Reverse Innovation in Financial Services A 10 Year Outlook
Authors note Global Growth Markets (GGMs) have no legacy, little infrastructure and as a consequence, a very high level of unbanked consumers, unlike developed markets. the most pivotal phases in recent economic history. new consumer in growth markets for more than 50% of the world GDP on the basis of purchasing power. new global economic equilibrium. While the traditional banking infrastructure such as branches is almost non-existent in growth markets, A 10 YEAR OUTLOOK
real GDP per capita growth by 3.6% through factors real impact economics So what has really changed? existing technology business models and disrupting their domestic as well as global markets. of entrepreneurial creativity and technological innovation from growth markets to developed ones. Matteo Stefanel Udayan Goyal revolutionise the sectorleapfrogging
Factsheet $34bn additional amount expected to be paid by the largest US banks each year in compliance costs to satisfy the new Dodd-Frank rules; one of the long-term impacts of the 2008 crisis Number of visits per year to a bank branch made by the average EU consumer by 2020 (vs 26.5 visits in 1995) 1/year unbanked adults globally 2.5bn 90% of them residing in GGMs Portion of the population in Sub-Saharan Africa and South Asia that is unbanked 70% Over 50% of savings in Sub-Saharan Africa are deposited outside formal financial services increase in financial inclusion 1% 3.6% increases real GDP per capita growth by 1 through factors such as increased savings and access to credit prompting better health, education and business creation and expansion Mobile phone penetration in GGMs stands at 78% Importance of mobile GGMs every 10% increase in mobile penetration leads to 1% increase in GDP In 2009 the total GDP of the E7 the seven leading GGMs was 2/3 of that of the G7 Vs. 2050, when the E7 s aggregate GDP will rise to 2x of that of the G7 In 1950, half of the world s population resided in GGMs and by 2020, the ratio is expected to increase to 5:1 1bn people from across the globe are expected to enter the consuming class by 2025 A 10 YEAR OUTLOOK
The next 10 years in growth The macro scenario Changes in the Financial Industry The Industry in GGMs GGM-based models radically change the industry in DMs
A 10 YEAR OUTLOOK
Contents AUTHORS' NOTE 1 FACTSHEET 3 4 CONTENTS 5 GROWTH MARKETS AND FINANCIAL SERVICES INFOGRAPHIC 7 Growth markets innovators are succeeding where their developed counterparts have failed 9 11 11 12 12 13 A high growth, high return environment 18 The US$30 trillion market opportunity 20 23 25 PRIVATE EQUITY WILL PLAY A CATALYTIC ROLE IN THE DEVELOPMENT OF GROWTH MARKETS FINANCIAL SERVICES 32 6
GROWTH MARKETS AND FINANCIAL SERVICES Revolution services Turkey, 0.8 Indonesia, 0.8 S.Korea, 1.1 Mexico, 1.2 Poland, 0.5 Argentina, 0.4 S.Arabia, 0.6 Explosive macro growth S.Arabia, 3.0 S.Korea, 3.3 Australia, 2.6 Nigeria, 3.5 Argentina, 2.3 Canada, 3.5 Spain, 3.6 Italy, 3.9 China, 48.5.0 Australia, 1.4 Turkey, 4.5 Spain, 1.5 US, 15.1 UK, 5.6 Canada, 1.7 France, 5.7 India, 1.8 Germany, 5.8 Russia, 1.9 Indonesia, 5.9 Itlay, 2.2 Mexico, 6.7 UK, 2.4 Russia, 7.1 China, 7.3 Brazil, 2.5 Japan, 8.1 US, 38.0 France, 2.8 Germany, 3.6 Japan, 5.9 Brazil, 9.0 India, 26.0 GDP 2011 (in US$ tr) = 55.4 GDP 2050 (in US$ tr) = 197.5 Favorable demographic transition Population pyramid 6,000 Population (in million) 5,000 90 to 94 75 to 79 60 to 64 45 to 49 30 to 34 15 to 19 0 to 4 4,000 3,000 2,000 1,000 0 DM GM 2010 2015 2020 2025 2030 2025 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 Africa Asia Europe S.America N.America High mobile and internet penetration Mobile cellular subscriptions (2012) (per 100 adults) Used international bandwidth growth by region, 2007-2011 122 107 106 100% 85 81 89 69 75% 53 45% 25% World High income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-saharan Africa 0% Europe Asia Oceania Middle East Latin America Africa US & Canada A 10 YEAR OUTLOOK
