INTERNATIONAL SCHOOL OF MANAGEMENT
Ph.D. Professional Assessment Evaluation I Standard Bank´s expansion strategy in Latin America

Andrea Valenzuela Rivas

 Abstract After the 2008 crisis, Standard Bank needed a strategy to continue with its grow being truthful to their emerging market presence vision. This paper analyzes the opportunity for the bank in a developing region, Latin America; considering the opportunities and challenges its countries face. Emerging markets have institutional voids that need to be filled, Latin America is no exception; it needs expert companies to provide value added services that bring customers and suppliers closer. For Standard Bank is crucial to identify itself as an aggregator and distributor, and provide innovative distribution and product development to improve its chances of success in Latin America. I. ‐ Introduction The 150 years history of Standard Bank has proven its vision to be a major competitive financial organization in emerging markets throughout the world. The bank is based in Johannesburg, South Africa and it has representation in 17 Sub Saharan countries and also in 16 countries that have an emerging market view (Standard Bank, 2009). Barriers for trade and investment have been coming down in the last 25 year and the volume for exports and investments have grown, forming a single, interdependent and global economic system. Countries around the world have adopted more liberal economic policies in order to be more competitive and to have favorable conditions for international business. (Hill & Hernandez‐ Requejo, 2012). Due to the changes in direct investment inflow since 1990s to emerging markets, these countries are very attractive for companies that want to expand internationally but it’s important to take into consideration the risks that still exists in them (Hill & Hernandez‐Requejo, 2012). History of Latin America includes dictators, low growth, high debt, hyperinflation and restrictions for foreign direct investment; but in the past two decades it has been in a process of change and modernization that has attracted a lot of attention for investors, and as for today, Latin America is considered as an emerging region (Hill & Hernandez‐Requejo, 2012). In order for Standard Bank to continue its growth, one approach would be to center its international strategy in Latin America, a region with a lot of opportunities and certainly with a lot of challenges for foreign companies with competitive advantages to exploit.

II. ‐ Context Formally South Africa is part of the BRICS since 2011 as a result of its concern that Africa´s interests should be internationally represented and that South Africa was the ideal candidate for the discussions that Brazil, Russia, India and China had have. South Africa is economically and institutionally stable and is perceived by the international community as the face of the continent (Morasso, 2013). Being part of the BRICS is already a success, what South Africa can achieve being part of the group depends on its capacity to have clear objectives and represent the interests of the continent. South Africa on the second half of the nineteen Century, moved from an agricultural economy to one centered on the extraction of precious metals (Diamonds and gold primarily). A variety of services such as finance, engineering, and insurance developed as a consequence of the mining industry (Werker, 2007). Between 1910 and 1948, the country grew economically with the dominance of the English speaking United Party but grow came with a lot of racial differences that didn´t helped the international image of the country. Everything change with the first democratic elections in 1994, the new government did everything in their hands to stabilize South Africa´s economy in order to achieve economic growth (Werker, 2007). Even though South Africa has grew considerably since the nineteen century, there are still a lot of challenges that the country must address in order to continue with the progress that it has had. One of the most important aspects of the South African economy is the outflow of foreign direct investments of its companies that positioned South Africa in 2012 as the largest source country of FDI in Africa (SAinfo Reporter, 2013). One of the companies that contributes largely with these result is Standard Bank group, which accordingly to the Africa report is the number one bank in the continent (The Africa Report, 2014). The 2013 Standard Group Financial Results (Standard Bank, 2013) states that 27% of their growth is from their subsidiaries outside South Africa. The history of Standard Bank began in 1862, their first expansion strategy was to acquire local town banks or to open branches where it was not possible to buy banks. One of Standard´s bank branches was the first one in the diamond fields and also Standard Bank invested and survived the gold fever that took place in 1890. During the 1920s and 1930s, Standard Bank consolidated its leading position in Africa, but delayed its expansion. For the next three decades the company expand its financial services with the acquisition and creation of new companies. By 1969 it had already seven subsidiaries that included different services for their clients and continue with its expansion. Thru the 70´s and 80´s the bank continued with its services expansion and in the 90´s started the use of systems to have a better service for their clients; and in 1994 it launched a product for the low‐income market. In the new century, the bank implemented a product driven instead of a geographic approach as their strategy. In the same years, 70´s, 80´s and 90´s, the company started to acquire local banks in Africa as well as internationally (Zürich, London, Hong Kong, New York, Miami, Sweden, Russia, United Arab Emirates, Czech Republic, Argentina, Colombia, Brazil, Peru, Singapore, Iran, China, Italy, Turkey, Australia, Romania, Malaysia and Mexico); some of the international offices were subsequently closed and others merged with other ventures. One of the most important aspects of the bank´s history has to do with its ability to defend the hostile takeover from Nedcor in 2000, as a result Standard Bank reevaluated its powers and limitations in order to continue as the main financial institution in Africa. In the same year, the bank involvement with

