Academic journal article The McKinsey Quarterly

Emerging Markets for Personal Financial Services

Academic journal article The McKinsey Quarterly

Emerging Markets for Personal Financial Services

Article excerpt

The market for personal financial services (PFS), like many other markets before it, is globalizing. Companies from developed regions are looking for opportunities to expand overseas, particularly in emerging economies. But to date there has been insufficient information for them to assess either the size or the attractiveness of new markets. Recent research, based on publicly available data and interviews with local market experts, has tried to fill the gap.

Market size

The global market for PFS is huge and growing fast. We estimate it is currently worth $380 billion in terms of profit opportunities, $125 billion of which is accounted for by the United States. Other OECD markets are worth a total of $181 billion, and emerging economies $74 billion [ILLUSTRATION FOR EXHIBITS 1 AND 2 OMITTED].

The United States will remain by far the world's largest PFS market for the foreseeable future, yet emerging economies' share of the global pie will undoubtedly increase. On the basis of forecasts of gross domestic product growth, profit [TABULAR DATA FOR EXHIBIT 2 OMITTED] opportunities in countries such as China and Brazil could exceed those in many OECD countries by 2002 [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. But even these projections probably understate the future size of emerging PFS business, as the pace of expansion is affected by factors other than GDP growth.

One of these factors is that economic growth tends to be unevenly distributed. As the overall level of wealth in emerging economies rises, so too does the proportion of wealth in the hands of the more affluent middle classes - the portion of the population most likely to buy financial services.

As people grow wealthier, moreover, they tend to become more sophisticated in their choice of products. In terms of PFS, that would mean a partial shift from the use of conservative, low-return deposit products to riskier, higher-return securities and mutual funds. And as economies stabilize and inflation and interest rates become more predictable, consumers are usually more willing to invest and borrow. Recent experience in Latin America has shown that when hyperinflation is brought under control and interest rates stabilize at a lower level, consumers increase their use of mortgage and consumer debt.

Market opportunities

The size and growth prospects of any given market are not the only factors that determine its attractiveness. Others are:

Regulatory environment. Although there is a global trend toward deregulation and the setting of international standards, local regulatory differences are, for the time being, still an important consideration. In China, for instance, the pace of deregulation remains slow. Citibank received permission to conduct local currency banking transactions there only recently, and AIG lobbied for years before it was allowed to sell insurance in Shanghai. Indonesia, by contrast, exercises relatively loose control over local and foreign financial institutions (and has attracted a flood of foreign direct investment as a result). …

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