How small-banks-innovating


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How small-banks-innovating

  1. 1. How Small Banks are InnovatingUniversal Banking Solution System Integration Consulting Business Process Outsourcing
  2. 2. When it comes to innovativeness, small banks While this might turn against them should theyhave shown that size does not matter. Small venture outside their core market, within it, it hasbanks, which we define as those with less than earned them the loyalty and faith of their audience.US$ 10 billion in assets for the purpose of this That’s a big plus at a time when others arepaper, typically include the likes of Credit Unions struggling through a crisis of confidence.and Community Banks in the U.S., BuildingSocieties in the U.K. and Co-operative Banks in Staying power: Small banks have proven survivalIndia. (Some of these do have a larger presence skills. Although some institutions were acquiredand balance sheet, but they are the exception or liquidated during the crisis, most smallrather than the rule). That being said, these banks have survived thanks to a combinationbanks have a lot more in common, such as a of agility, restraint and internal control. Hence,co-operative structure, membership-based model their long history is not a matter of good fortuneand an aversion to risk. or coincidence, but the result of a clear long term strategy.Forced to compete against the biggies on thesame terms, these institutions have overcome Superior service: Their manageable size allowsmany hurdles with an innovative approach. Before small banks to accommodate local variationswe understand how they’ve gone about this, let’s based on need or custom. Hence, they are nottake a quick look at the challenges they face: bound like the behemoths are to offer the same services, channels or experience to all customers.• Small banks receive no concessions for their Within the law, small banks are open to ‘bending size, and generally have to adhere to the the rules’ for certain customers, which gives them same rules and regulations as large banks. a crucial edge in service. Hence, in-branch• They lack clout and have limited financial service is friendly and laidback in a pensioners’ resources to spend on marketing, distribution town, but turns brisk and professional in the city. and other things. These are important lessons for mainstream banks which are now trying to personalize their• Since they operate within a restricted offerings to the taste of individual users. geographic area, they are unable to roll out a wide suite of products to a huge Low costs: Small banks have lower funding and customer base. operating cost thanks to their limited suite of products, large retail deposit base and modestSmall banks have some unique advantages. infrastructure and salaries. This is both a source of resilience and competitive advantage.But it’s not all bleak, and small banks do havecertain advantages which they must continue to Relevant products: At global institutions, thecapitalize on. goal of centralized product development is to introduce standardized offerings in every marketTrusted relationships: Because credit unions, that they operate in, perhaps with minorcommunity banks and co-operatives are funded variations. Hence, a designer in Europe whoby their members who are also the users of creates products to be consumed in Asia, Southproducts and services, they form much closer America and everywhere in between, might‘customer’ relationships. It is for this reason that base his decisions on the needs of his ownthese banks continue to enjoy a high level of trust. market, a set of standard benchmarks or someStrong ‘community’ identity: Small banks’ other consideration. In contrast, because theirlimited geographic reach is their blessing in creator is located so close to the actual users, thedisguise - by concentrating all their activity within products of small banks are designed from thea region, they have built a strong identity and latter’s perspective and are usually ‘practical’relationships among the local community as well and well-aligned to their preferences. This is oneas a sound understanding of its needs, which more example of how the ability to make anthey go all out to fulfil. Thus, small banks’ services exception to suit a specific requirement standsoften have a ‘local flavour’ which is missing in small banks in good stead, a point that isthe standardized offerings of bigger institutions. elaborated in a later section. How Small Banks are Innovating
  3. 3. Deep roots: Small banks also demonstrate how Their channels deliver small innovativedeep-rooted they are within the community services. Like their larger brethren, small banksthrough their policy of hiring mostly local talent. too have used channel innovation to improveEmployee loyalty and empathy is stronger in operating efficiency, reach, service and customerthese banks as the personnel identify themselves experience. Many sport kiosks and onlinestrongly with the brand. channels offering products and services to meet the expectations of tech-savvy clients.Greater flexibility: These banks are more Yet, some, like Umpqua Bank have done a littleflexible than the big institutions in many aspects – bit more. They offer a unique cheque printingwhen charging a fee, extending an overdraft or facility at their kiosks specifically for customersasking for documentation, for example. Branch who don’t normally use cheques, but might havemanagers and