Liberty add a different variety of insurance, health and retirement products to their banking products (Standard Bank, 2009). Taking into consideration Standard´s Bank vision that states “We aspire to be a leading emerging markets financial service organization” (Standard Bank, 2009) and the past growth of the bank in emerging markets, one of the best options to continue its growth is to concentrate in emerging markets, more specifically Latin America. The world economy has been changing in the last years but after the 2008 crisis, those changes have been more significant. From 2000 to 2011, Latin America and the Caribbean participation in the world GDP grew from 6.4% to 8.1% (United Nations, 2012). Another important factor about Latin America is that its population is young and urban which makes a difference in terms of consumer preferences, access to information and ambitions (“”De mercados emergentes e innovación””, (n.d.). In the ten most populated countries in Latin America, their middle class has been growing, over the last 16 years it has progressed from 56 million to 128 million (Casilda Béjar, 2013). Latin America is in the process of transformation similar to developed regions in the world, which makes the continent an attractive place to invest and a natural place for companies to grow. We cannot stop recognizing that in Latin America there are a lot of obstacles that need to be overcome in order to achieve the potential that the region has. Infrastructure, security and anti‐ capitalist feelings, just to mention some are the main discouragers for foreign investors. Companies that understand the reality and challenges in Latin America, are willing to balance them because in the long run, they see more benefits than risks. III. – Background Over the last twenty years, the financial sector in Latin America has evolved and its structure can know be compared to the one in developed markets. Latin America´s financial systems had shown signs of development in different dimensions. (De la Torre, Ize & Shmukler, 2011). Table 1. Countries analyzed by region Asia Eastern Europe G7 Other developed economies LAC LAC7 South America Central America The Caribbean Indonesia, Malaysia, Philippines, Republic of Korea, and Thailand. Croatia, Czech Republic, Hungary, Lithuania, Poland, Russia and Turkey. Canada, France, Germany, Italy, Japan, UK and US Australia, Finland, Israel, New Zealand, Norway, Spain, Sweden Argentina, Chile, Brasil, Colombia, Peru and Uruguay. Bolivia, Ecuador, Paraguay and Venezuela Belize, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua. Jamaica, Trinidad and Tobago.

 Offshore financial service (De la Torre et al, 2011, p. 34, table 3.1)

Aruba, Bahamas, Barbados, Bermuda, Caiman Island, Netherlands Antilles, Panama

In graph 1, we can see the composition and size of the financial systems. In 2000‐2009 Latin America´s financial actives compared to their GDP were in the lowest of the groups analyzed. These results were the consequence of very limited bank assets in the region. Graph 1.
350 300 250 200 150 100 50 0

% of GDP

89 73 36 83 1990‐99 65 56 84 2000‐09 13 8 95 1990‐99 63 36 128 2000‐09 20 17 51 1990‐99 65 26 43 50 2000‐09 92 97 1990‐99 104 123 2000‐09 30 20 36 1990‐99 61 35 60 2000‐09 31 20 30 1990‐99 48 33 44 2000‐09 95 49 52 80 1990‐99 59 105 2000‐09

Asia (5)

China

Europe

G‐7 (2)

India

LAC‐7 (6)

Other Developed Economies (4)

Banks

Bonds

Capital

(De la Torre et al, 2011, p. 52, graph 3.1) Because of the growth in personal credit over the last years, the differences between Latin America and other regions is focused on commercial credit and mortgage considered to be low in comparison to the other regions analyzed in graph 2.

