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PCBB Banc Investment Daily August 25, 2015
Banc Investment Daily
August 25, 2015

Community Banks - The Disruptors

We keep reading about disruptors and our thoughts immediately turned to those sounds that disturb our sleep - that's what they are talking about, right? Forbes put together a list of the most disruptive noises as rated by dwellers in apartment buildings and found that many of the noises most likely to disturb sleep were not a big surprise: a party in the building, outside construction, and thumping on the wall. Others that came in high on the list like snoring and nearby footsteps were a little more unusual.
There is another definition of disruption though that relates to technological innovation. A disruptive innovation is one that helps create a new market or value network, and eventually disrupts an existing market and value network (over a few years or decades), ultimately displacing the earlier technology. Banks are actively involved in both sides of this equation, trying to offer value and struggling with the displacement of an earlier technology. Community banks have primarily let the larger banks take on the expense and effort of determining which technologies are likely to stick and which ones will fade away due to lack of utility. But can smaller financial institutions be disruptors, can they lead the way in the quest for what customers want, and in doing so, create new markets and value?
Consider a book by Tolga Tavlas, head of digital banking at Unicredit Bank Austria entitled "Digital Banking Tips - Practical Ideas for Disruptors" that offers some advice on how to go about this. Tavlas had a blog before he wrote a book and what prompted his deeper dive according to an interview with EFMA was that most other writings on the subject were more theoretical than practical. Most banks need a quick and dirty manual on how to implement successful digital banking services.
First a good definition of digital banking is necessary and Tavlas describes it as banking or financial services through self-service channels with limited or no branch support. Internet and mobile services are a crucial part of that, but contact centers for support, ATMs and notification services are equally important parts of the equation.
That said; one of the biggest false assumptions is that innovation is always related to technology and most of the time requires a big financial investment in its development. Instead, banks can often find ways to more efficiently use resources they already have, by using them in a different way in order to bring about change. Banks should look for ways to reduce cost by migrating more transaction operations (both customer and internal) to low cost digital channels, generating revenues wherever possible using digital channels and most important of all increasing customer satisfaction.
For most community banks, partnerships are necessary to accomplish this, especially when it comes to offering technology like mobile services to customers. Strategic partners that can help your bank accomplish greater efficiency and greater customer satisfaction offer some of the greatest opportunities to differentiate your bank's services.
McKinsey and Company offers five criteria for successful partnerships: (1) Have a clear partnership strategy, meaning that both partners understand who the customer is and what they want. (2) Strategic fit of the partners - the relationship between partners should be based on trust and a complementary plan for the endeavor. (3) Harmonized customer experience. (4) Integration between platforms and seamless experience for the customer. (5) Have aligned incentives - financial goals between partners should be aligned with the vision of the task. Standing behind your bank's partnerships and the great technology is your friendly and capable staff to make the customer experience even more successful.
Given these thoughts, community banks can indeed be leaders in innovation and therefore be the disruptors in their markets. Doing so will also hopefully be especially disrupting to the tranquility (and the sleep) of the big bank across the street.