Prahlad than by doing a mashup of Bank of America site with LendingTree!

For example, customers of banks in India can check their balances and pay bills by using text messaging on their cell phones. And text messages in India cost lower than 1c per message. In fact, over the next few years as banks from India and other low-cost high-capability countries set up shop in the USA, they may end up giving the US banks a run for their money. If Infosys can run IT operations of large European or US banks at a lower cost, then their friends at HDFC Bank or ICICI Bank may one day be able to provide banking services that can compete with the large US banks. And that may be the logical conclusion of outsourcing. You only have to look at how the PC industry started with outsourcing manufacturing of minor parts, then chips and now Lenovo owns IBM to wonder if one day the same could happen in other industries from banking to healthcare.

BRIC2.0 is the next generation of developing economies that are the engines of growth for banks, automotive, steel, etc. Indeed, IBM is moving its global procurement offices to China from New York. A sign of times to come... forget Web2.0, focus on BRIC2.0!

Ever heard of UFIDA, KingDee, Tally?

Well, you may never have heard of these enterprise software vendors but they are the giants from China and India. KingDee and UFIDA are #1 and #3 vendors in China and Tally is the top local vendor in India. Gartner recently predicted that a large vendor will emerge from China and India over the next 5 years. These 3 could well be the favorites for that spot. Tally is the QuickBooks of India with ambitions in mid-market ERP.

These homegrown wonders have the advantage of deep knowledge of the local markets, ability to develop software that fits the unique infrastructure of these countries. For example, connectivity to the Internet is far from ubiquitous in India. These limitations box these vendors allowing them to innovate in a space that is unique and disconnected from the global enterprise software world. And believe it or not, this is actually an advantage (see The Innovation Sandbox by C.K. Prahlad) as it prevents easy co-option by global vendors. We have already seen this play out in the consumer internet world with the success of Baidu.

Race to the top?
(by Bruno Girin)

So while we all look to climb the ladder of features and architecture and race to take advantage of Web2.0 and SOA in the enterprise software universe, we are also increasingly distancing ourselves from a market that cares about simple software that meets the most basic needs, can run in a sometimes connected world and on previous generation computers. And this market at the bottom of the pyramid is probably many times larger than the top we are all running towards. What do you think?

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