Graph 2

Composition of private banking loans
% of total loans 100 80 60 40 20 0 22 37 40 2000‐03 19 51 31 2004‐07 17 58 25 2008‐09 17 34 49 2000‐03 18 40 41 2004‐07 18 49 34 2008‐09 11 43 45 2000‐03 10 47 42 2004‐07 10 47 43 2008‐09 14 19 66 2000‐03 24 14 62 2004‐07 26 14 60 2008‐09 9 43 48 2000‐03 9 43 48 2004‐07 8 42 50 2008‐09

China

Eastern Europe Commercial

G‐7 (2) Mortgages

LAC‐7 (6) Personal

Other Developed Economies (3)

(De la Torre et al, 2011, p. 55, graph 3.3) In Latin America is the region of the world where we can find more participation of foreign banks if we evaluate it with the other regions. We can see these tendency in graph 3. Graph 3

Number of foreign owned banks as % of total banks
60 50 % of total of banks 40 30 30 20 10 0 Asia (4) China Eastern Europe (7) 1995‐99 G‐7 (4) LAC‐7 (7) Other Developed Economies (4) 20 15 12 25 20 22 17 16 45 49 43

2000‐08

(De la Torre et al, 2011, p. 56, graph 3.4)

Several authors have analyzed the pros and cons of foreign bank´s participation in financial services, their normal conclusion is that foreign banks are more efficient in emerging markets than local banks. Their reasons to sustain the theory is that foreign banks have more financial diversification: Liquidity support from their headquarters, access to economies of scale and innovative products. (De la Torre et al, 2011). A challenge to have a clear idea of the level of bankization in Latin America is to differentiate between the financial services access and its use. If a country has high levels of financial inclusion it’s not only good for the banks, it has also a direct relation with de economic development of the country by itself. Access to financial services improves the life and opportunities of a country´s population (Ruiz, 2006). The obstacles for bankization are identified in the demand and the supply of services. From the supply side, Latin America can be put in the same level as Asia, but below developed economies, in the number of bank branches, ATM machines and deposits. Comparing the costs in Latin America, the minimum balance required by banks is comparable to developed countries but the deposit tariffs are higher in Latin America than in other regions. In the same way, tariffs for consumer loans and mortgages are higher in Latin America than in developed economies and the tariffs for other kinds of loans are similar with other regions. (De la Torre et al, 2011).In order to improve the transaction costs and tariff that banks charge to their customers, strategies for Standard bank to compete in the region could include: Partnership with institutions, improvements in technology and innovations in regulations. Other obstacles besides the cost can include the number of documents to open a deposit account, in Latin America banks ask for more documents than other countries. According to the World Bank, leaving aside mortgage credits, that normally take two weeks for process; other types of loans take in average the same number of days than other regions in the world (De la Torre et al, 2011). In my opinion the most important barrier to overcame in the supply of financial services, is the cost and tariffs that banks charge to their customers. Analyzing the obstacles in the demand, we can find that the majority of Latin America´s companies (including SME´s) have a bank account and also they use bank loans. In households in Latin America the analysis is that the use of banking services is quite limited. The primary reason is family income and they auto exclude themselves to receive the service (De la Torre et al, 2011). Households with access to savings accounts Households with access to credit (Navajas & Tejerina, 2006). Population Poor Non‐Poor Rural Urban