Leading to the US$30 trillion opportunity Global consumption growth (US$ tr, 2010-2025) CAGR:7% 30 12 26 CAGR:2% 34 2010 2025 Developed markets Growth markets Financial services to be a core beneficiary Insurance & Risk Management Credit Wealth Creation Capital Markets & trading Payments Retirement plan Insurable contingencies Buffer savings Emergency loan Consumption loan Business livelihood Savings and investment Ease of flow Primary and secondary markets mwallet Processing Remittances Housing loan Acquiring Growth Markets are already witnessing innovative, alternative financial services business models Prepaid Microfinance Mobile money Agent banking ecommerce Capital markets
Revolution services A 10 YEAR OUTLOOK
REVOLUTION TENSIONS AROUND FINANCIAL SERVICES increased regulatory capital requirements and segregated banks core safer activities from riskier, higher return activities DRIVER FOR FINANCIAL SERVICES witnessed strong and resilient growth over the past years, even during the crisis. 36% 20% 16% 19% 2% 9% 9% 9% 5% 6% 10% 13% 14% 12% APAC Europe US Canada Latin America MEA World 2008-2011 2011-2016 alternative distribution models and technology-enabled products and services generate additional volumes from untapped market segments enabling adoption of digital business models, A 10 YEAR OUTLOOK
TECHNOLOGY STARTUPS Distribution models are also moving away from physical to virtual/digital channels GROWTH MARKETS INNOVATORS ARE SUCCEEDING WHERE THEIR DEVELOPED COUNTERPARTS HAVE FAILED startups have successfully captured large market shares
A 10 YEAR OUTLOOK
Banked population (2011) - All adults (%, age 15+) 89% no data 0-16% 16-28% 50% 55% 45% 39% 18% 33% 24% 28-50% 50-81% 81-99% World High Income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 6 with per capita GDP of an economy 7 100% Banked population (% adults) (2011) 80% 60% 40% R =0.7031 20% 0% 10 20 30 40 50 60 70 GDP per capita (current USD) (2011) A 10 YEAR OUTLOOK
not having enough money as a reason for not having an account Not enough money to use Too expensive Family member already has account Too far away 29% 25% 23% 20% 65% Lack of necessary documentation 18% Lack of trust 13% Religious reasons 5% Savings (% adults) Credit (% adults) 40% 40% 28% 34% 40% 25% 42% 32% 47% 20% 26% 20% 21% 7% 10% 5% 11% 14% 9% 8% 8% 5% 9% 5% Saved any money last year Saved at a financial institution in the past year Loan in the past year Loan from a financial institution in the past year East Asia & Pacific Europe & Central Asia Latin America & Caribben MENA South Asia Sub-Saharan Africa
Mushrooming alternative business models environment ripe for alternative business models 14 World 38 73 27 18 8 High income East Asia & Pacific Bank branches and ATMs (2011) (per 100,000 adults) 17 42 Europe & Central Asia 31 15 22 17 Latin America & Caribbean Middle East & North Africa 8 South Asia 6 3 Sub-Saharan Africa 5 Bank branches ATMs giving short shrift A 10 YEAR OUTLOOK
A HIGH GROWTH, HIGH RETURN ENVIRONMENT the developed markets rate 100% Africa Other Asia India China 50% Japan LatAm US Former USSR Other West 0% Europe (FR,GER,IT,UK, SP) 1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2003 2018 growth markets share of the world output grew at more than a percentage point per year, East Asia & Pacific 7.2% South Asia 5.5% Sub-Saharan Africa 4.9% Middle East and N. Africa Europe and Central Asia Latin America and Caribbean 3.0% 3.3% 3.7% Growth Markets 5.2% High income 2.0% Global 3.0% resilience of FDI
crisis Growth Markets population to outnumber developed ones 6,000 5,000 4,000 3,000 2,000 1,000 0 2010 2015 2020 2025 2030 2025 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 Africa Asia Europe S.America N.America 92% of the population growth in the next decade will be in growth markets Growth Markets sequential demographic dividends converging to the structure of the population observed in developed markets today. 90 to 94 75 to 79 60 to 64 45 to 49 30 to 34 15 to 19 0 to 4 DM GM A 10 YEAR OUTLOOK
Global median age no data 14-20 20-25 25-30 30-35 40+ the compounding of two separate demographic dividends and the unlocking of the demographic transition opportunity truly a once-inseveral-generations opportunity. THE US$30 TRILLION MARKET OPPORTUNITY Transition from export-led centres of manufacturing to domestic consumption oriented societies emergence of a wealthy middle class and disposable income. Nearly 1 billion people Global consumption growth (US$ trillion, 2010-2025) 12 26 CAGR:7% CAGR:2% 30 34 2010 2025 Developed markets Growth markets
