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 (Exhibit 1 and Exhibit 2).

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 opportunities in countries such as China and Brazil could exceed those in many OECD countries by 2002 (Exhibit 3). 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). Overseas banks can establish branches there relatively easily, and are free to set up joint ventures with local banks as long as the local bank owns at least 15 percent of the venture.

Local competitive environment. The extent to which new entrants in a market will succeed hinges also on their ability to offer customers distinctive value. That in turn will depend on the competition. In many markets, particularly emerging ones, local banks enjoy the lion’s share of PFS business, but the low level of competition often means they are poorly attuned to changing customer needs. Newcomers therefore have wide scope to offer different and better services.

In more fragmented markets, competition is likely to be stiffer but consumer loyalty might be weaker, so customers may not need as much persuading that an outside or non-bank institution is a suitable provider of PFS.

Asset mix. The particular mix of assets and liabilities held by consumers in a given country is also important in determining opportunities. In many emerging economies, a huge portion of personal assets is still held in bank deposits rather than in securities or mutual funds, as is the case in some OECD countries (Exhibit 4). In such markets, a more efficient foreign operator might be able to gain share by offering a better service and better yields on customers’ deposits, while extracting value from these traditionally high-margin deposits.

Channel opportunity. PFS providers looking for business outside their home bases are often attracted by the idea of building a franchise without the costly infrastructure saddling local companies. To do so requires the development of direct telephone, mail, or electronic sales channels. Yet few markets currently have direct channels of any strength. (Direct channels take 5 to 10 percent of PFS sales in the United Kingdom and Germany, while workplace channels account for 20 percent or more of sales in Switzerland, Australia, and Brazil.) New entrants will therefore have to be able to invest in building infrastructure, or develop direct channels.

Global PFS providers

The globalization of PFS is just beginning. None the less, some early movers—such as Citibank in retail banking and AIG in insurance—have already staked out leading positions in the fastest-growing markets. Their learning curve has been long: they became successful globalizers not overnight, but over decades. Financial institutions that aspire to be tomorrow’s global leaders must therefore start laying the foundations today.