Internationalization of Banking: great opportunities and risks

A trend among the largest

During the last 20 years, banking has followed a clear trend towards internationalization. This strategy has been carried out by leading banks in their countries of origin, which have focused their growth strategy on internationalization and geographical diversification.

The data speaks for itself: the 25 largest banks in the world employ 900,000 people and generate 36% of their income outside their home markets. Currently, the 9 most internationalized banks have a greater volume of business outside their country of origin than in their own, unlike just 15 years ago when only the Standard Chartered Bank complied.

The main reasons for these movements are the following:

  • Leadership in domestic markets that grow moderately
  • Search for markets with higher growth rates
  • Possibility of accompanying clients in their internationalization
  • Entry into less banked markets that allow the application of proven strategies
  • Achieving economies of scale and economies of scope
  • Diversification of risks and returns, which has produced a positive effect for many entities during the current financial crisis

However, not all entities have managed to generate higher returns for their shareholders during their periods of internationalization, and some have even begun divestment movements and refocus on their traditional markets.

Main challenges

Entities face many challenges in their internationalization strategy and the approach chosen to overcome them is the difference between those that will be large global entities with worldwide relevance in the future and those that will fail in the attempt.

The management of global entities is complex because they operate in different countries, with different legislation, different sizes, different competitors, with different clients and products.

It is essential that managers understand the balance that must be struck between individualized management and the mass customization that customer intelligence allows.

In this way, entities face various challenges when deciding to implement an internationalization strategy in their business models. Among some of the most important are those related to the application of the best practices in commercial and marketing management and the definition of the role of the central matrix compared to the role of the countries in business management.

  • Best practices in commercial and marketing management

The first step is to identify and understand the needs and expectations of customers in each of the countries/markets.

A competitive advantage of international banks is the ability to identify best practices where they occur, and then establish the organization, incentives and processes necessary for them to be properly exchanged. Truly global entities flee from the cliché that the best management is in the country of origin.

An example of a successful internationalization strategy can be found in the Spanish banks Banco Santander or BBVA, recognized worldwide for their good management of retail banking, based on customer orientation and focused on directing the commercial force towards the best opportunities identified in their clients.

In a business framed in a fully banked market with medium or high value customers, the good practices of said entities in Spain should be taken as a reference. However, sometimes it is also necessary to identify best practices from other markets. Thus, for example, in Brazilian or Mexican banking, there is a large segment of very low-value customers in the banking process that requires a very low-cost service scheme.

Businesses in these countries have much to contribute in terms of how to define customer strategies that selectively reduce costs and build highly automated business processes to make profitable customers with few low-margin products and turnover ratios of up to 40%. annual.

The leading entities at a global level have incorporated the role of an external partner to the organization that is capable of implementing best practices with local adaptation and with the ability to pivot between the role of the countries and the central matrix.

  • business organization

Global entities need to decide which businesses should be managed locally in each country and which others require centralized corporate management.

The criteria to be taken into account are:

  • The variability in the business model between different countries
  • Possible economies of scale in global management
  • The size of the business and its complexity, both in terms of business volume and number of employees

According to these criteria, some entities choose to manage the Private Banking business more centrally, since the design of financial products and investment recommendations benefit from the global scale. In contrast, the number of commercial managers and staff in central services is not very high.

On the other hand, the Retail Banking business (mass market) with thousands of bank branches, millions of customers and hundreds of local campaigns, is usually managed with great local independence. The function of the corporate areas in these cases is to a greater extent the identification of the best practices, the diagnosis of the potential for improvement and the internal sale to the countries of the improvements that are deemed appropriate.

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