24.3 6

14.5 3.3

32.4 8.4

17.1 4.1

28.4 7.8

 As mentioned, one of the suggested strategies for Standard Bank growth is to invest and expand to Latin America. With the information analyzed in the section, we can say that in order to have a more profound culture in the market, it’s not enough but absolutely necessary the elimination of obstacles described above. In terms of strategies that Standard Bank could follow in Latin America to have better opportunity to be effective, we can describe commercial activities that had been successful in other emerging countries. The information is by Montefalcone (as cited in Ruiz, 2006) and has been described as follows:  Banco Rio, Santander subsidiary in Argentina: Offer commercial discounts with their debit card after the 2001 crisis. The model was soon copied by other banks in the country.  Banco Azteca in Mexico: For the low income segment, distribution of bank products thru a company named Electra that sells its products with credit.  Standard Bank in South Africa: In 1994 launched E Bank, deposit account for the low income segment with low transaction costs in ATM machines and special security measures. By 2000, it had 2.6 million from an 11 million working population. In the insurance part of the business in Standard Bank, Latin America would be a very attractive region to invest in with $130 billion dollar annual sales and 550 million people. Middle class growth in Latin America is a great opportunity to develop these part of the business because it’s investing in education and savings. (Ernst and Young, 2012). Another important factor to consider in this industry is that population in Latin America is young compared to other regions in the world. In Mexico, Brazil, Colombia and Argentina; more than 25% of their population are under 15 years old, and less than 7% of Latin America´s population is over 65 years. The data means that Standard Bank would have the possibility to position itself with these new customers that have no experience with other insurance companies. (Ernst and Young, 2012). One obstacle for insurance companies is the cost of their services and the response to their customer’s preferences. A solution for Standard Bank to both of the obstacles could be to innovate in distribution and product development. (Ernst and Young, 2012). Condition Limited customer reach Low insurance perception Rising globalization and trade Innovative Objective Convenient access Informed customer market Cross‐regional risk management Solution Examples Travel insurance via travel agent Micro‐insurance products Customized capital and risk management products.

(Ernst and Young, 2012. p. 5). Analyzing another side on the insurance industry where companies are the customers, we can say that because of Latin America´s incorporation to different trade agreements, the risk for companies is higher and the need for a robust insurance is necessary. (Ernst and Young, 2012). These would be another opportunity for Standard Bank but with the requisite to completely understand the operation of Latin America´s businesses. Another aspect to consider in Latin America is the risk of its countries to natural catastrophes (hurricanes, earthquakes, tsunamis, etc.) that remained not insured. Improvements in

last years have enlarged the capacity to access foreign capital, and investors need improved catastrophe risk management. (Ernst and Young, 2012). Recent Latin America Earthquakes Catastrophe Extent of damage Insurance cost August 15, 2007. Peru, Killed 519 people, destroyed Insured losses at less than earthquake 8.0 Richter scale 59,000 homes and caused US$1 billion US$15 billion to $30 billion in economic losses. January 12, 2010. Haiti, Killed over 220,000 people, US$200 million, including the earthquake 7.0 Richter scale left 1.5 million homeless and $7.8 million that the caused US$14 billion in Caribbean Catastrophe Risk Insurance Fund paid to the infrastructure damaged Haitian government. February 27, 2010. Chile, Killed 82 people and had total Insured losses at US$8.2 billion earthquake 8.8 Richter scale losses near US$30 billion (Ernst and Young, 2012. p.10) In general terms, Latin America has a long term market opportunity for insurance companies that are willing to use technology and innovation, because of its young population, immature market development and catastrophe risk. IV. ‐ Conceptual framework The term emerging market has been used a lot by authors and the media, in reality the term was created by the International Finance Corporation in 1981 when the group was indorsing the first mutual fund investments in developing countries. The term can vary widely even though it’s referred a lot in foreign policy and trade debates. (Khana &Palepu, 2010). Frequently used criteria for defining emerging markets Category Poverty Criteria Low or middle income country Low average living standards Not industrialized Low market capitalization relative to GDP Low stock market turnover and few listed stocks Low sovereign debt ratings Economic liberalization Open to foreign investment Recent economic growth

Capital markets

Growth potential

(Khana &Palepu, 2010, p. 4)

