Banking Innovation: What's same, What's Different, in the Developed and Developing world If there wasn’t enough focus on it already, the financial crisis has taken innovation to the top of the most banks’ agendas. In mature as well as emerging markets, banking instructions are differentiating their value proposition from that of their competitors by innovating upon their offerings, benefiting both customers and the organisation in the process

1. Banking Innovation: What's Same,
What's Different, in the Developed and
Developing World
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2. If there wasn’t enough focus on it already, the competition. Here, banks can grow along
financial crisis has taken innovation to the top with the market by bringing those without
of most banks’ agendas. In mature as well as financial access into the net of basic
emerging markets, banking institutions are banking services.
differentiating their value proposition from that
of their competitors by innovating upon their Although financial inclusion is a much larger
offerings, benefiting both customers and the priority – and opportunity for innovation – in
organization in the process. emerging economies, it does not mean that
it has no place in mature markets. In fact,
The pursuit of globalization and global the U.S. alone was estimated to have over
standardization by banks has meant that 70 million unbanked/underbanked people
innovations that originate in a particular region in 2009. However, the nature of the problem
make their way quickly across the world, so is quite different there. Financial exclusion
that banking customers everywhere enjoy a in the developing world is essentially on
similar, if not the same, usage experience. account of poor branch penetration in rural
or remote areas, whereas in developed
That being said, there are many differences in countries it is quite often, a voluntary decision
the way that banks from the developed and or the result of inability to meet KYC norms –
developing worlds innovate, arising from other the Hispanic immigrants living in the United
fundamental differences in their respective States are a classic example of this
markets. The nature of these factors and their phenomenon, choosing to rely on informal
causative impact on innovation differentiation is networks or carriers rather than on a bank to
discussed below: send money home.
• Market Maturity • High Net Worth Segment
A research report presented by The Asian In every banking market around the world,
Banker and Finacle from Infosys on the High Net Worth Individuals (HNWI) are
innovation trends and practices in Asia top-drawer. Because the financial elite come
made an interesting observation about how in small stable numbers, (even in 2020, the
banks go through successive stages of U.S., which has the most HNWI, will have
innovation – from Product to Sales to Market less than 21 million millionaire households)
Share to Customer Service Innovation – acquiring such customers in both developing
depending on market maturity. Therefore, and developed markets is usually a matter
while banks in Bangladesh, Sri Lanka, of poaching them from rival banks. Also,
Vietnam, and rural China and India, which since the ultra-rich are the same everywhere,
have large unbanked segments focus on having similar needs, wealth managers and
introducing basic products, their counterparts private bankers in both the developed and
in the competitive Australian, Singapore developing world follow a largely similar
and Hong Kong Markets are more intent approach while serving these customers. A
on defending their market share by key difference however, is that the HNWI
providing accessibility, convenience and segment is growing faster in emerging
cheaper distribution. markets thanks to their rising prosperity as a
result of which their mass affluent are turning
• Customer Universe rich and the already rich are turning richer
quicker than their mature market counterparts.
Given the high penetration of banking This is creating more opportunities for
services amongst developed nations, a bank innovation in emerging nations.
operating in those markets can only grow
its market share at the cost of another. On • Telecom and Payments Infrastructure
the other hand, developing countries house
the majority of the 2 billion-strong global The well-established telecommunications and
unbanked population and hence have more payments infrastructure of the developed
room for growth and relatively less aggressive world facilitates banking transactions over
Banking Innovation: What's Same, What's Different,
in the Developed and Developing World

