If there wasn't enough focus on it already, the financial crisis
has taken innovation to the top of most banks' agendas. In mature as
well as emerging markets, banking institutions are differentiating their
value proposition from that of their competitors by innovating upon
their offerings, benefiting both customers and the organization in the
process.
The pursuit of globalization and global standardization
by banks has meant that innovations that originate in a particular
region make their way quickly across the world, so that banking
customers everywhere enjoy a similar, if not the same, usage experience.
That
being said, there are many differences in the way that banks from the
developed and developing worlds innovate, arising from other fundamental
differences in their respective markets. The nature of these factors
and their causative impact on innovation differentiation is discussed
below:
Market Maturity
A research report presented by The
Asian Banker and Finacle from Infosys on the innovation trends and
practices in Asia made an interesting observation about how banks go
through successive stages of innovation - from Product to Sales to
Market Share to Customer Service Innovation - depending on market
maturity. Therefore, while banks in Bangladesh, Sri Lanka, Vietnam, and
rural China and India, which have large unbanked segments focus on
introducing basic products, their counterparts in the competitive
Australian, Singapore and Hong Kong Markets are more intent on defending
their market share by providing accessibility, convenience and cheaper
distribution.
Customer Universe
Given the high penetration
of banking services amongst developed nations, a bank operating in those
markets can only grow its market share at the cost of another. On the
other hand, developing countries house the majority of the 2
billion-strong global unbanked population and hence have more room for
growth and relatively less aggressive competition. Here, banks can grow
along with the market by bringing those without financial access into
the net of basic banking services.
Although financial inclusion is
a much larger priority - and opportunity for innovation - in emerging
economies, it does not mean that it has no place in mature markets. In
fact, the U.S. alone was estimated to have over 70 million
unbanked/underbanked people in 2009. However, the nature of the problem
is quite different there. Financial exclusion in the developing world is
essentially on account of poor branch penetration in rural or remote
areas, whereas in developed countries it is quite often, a voluntary
decision or the result of inability to meet KYC norms - the Hispanic
immigrants living in the United States are a classic example of this
phenomenon, choosing to rely on informal networks or carriers rather
than on a bank to send money home.
High Net Worth Segment
In
every banking market around the world, High Net Worth Individuals
(HNWI) are top-drawer. Because the financial elite come in small stable
numbers, (even in 2020, the U.S., which has the most HNWI, will have
less than 21 million millionaire households) acquiring such customers in
both developing and developed markets is usually a matter of poaching
them from rival banks. Also, since the ultra-rich are the same
everywhere, having similar needs, wealth managers and private bankers in
both the developed and developing world follow a largely similar
approach while serving these customers. A key difference however, is
that the HNWI segment is growing faster in emerging markets thanks to
their rising prosperity as a result of which their mass affluent are
turning rich and the already rich are turning richer quicker than their
mature market counterparts. This is creating more opportunities for
innovation in emerging nations.
Telecom and Payments Infrastructure
The
well-established telecommunications and payments infrastructure of the
developed world facilitates banking transactions over multiple channels,
such as the phone, ATM, POS terminal, Internet and mobile, and payments
through several additional modes including cards, giros and third party
payment gateways like PayPal. Unfortunately, such facilities are either
missing or very poorly developed in developing countries -
infrastructure for financial transactions is still in its infancy and
only a limited number of payment options exist.
However, with
mobile networks penetrating remote corners of the developing world that
still lack basic channels of banking and communication, the mobile phone
is emerging as a viable mode of payment and financial transaction.
Banking innovation in many emerging economies is focusing on mobile
phone-based services, albeit of a basic variety. On the other hand, in
the sophisticated mobile markets of the developed world, it's the
Smartphones and tablets that are taking banking innovation towards
augmented reality, location-based services, contactless payments etc.
The
most interesting contrast though, is that while the infrastructure of
developed countries has enabled high-end innovation, it has mostly
brought incremental change, whereas in the developing world, the absence
of infrastructure has forced industry players to look for breakthrough,
at times disruptive, solutions. The development and success of M-PESA, a
mobile phone-based money transfer service in Kenya is a perfect example
of the latter.