 In order to differentiate emerging markets from developed economies, three different opinion and views exist. The first one is that emerging countries have had a fast economic growth due to the opening of their economies in terms of trade, investment and technology. Due to the aperture a strong middle class was created willing to consume and work, companies take advantage of these work force when in developed economies they can’t (Khana and Palepu, 2010). Second view is that businesses based in emerging markets are competing hand in hand with companies based in developed economies, so they need to be more competitive. Third view is that emerging economies are similar to other markets, the difference is that they are moving faster; indicators of companies listed in the New York Stock Exchange or the number of billionaires in Forbes could be examples of these. (Khana & Palepu, 2010). One of the most important aspects to consider about emerging markets it that in these markets, buyers and sellers would not easily or efficiently come together because there is an institutional void that needs to be overcome. Every market has its own difference regarding institutions, so it’s important for companies interested in invest in them to incorporate it in their risk assessment and adapt their strategy taking these voids into consideration. (Khana & Palepu, 2010). “In order for companies to take advantage of these institutional voids, it’s important to identify the lack of intermediaries that add value and reduce transaction cost for buyers and sellers. There are six types of market institutions: Credibility enhancers, information analyzers and advisers, aggregators and distributors, transaction facilitators, regulators, and adjudicators. Each one of them completes a critical job in order for the market to function properly”. (Khana & Palepu, 2010 p. 12) These institutions needs specialized skills and knowledge to achieve its mission, growth of these institutions is also a matter of politics not only economics. (Khana & Palepu, 2010). Institutional infrastructure in a developed market (the United States) Type of market institution Credibility enhancers Function it performs Third‐party certification of claims by suppliers or customers Collect and analyze information on producers and consumers in a given market Examples in capital markets     Audit committees Auditors Examples in product markets       ISO certification. CMM level certification Consumer Reports magazine J.D. Power ratings Press Industry analysts (Gartner group) Examples in talent markets    AACSB certification ETS admission test. Publications that rank universities and professional schools Career counselors HR consultants

Information analyzers and advisers

 

Financial analysts Credit rating agencies for companies and individuals Financial press Financial planners

 



Investment bankers

   

Provide low cost matching and other value added services for suppliers and customers through expertise and economies of scale Transaction Provide a facilitators platform for exchange of information, goods, and services, support consummating transactions Adjudicators Resolve disputes regarding law and private contracts Create and Regulators and other enforce appropriate public regulatory and institutions policy framework

Aggregators and distributors

   

Banks Insurance companies Mutual funds Venture capital and private equity funds

 

Market research firms TripAdvisor Managemen t consultants Audit Bureau of Circulation Trading companies Mass retailers

 



Universities Professional training institutions Labor unions

 

Stock, bond, and futures exchanges Brokerage houses

   

eBay Commodities exchanges Credit card issuers PayPal

 

Executive recruiters Online job announcement Web sites

 

Courts and arbitrators Bankruptcy specialists SEC FASB NASD



Courts and arbitrators

 

  

  

   (Khana & Palepu, 2010, p. 16)

FDA EPA Consumer Product Safety Commission FCC FTC FAA

 



Courts and arbitrators. Union arbitration specialists OSHA Equal Employment Opportunity Commission Unemployment insurance agencies

For Standard Bank to succeed in Latin America is important to recognize its relative advantage as aggregator and distributor, to acquire the capabilities needed and determine the segments it can serve. It is clear that the segment Standard Bank should pursue in Latin America is

the middle class where it has expertise and also the segment that has been growing. Another important factor to take into consideration in order to have more opportunity to be successful is to make deals with local companies that understand and know how to move in those countries. A final recommendation would be to build a local team with the specific information and awareness of the local conditions, how to react quickly and how to enter new segments of the market. (Ichii, Hattori & Michael, 2011). IV. ‐ Conclusion Standard Bank has a lot of different opportunities and options to grow their business and satisfy shareholders; to continue with its vision, one of the logical paths would be to grow into Latin American countries. We can say that Latin America is in the right track as an emerging region, for sure it has a long way to go and a lot to learn, but without a doubt, the process that already started is only going to get stronger. The strengths that Latin America has shown are not the result of improvised economic policies of its governments to respond to the financial crisis, but the result of learning from previous crises in the 80´s. (Casilda Bejar, 2013). The most important challenges for Latin America are to increase its competitiveness and productivity; and to continue with its grow potential, it’s necessary to invest in infrastructure, human resources, diversify exports and improve regulation. (Pozzi, 2013). Understanding these challenges and having a strong vision is the best option to have success in emerging markets. Standard bank needs to recognize that in the financial sector, Latin America needs more bankization and the best way to succeed is with new ways of distribution and innovative products.

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