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Small Banks Lead the Innovation Agenda

The elephant is always afraid of the ant, said an old jungle lore. Today’s banking environment seems to reflect this adage more than ever.

For the sake of simplicity, let us define small banks as banks with less than US$ 5 billion in assets. These small banks might not have substantial budgets to fund extensive research operations like the larger banks do, but they have the ability to breed new ideas and the flexibility and the hunger to apply them to disrupt their competition, and the banking industry as a whole. Today, we are witnessing numerous instances of smaller players spawning innovations across social media, self-service channels, mobile banking, pricing, payments etc. to deliver customer delight.

So, what is making banking, an industry not often associated with innovation, look for new and innovative ideas? Moreover, what makes small banks stay ahead in the innovation race? The idea is not that small is best and big is boring. There are lessons on agility, drive for change and customer orientation that larger institutions can imbibe from the smaller banks and replicate them accordingly.

The BORED Consumer!

The pampered for choice consumer is bored! With every new technology defining a new way of consuming, sharing and delivering information, the constant question when thinking in the context of money is “Why can’t I do that” and often, the answer is the inability of the bank. The next logical response is “Since my bank does not allow me to do it, I found this other cool guy who does.”

The “I” that occurs repeatedly in the paragraph above is the primary driver for change. Delivering human-centric change is the most dominant and compelling factor inducing innovative ideas in banking. Be it about getting more individual customers or retaining the existing ones, the change is perceptible.

Where Small Banks Hold an Edge

I also want to talk about some of the attributes that help small banks lead the innovation race. First, small banks are more agile than big institutions when it comes to decision-making, adoption of technology and the way they provide banking services in general. Smaller banks tend to be more flexible in terms of fees and charges, product modification, need for documentation and customer on-boarding. They are also typically faster and more effective than their larger counterparts in adopting new technologies. A great example to demonstrate this is Access bank, a reputed bank in Nigeria. The bank has been extensively recognized for its innovative products, performance, and customer service. The bank recently launched a highly innovative, web-enabled product designed to facilitate seamless trade transaction between the bank's customers and their trade partners in any part of the world. The product supports online, real-time initiation and tracking of transactions by customers of the bank from the convenience of their homes and offices. The bank has won multiple global awards, prominent among these being ‘The Banker 2012 mergers and acquisitions deal of the year’ for Africa, and ‘Best Bank in West Africa’ award by African Banker in 2012.

Secondly, these banks excel when it comes to customer service. These banks accommodate local variations based on region-specific and customer-specific needs. They can offer differentiated and customized services, channels or experience to all customers. The small banks can always take calculated risks, which enable them to afford new and innovative approaches that do not place the bank in jeopardy even if they falter. Small banks also have lower operating costs since they have a limited suite of products, a large retail customer base, and moderate infrastructure and staff costs, which provides them both the ability to sustain and develop a competitive advantage. With over forty years of experience, Diamond Trust Bank, Africa provides its customers with ease and convenience, flexibility, accessibility and competitive rates to its business customers. The bank has been awarded as the Best Bank in Asset Finance (2012 and 2011), Best Bank in SME Banking (2011), and Best Bank in Technology Use (2009) by The Banking Awards.

Lastly, some of the small banks operate on a completely different business model based on the needs of a specific customer group, such as gen-Y users. The virtual banks are an excellent example of business model innovation. Jibun Bank has pioneered a successful new business model the revolutionary Mobile Only banking. In its first two years of operation it attracted more than US$ 1.7 billion in deposits as more than one million customers opened accounts, equating to a compound annual growth rate of 958%. The bank offers the entire lifecycle of products and services on the mobile phone—right from account opening to account closure, and has recently expanded into insurance and credit cards as well. The bank received The Asian Banker IT Implementation Award of Best Core Banking Project (2009) and ‘Most Innovative Entry’.

The Way Forward

Going forward, the small banks would keep investing in innovation to differentiate themselves and compete with large banks. With limitations on network expansion, they will grow by providing better customer experience, higher up/cross-sell revenues, rightly priced products and services, or by other innovative means. This holds a huge promise for the banking industry itself, as the players will be forced to strike a balance between innovation and business-as-usual. A group of small banks may also come together to collaborate and improve upon existing industry practices; e.g., payments —banks can form an association to process inter-banks payments faster. Small banks would continue to stress upon innovation, and get recognized and rewarded in return by their customers and the industry.

I would love to hear about the innovative ideas you are trying to implement within your bank and what you are doing differently.


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