Virtual businesses set to grow, but what are the implications for business banking?BY JOHNNY MCGINLEY
A report released this month by Cushman & Wakefield property consultants found that Asia is in the midst of a boom in business office rents.
Among the findings in the report were that rents for prime business office space in Beijing rose 75% last year and notes that this was the highest increase of any city in the world in 2011. Other Asian cities also experienced similar inflation in business office rents with Hong Kong continuing to be the number one city globally for the most expensive city for office space in terms of total occupancy.
I believe that the continued increase in office accommodation rents is likely to become a significant catalyst for fuelling the growth of Virtual Businesses.
The virtual business model avoids the heavy overheads of business office accommodation. Today with such technology as cheap internet calls, portable computing, cloud based storage services and high definition online video conferencing, business can be setup and run from home or indeed anywhere with internet access.
There is however more to the virtual business model than keeping office accommodation costs low however. If you look at virtual businesses globally one of the things you see is that many of them will have few permanent employees.
They employ freelance staff on an “as required” basis which also helps keep their overheads low while simultaneously improving their competiveness. Indeed, virtual businesses are arguably well placed to compete on a global scale because of their lean and low cost structure when compared to businesses with physical premises.
In an increasingly competitive and tough global business environment the virtual business model has a lot to offer and is arguably very attractive to a B2B or service orientated business.
So how does the potential growth in virtual businesses, fuelled by increasing office accommodation costs across Asia, impact upon business banking in Asia?
I wanted to briefly consider that for this months feature article. This is because not much has been written about this and I believe it is something that will become increasingly important for the Asian and indeed global banking industry going forward over the next 5-10 years.
Let’s start with what we know. We know for example that Singapore in particular is one part of Asia where there are significant incentives for new start-up entrepreneurs to base a business there.
This is because Singapore tax levels and business regulation make it attractive to new businesses and entrepreneurs setting up the country.
Service orientated businesses lend themselves particularly well to the virtual business model.
This is because they do not manufacture anything and so as a result do not need factory or warehousing premises. With an increasingly turbulent and competitive global economy, the virtual business structure which has at its heart a philosophy centred on less expense and more profit, looks set to rapidly take-off now and in the future.
So to kick-start renewed thinking in this area here are three of my thoughts on what the growth of virtual businesses may mean for business banking in Asia, and indeed, globally:
1. Risk Profiling Models
As virtual businesses have a very lean and flexible structure to them and are centred on a low expense, more profit philosophy, risk profiling models for lending may need to be re-thought. Arguably, risk profiling models for traditional businesses based in physical offices and employing staff - with all the overheads and expenses that come with that - will have a different risk profile than a virtual business that does not incur those overheads.
As virtual businesses become more popular this will therefore inevitably lead to more of a focus on this area within the global business banking arena.
2. Business Start-Up Lending To Virtual Businesses
For start-up entrepreneurs setting up a business who adopt the virtual business model it will likely mean that they will not require a significant amount of a loan from a bank to start up that business enterprise. The reason I say that is because if they can run their service orientated business from home or anywhere with a relatively low cost they may not require any bank loan at all to get started.
Even if they do require a start-up loan it is likely to be significantly less than a traditional start-up business looking to lease office premises which has overheads and expenses with that. Technology is advancing all the time now and becoming cheaper the more widespread the adoption of it is, and that in itself will arguably fuel the virtual business trend.
3. Virtual Business Banking Services
I also believe that as the Virtual Business model by its very nature will naturally lead to the entrepreneurs behind them seeking an increasingly deeper virtual banking service. They will seek this in order to match it with and support their virtual business model. This is closely related to my article last month which reported on how Asia Pacific is set to lead investment levels in banking technology in 2012 and how banks can capitalise upon that.