eties $32.6 $5.5 $4.8 $1.1 $8.0 $1.5 $5.8 $2.8 $11.3 $3.2 N.America Asia Pacific Africa & ME Europe LatAm N.America Asia Pacific Africa & ME Europe LatAm 2010 2050 digitization experiencing a revolution driven by technology and mobile internet. services A 10 YEAR OUTLOOK
inclusion in growth markets A priority for economic development growth and stability in these markets. more than 50 national policymaking and regulatory bodies had local regulatory authorities hence corruption. A 10 YEAR OUTLOOK
Financial services are fundamental to economic growth and development
Are growth markets an incubator services globally? A 10 YEAR OUTLOOK
85 World Mobile cellular subscriptions (2012) (per 100 adults) 122 High income 81 t Asia & Pacific 107 106 rope & Central Asia atin America & Caribbean 89 Middle East & North Africa 69 South Asia 53 saharan Africa last mile of banking kiosks and terminals pre-paid cards leveraging existing customer data. A 10 YEAR OUTLOOK
from growth markets the global economic and innovation balance. 26 centric
enabling resource-starved growth markets lead developed markets in global channel of choice will be mobile creation and proliferation of real-time clearing systems and retail-centric exchange systems Prahalad s vision of eradicating poverty through private equity can play an instrumental role in achieving Prahalad s vision of Serving the World s Poor, A 10 YEAR OUTLOOK
Private equity chain reaction set off by clever, successful investment and subsequent growth is inspiring. chances of their success multiply instantly. nature of patient capital pivotal in turning local champions into industry giants drive positive change in growth markets. and Venture Capital Have Failed--and What to Do About It A 10 YEAR OUTLOOK
REFERENCES 6 A 10 YEAR OUTLOOK
AUTHORS Matteo Stefanel, Founding Partner, Apis Partners Udayan Goyal, Founding Partner, Apis Partners
Apis Partners is a PE fund manager focused on Financial Institutions and related Business Services (FS) in growth markets. It is managed by a triedand-tested team, who have worked together for over 15 years with extensive expertise in FS growth markets and garnered in the leading firms in both private equity and investment banking. From the outset, Apis Partners can count on extensive industry-specialized human capital, resources and an attractive pipeline of investments. In addition to the core team, the operating partner network consists of 20+ financial services professionals, on-theground presence in 5 countries and an extended network of 27 partner companies. Apis Parners is the manager of the Apis Growth Fund. The fund invests in capital-light FS companies within growth markets, namely those that are well positioned to benefit directly from favourable demographic and economic trends (2010-2025 growth market consumer spending CAGR of 7% vs. 2% in developed markets), strong structual supply/demand gaps (2.2bn of 2.5bn global unbanked adults live in growth markets) and high financial services growth (2006-10 growth markets banking assets CAGR of 20% vs. 6% in developed ones), rather than leveraged bets on credit portfolios. In other words, the Fund s investment pipeline includes companies in payments (processors, remittance businesses, and ecommerce and mcommerce enablers), retail banking and consumer finance (inc. microlenders), insurance (inc. claims managers), capital markets and other technology-enabled financial institutions. The Fund s focus is on Africa and Asia, geographies where the team has successfully completed investments over the past decade and where the opportunity to provide capital (finanial and human) with favourable high margins in a high growth environment. Africa and Asia showcase similar financial services innovation patterns as these regions continue to transform to meet growth market FS needs. Apis Partners is an affiliate of Anthemis Group. Anthemis Group is the leading digital financial services investment and advisory firm focused on re-inventing financial services for the 21st century. For more information email us at info@apis.pe