Customer Need
In many emerging economies, a
sizeable majority of people are first or second generation banking
customers and therefore, relatively new to such services. Therefore, the
product and service expectations of these customers are quite different
- and dare we say, less evolved - than those of mature market
customers, which has a strong bearing on innovation.
Branch
banking is a classic example of this difference. Bank branches located
in emerging markets are mainly concerned with processing a large number
of small-ticket transactions as efficiently as possible. They are
interested in innovations that cut cost, improve productivity or ramp up
scale at the branch. In contrast, branch banking is on the decline in
mature markets, where customers use electronic channels to conduct
routine transactions. In these markets, branches are focused on
delivering financial advice and high-end services; therefore, their
innovation priorities revolve around improving customer experience
within the branch.
Legacy Burden
In a 2010 survey of banks
in Europe, Middle East and Africa presented jointly by the European
Financial Marketing Association and Finacle from Infosys, nearly two out
of three respondents from the mature markets of West Europe said that
inflexible legacy systems posed a barrier to innovation. Indeed, this is
symptomatic of the banking industries of most developed nations, which
are struggling to implement new ideas, hindered by their burden of
legacy. For instance, in the U.S., the legacy infrastructure supporting
card transactions is so widespread that replacing it in order to switch
to new robust EMV card technology is both prohibitively expensive and
extremely difficult to implement. On the other hand, adopting new
technology is much simpler in the developing world, which is unhindered
by legacy issues. Not only that, freedom from legacy has also allowed
banks in developing countries to come up with unique products that were
unheard of in the rest of the world.
Cost of Innovation
It
is found that the cost of implementing a completely new system in the
developing world is lower than that in the developed one. Often, the
developed world has heavy investments in an existing technology and an
inventory of infrastructure on which the return is yet to be fully
realised. The developing world has no such legacy investment in
infrastructure to worry about, and hence innovations are comparatively
cost effective.
The tables are turned in the case of incremental
innovation, which typically works around existing infrastructure or
investments - available in the developed world, but not in the
developing. Therefore, in order to adopt or innovate upon something that
isn't totally new, the developing world may first need to make sizeable
investment in basic infrastructure.
Legal and Compliance Issues
Compared
to emerging economies, mature markets face tougher legal and compliance
requirements that could be a constraint while innovating. The former
not only have a more permissive regulatory environment, but also less
harsh liability norms, making it easier for banks to experiment, and if
unsuccessful, withdraw quickly without suffering too much damage. This
would not be possible in a country like the U.S., for instance, where
there is a high likelihood of severe public backlash should an
innovation fail. It is therefore no surprise that many multinational
banks including HSBC, Citibank, and Standard Chartered pilot innovations
in the developing world before taking them elsewhere.
What is common?
Differences
apart, the two worlds do have some things in common. Both encounter
similar challenges while trying to establish a culture of innovation,
namely resistance to change, misalignment between business and
technology teams, and lack of unanimity of purpose. Similarly, all banks
in all markets face budgetary constraints, made worse by the financial
crisis.
There's another 'peculiar' commonality between developed
and developing world banking innovation, which is that some ideas,
particularly in the realm of payments, which are well suited to one
world are quite irrelevant in the other. For instance, NFC technology,
which has made a big impact in Japan - by enabling tap and go mobile
payments - and is gathering momentum in many developed countries, is
likely to be a slow-starter in emerging economies on account of the
infrastructure that it calls for. Likewise, mobile money transfer, a
super hit amongst the unbanked classes of Africa and South Asia, may
gain marginal acceptance at best in say, Western Europe or Australia.
Ironically, in their respective worlds, these mobile payment innovations
are happening at break-neck pace!
Conclusion
While local
and cultural variations will continue to create some differences between
banking innovation in different countries (even McDonalds has a
separate menu for certain countries!) for at least a while, connectivity
and globalization will pull in the opposite direction to spread many
other innovations from one part of the world to another, sometimes in
real time. Therefore, in future it is more likely that an innovation
will get picked up, replicated, adapted, improved and transported much
faster than before. The consolidation and standardization of systems,
processes and products by global banks will further this trend of global
relevance. Also, much of the developing world will evolve into a
developed state, erasing many of the differences that exist today. That
being said, institutions that are rooted locally will continue to
practice localized innovation as a way of differentiation.
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