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Tracking Innovation in Financial Services

The idea of innovation has been on a conceptual roller coaster in recent years.

Size Matters

Smaller banks may have the upper hand in executing innovative technologies.

By: Cynthia Ramsaran

Good things come to those who wait. But good things also come in small packages. These cliches present a choice to small banks: follow the lead of large banks in adopting proven technology, or seize a competitive edge by embracing technology innovation.

Though the 2004 Financial Services 40 highlights the major players in the financial services industry, according to industry experts, smaller banks may have the upper hand in technology innovation because these institutions have less monetary and architectural risk than large banks with multiple channels and larger systems to upgrade. "With credit unions and the smaller community banks, there is a lot of technology innovation happening," says Wim Geurden, Seattle-based associate partner, financial services technology architecture group, Accenture. "These banks have a large advantage because everything they do is a lot smaller."

Big banks sometimes delay adopting innovative technologies or platforms because a significant ROI might not result from the investment, Geurden explains. "For large banks, it is just economically not feasible to be a rapid adopter of anything," he says. "They need to see that the scale is industrialized and repeatable." The smaller the bank, the easier it is to implement a new system, adds Geurden, who says small banks can more easily implement a new technology such as check truncation, for example.

Smaller Staff, More Hats

Although large financial institutions have the resources to roll out an innovative technology, it is often easier for a small bank - with fewer employees and systems - to succeed in implementing a new system, according to Jane Pitts, senior vice president, chief technology officer, Stephens Federal Bank (Toccoa, Ga.; $180 million in assets). "We try to get the [new] product viewed by a cross section of employees to find out if it is going to work for all of them," Pitts says. "That gives us a broader view and, because we are a smaller shop, people wear different hats."

Because a large institution usually is spread more thinly, with responsibilities spread across more employees - who usually have one expertise - the feedback on a new product goes from department to department, making the employees' views on the success of the implementation less effective, Pitts notes. "At a smaller bank, employees can look at it from a larger perspective, as opposed to an employee at a larger bank who can provide only one perspective."

The same is true for testing new technologies, according to Pitts. With fewer corporate layers, a smaller organization can more easily gather feedback from all types of users than its larger competitors can. When Stephens Federal Bank wanted to automate its loan origination system, it participated in a beta testing program with Fiserv Lending Solutions (Lake Mary, Fla.), Pitts says.

"We had a good experience beta testing because it gave us a lot of input," Pitts relates. She adds that because of the bank's less complicated infrastructure, "If anything went wrong, we could always fall back on our old methods." According to Pitts, the testing went so well that "As [Fiserv] starts new products, they ask if we want to be on the test group and they ask us if it is something that banks would want to use."

Think Outside (the Industry) Box

Although small banks may have an easier path to adopting innovative tools, all banks - large and small - can learn from the technology strategies of leading companies in other industries, according to Accenture's Geurden. "Companies such as e-Bay, Google and Amazon are clearly leaders in the areas of information delivery," he says. "If you look at the technology that they are using, it is very different from banking platforms."

Banks can pick up a tip or two from these companies, as well as from leading insurance companies such as Progressive, which have demonstrated innovation in streamlining processing and making their businesses more efficient, Geurden says. Even the hotel industry offers a good example for banks regarding innovative customer relationship management strategies, he notes. "There are certain hotel chains that have incredible customer info - that track preferences like what you order for room service, for example," Geurden explains. "They keep track of how you behave." This offers a valuable lesson for the banking industry, he adds.

Also regardless of size, if a financial institution wants to be an industry leader, it must take certain risks regarding technology, according to Pamela Schneider, vice president, e-business, Old National Bancorp (Evansville, Ind.; about $9.3 billion in assets). Banks need to look to leverage technology to succeed where they previously failed, she says.

"Gone are the days when a company could expect to follow a five-year plan ... or wait to realize the return on the investment in a project for five years," Schneider asserts. "Today, you can't even wait for the return to be realized for two years."

In today's competitive market, innovation is often the first step toward competitive advantage, she says. "You can use the brain trust in your own organization to take a leap ahead in an area where you previously did not compete well."

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3 Strategies to Gain an Edge

According to Kaihan Krippendorff, author of The Art of the Advantage: 36 Strategies to Seize the Competitive Edge, financial Institutions can gain a competitive advantage by adopting the following tactics:

1. Move upstream into your customer's decision process. Think about what steps your customer takes as he/she moves toward a buy decision, then find a way to position yourself further upstream. By introducing a mini-card, for example, Bank of America moved its credit card from the wallet to the key chain. A customer who steps up to the counter, keys in hand, to pay for gas, may find it easier to hand the teller her key chain than to dig through her purse.

2. Exchange immediate profit for loyalty. Gillette earns profits from replacement blades, not razors, and Sony loses up to $150 on each video game console it sells but makes this up selling individual video games. In each case, the up-front loss locks in a new "loyal" customer. What can you give up to lure a customer into a codependent relationship?

3. Ask how a non-bank would approach your customer: Virgin approached the airline business as only a radio and music retailing company could and took the long-dominant incumbent, British Airways, completely by surprise. ING has similarly started approaching financial-products customers the way a coffee shop might. Before a non-banking competitor tries to take you by surprise, ask, "How would I attempt to steal customers if I were a coffee shop, a supermarket, a gas station or another non-banking firm?"

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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