1. How Small Banks are Innovating
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2. When it comes to innovativeness, small banks While this might turn against them should they
have shown that size does not matter. Small venture outside their core market, within it, it has
banks, 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 are
paper, typically include the likes of Credit Unions struggling through a crisis of confidence.
and Community Banks in the U.S., Building
Societies in the U.K. and Co-operative Banks in Staying power: Small banks have proven survival
India. (Some of these do have a larger presence skills. Although some institutions were acquired
and balance sheet, but they are the exception or liquidated during the crisis, most small
rather than the rule). That being said, these banks have survived thanks to a combination
banks 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 fortune
and an aversion to risk. or coincidence, but the result of a clear long
term strategy.
Forced to compete against the biggies on the
same terms, these institutions have overcome Superior service: Their manageable size allows
many hurdles with an innovative approach. Before small banks to accommodate local variations
we understand how they’ve gone about this, let’s based on need or custom. Hence, they are not
take 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 modest
Small 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 have
certain advantages which they must continue to Relevant products: At global institutions, the
capitalize on. goal of centralized product development is to
introduce standardized offerings in every market
Trusted relationships: Because credit unions,
that they operate in, perhaps with minor
community banks and co-operatives are funded
variations. Hence, a designer in Europe who
by their members who are also the users of
creates products to be consumed in Asia, South
products 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 own
these banks continue to enjoy a high level of trust.
market, a set of standard benchmarks or some
Strong ‘community’ identity: Small banks’ other consideration. In contrast, because their
limited geographic reach is their blessing in creator is located so close to the actual users, the
disguise - by concentrating all their activity within products of small banks are designed from the
a 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 one
as a sound understanding of its needs, which more example of how the ability to make an
they go all out to fulfil. Thus, small banks’ services exception to suit a specific requirement stands
often have a ‘local flavour’ which is missing in small banks in good stead, a point that is
the standardized offerings of bigger institutions. elaborated in a later section.
How Small Banks are Innovating

3. Deep roots: Small banks also demonstrate how Their channels deliver small innovative
deep-rooted they are within the community services. Like their larger brethren, small banks
through their policy of hiring mostly local talent. too have used channel innovation to improve
Employee loyalty and empathy is stronger in operating efficiency, reach, service and customer
these banks as the personnel identify themselves experience. Many sport kiosks and online
strongly 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 little
flexible than the big institutions in many aspects – bit more. They offer a unique cheque printing
when charging a fee, extending an overdraft or facility at their kiosks specifically for customers
asking for documentation, for example. Branch who don’t normally use cheques, but might have
managers and tellers are willing to go that extra a one-off requirement.
mile to provide leeway to their customers in
sever always. In many institutions, branch Small banks are also leveraging the popularity
managers enjoy higher power and decision of the mobile phone to improve reach and
making 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 Mexico
Small banks have been quite innovative, in their on-board customers purely on the basis of mobile
own way. ownership, treating the currency in the mobile
phone as an account balance, whereas others in
Amidst all the fanfare surrounding the innovations the Middle East are providing their customers a
from 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 played
Most innovation by small banks is customer- a role in the service and product innovation of
centric. The interest of their customers is the small banks, it has been the prime mover of
top 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 small
instance, some of the branches located in banks’ constraints – limited financial resources,
commercial areas collect cash outside of low risk appetite, small scale of operations – to
business hours from their customers’ business develop pre-configured core banking solutions
premises, 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 which
pioneered 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 to
could unwind or check email over a cup of ensure business continuity and sustainability.
coffee, a concept which was subsequently For instance, when they were pressed to reduce
implemented even by the larger institutions. their dependence on servicing multiple large
borrowings, they shifted towards securitized
Product innovation is much more personalized. products. Similarly, small banks operating under
There are known examples of how local banks stringent regulatory jurisdictions went about
have enhanced a simple savings account by compliance smartly, trying to take full advantage
bundling it with a term deposit to help salary of the rules that were enforced upon them by
earners save more, or linked it to a pension creating a culture of quality which was a catalyst
product 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, have
deposits by introducing a step up option to allow wholeheartedly adopted the various legislations
customers 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. This
which are not this flexible. has resulted in increased market confidence,
How Small Banks are Innovating

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, video
The future of small banking innovation banking might be increasingly deployed to
deliver a personal, branch-like experience over
Exciting possibilities for innovation await the self-service channels. And social media might
small banking sector. Which is just as well, play a key role in the future when these banks
because being constrained from expanding their need to pursue Gen Y customers.
network, these institutions can only grow their
business with better products and services, Because there are so many possibilities open
higher cross-sales or other innovative means. to small banks around the world, there’s no
One way to get around their size and resource telling which path they will take. However, one
limitations is to pool what they have with other thing is certain – they’re all headed in the direction
institutions, to mutual benefit. This could take the of innovation.
shape of a co-opetition arrangement in which a
small bank throws open its distribution network References
to a national player, and gets access to the latter’s
products 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 EconomyWatch.com, 19 August 2010 (Don’t
leaders in the adoption of technology-driven know the author)
innovation, setting an example to their peers and
mainstream competitors by readily embracing the 2. http://ifmrblog.com/2010/11/16/the-case-for-
Cloud and hosting services for their hardware small-banks/SuyashRai,
requirements. This has given them the singular
advantage of converting capital expenditure on
IT infrastructure into a variable operating expense.
Author
There’s also a real likelihood of identification
technologies such as biometrics being used at Anuradha Mallya
ATMs to cut short transaction time as well as Principal Consultant – Product Strategy, Finacle
enable the less literate to adopt the channel. Infosys Technologies Limited
Such technologies come cheap, are pretty
How Small Banks are Innovating

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