tellers are willing to go that extra a one-off requirement.mile to provide leeway to their customers insever always. In many institutions, branch Small banks are also leveraging the popularitymanagers enjoy higher power and decision of the mobile phone to improve reach andmaking authority which enables them to act fast interaction with customers in regular markets,in their customers’ favour. and acquire new ones among the financially excluded. Some banks in Brazil and MexicoSmall banks have been quite innovative, in their on-board customers purely on the basis of mobileown way. ownership, treating the currency in the mobile phone as an account balance, whereas others inAmidst all the fanfare surrounding the innovations the Middle East are providing their customers afrom leading banks, the small ones have gone platform for making remittances via mobile.about theirs quietly, in the following ways: Although technology may or may not have playedMost innovation by small banks is customer- a role in the service and product innovation ofcentric. The interest of their customers is the small banks, it has been the prime mover oftop priority of small banks’ innovation agenda; their channel innovation efforts. To their credit,all other considerations are secondary. For technology vendors have taken due note of smallinstance, some of the branches located in banks’ constraints – limited financial resources,commercial areas collect cash outside of low risk appetite, small scale of operations – tobusiness hours from their customers’ business develop pre-configured core banking solutionspremises, something no big bank would do for which can be implemented quickly, at lower cost,fear of the risk involved. Another example is to start them on the road to innovation.that of First National Bank of Omaha whichpioneered the coffee house branch, providing a Their innovation is driven by necessity. Often,space within its premises where customers small banks are forced to innovate in order tocould unwind or check email over a cup of ensure business continuity and, a concept which was subsequently For instance, when they were pressed to reduceimplemented even by the larger institutions. their dependence on servicing multiple large borrowings, they shifted towards securitizedProduct innovation is much more personalized. products. Similarly, small banks operating underThere are known examples of how local banks stringent regulatory jurisdictions went abouthave enhanced a simple savings account by compliance smartly, trying to take full advantagebundling it with a term deposit to help salary of the rules that were enforced upon them byearners save more, or linked it to a pension creating a culture of quality which was a catalystproduct to offer security to seniors during their for the drastic improvement of their processes.twilight years. Some have innovated on term Building societies in the U.K. for instance, havedeposits by introducing a step up option to allow wholeheartedly adopted the various legislationscustomers to add gradually to the account, in applicable to their lending business to formalize,contrast to the term deposits of other banks clean-up and streamline their processes. Thiswhich are not this flexible. has resulted in increased market confidence, How Small Banks are Innovating
  4. 4. improved customer satisfaction and employee efficient and from the institutions’ point of view,empowerment. also strengthen security against fraud and improve compliance. Cost permitting, videoThe future of small banking innovation banking might be increasingly deployed to deliver a personal, branch-like experience overExciting possibilities for innovation await the self-service channels. And social media mightsmall banking sector. Which is just as well, play a key role in the future when these banksbecause being constrained from expanding their need to pursue Gen Y, these institutions can only grow theirbusiness with better products and services, Because there are so many possibilities openhigher cross-sales or other innovative means. to small banks around the world, there’s noOne way to get around their size and resource telling which path they will take. However, onelimitations is to pool what they have with other thing is certain – they’re all headed in the directioninstitutions, to mutual benefit. This could take the of innovation.shape of a co-opetition arrangement in which asmall bank throws open its distribution network Referencesto a national player, and gets access to the latter’sproducts or technology in return. 1. T h r e e R e a s o n s F i n a n c i a l S e r v i c e s Innovation is Moving to Emerging Markets,In fact, some small banks have been market, 19 August 2010 (Don’tleaders in the adoption of technology-driven know the author)innovation, setting an example to their peers andmainstream competitors by readily embracing the 2. and hosting services for their hardware small-banks/SuyashRai,requirements. This has given them the singularadvantage of converting capital expenditure onIT infrastructure into a variable operating expense. AuthorThere’s also a real likelihood of identificationtechnologies such as biometrics being used at Anuradha MallyaATMs to cut short transaction time as well as Principal Consultant – Product Strategy, Finacleenable the less literate to adopt the channel. Infosys Technologies LimitedSuch technologies come cheap, are pretty How Small Banks are Innovating
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