3. multiple channels, such as the phone, ATM, transactions as efficiently as possible. They
POS terminal, Internet and mobile, and are interested in innovations that cut cost,
payments through several additional modes improve productivity or ramp up scale at the
including cards, giros and third party branch. In contrast, branch banking is on the
payment gateways like PayPal. Unfortunately, decline in mature markets, where customers
such facilities are either missing or very use electronic channels to conduct routine
poorly developed in developing countries – transactions. In these markets, branches are
infrastructure for financial transactions is focused on delivering financial advice and
still in its infancy and only a limited number high-end services; therefore, their innovation
of payment options exist. priorities revolve around improving customer
experience within the branch.
However, with mobile networks penetrating
remote corners of the developing world that • Legacy Burden
still lack basic channels of banking and
communication, the mobile phone is emerging In a 2010 survey of banks in Europe, Middle
as a viable mode of payment and financial East and Africa presented jointly by the
transaction. Banking innovation in many European Financial Marketing Association
emerging economies is focusing on mobile and Finacle from Infosys, nearly two out of
phone-based services, albeit of a basic three respondents from the mature markets
variety. On the other hand, in the sophisticated of West Europe said that inflexible legacy
mobile markets of the developed world, it’s systems posed a barrier to innovation.
the Smartphones and tablets that are taking Indeed, this is symptomatic of the banking
banking innovation towards augmented industries of most developed nations, which
reality, location-based services, contactless are struggling to implement new ideas,
payments etc. hindered by their burden of legacy. For
instance, in the U.S., the legacy infrastructure
The most interesting contrast though, is supporting card transactions is so widespread
that while the infrastructure of developed that replacing it in order to switch to new
countries has enabled high-end innovation, robust EMV card technology is both
it has mostly brought incremental change, prohibitively expensive and extremely difficult
whereas in the developing world, the to implement. On the other hand, adopting
absence of infrastructure has forced industry new technology is much simpler in the
players to look for breakthrough, at times developing world, which is unhindered by
disruptive, solutions. The development and legacy issues. Not only that, freedom from
success of M-PESA, a mobile phone-based legacy has also allowed banks in developing
money transfer service in Kenya is a perfect countries to come up with unique products
example of the latter. that were unheard of in the rest of the world.
• Customer Need • Cost of Innovation
In many emerging economies, a sizeable It is found that the cost of implementing a
majority of people are first or second completely new system in the developing
generation banking customers and therefore, world is lower than that in the developed
relatively new to such services. Therefore, one. Often, the developed world has heavy
the product and service expectations of investments in an existing technology and
these customers are quite different – and an inventory of infrastructure on which the
dare we say, less evolved – than those of return is yet to be fully realised. The developing
mature market customers, which has a strong world has no such legacy investment in
bearing on innovation. infrastructure to worry about, and hence
innovations are comparatively cost effective.
Branch banking is a classic example of
this difference. Bank branches located in The tables are turned in the case of
emerging markets are mainly concerned incremental innovation, which typically
with processing a large number of small-ticket works around existing infrastructure or
Banking Innovation: What's Same, What's Different,
in the Developed and Developing World

4. investments – available in the developed may gain marginal acceptance at best in
world, but not in the developing. Therefore, say, Western Europe or Australia. Ironically, in
in order to adopt or innovate upon something their respective worlds, these mobile payment
that isn’t totally new, the developing world innovations are happening at break-neck pace!
may first need to make sizeable investment
in basic infrastructure. Conclusion
• Legal and Compliance Issues While local and cultural variations will continue
to create some differences between banking
Compared to emerging economies, mature innovation in different countries (even McDonalds
markets face tougher legal and compliance has a separate menu for certain countries!) for
requirements that could be a constraint while at least a while, connectivity and globalization
innovating. The former not only have a more will pull in the opposite direction to spread many
permissive regulatory environment, but also other innovations from one part of the world to
less harsh liability norms, making it easier another, sometimes in real time. Therefore, in
for banks to experiment, and if unsuccessful, future it is more likely that an innovation will
withdraw quickly without suffering too much get picked up, replicated, adapted, improved
damage. This would not be possible in a and transported much faster than before. The
country like the U.S., for instance, where consolidation and standardization of systems,
there is a high likelihood of severe public processes and products by global banks will
backlash should an innovation fail. It is further this trend of global relevance. Also, much
therefore no surprise that many multinational of the developing world will evolve into a
banks including HSBC, Citibank, and Standard developed state, erasing many of the differences
Chartered pilot innovations in the developing that exist today. That being said, institutions
world before taking them elsewhere. that are rooted locally will continue to practice
localized innovation as a way of differentiation.
What is common?
Reference:
Differences apart, the two worlds do have
• Innovation in Retail Banking – Asia Pacific,
some things in common. Both encounter similar
Presented by The Asian Banker and Finacle
challenges while trying to establish a culture
from Infosys, September 2010
of innovation, namely resistance to change,
misalignment between business and technology • Innovation in Retail Banking, Presented
teams, and lack of unanimity of purpose. by EFMA and Finacle from Infosys,
Similarly, all banks in all markets face budgetary September 2010
constraints, made worse by the financial crisis.
• The US Wealth Management Market In 2020 –
Deloitte,http://www.wealthbriefing.com/html/
There’s another ‘peculiar’ commonality between
article.php?id=36520
developed and developing world banking
innovation, which is that some ideas, particularly • Identifying the Unbanked Market,
in the realm of payments, which are well suited http://www.idology.com/blog?p=344
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 Author
in many developed countries, is likely to be a
Balwant C Surti
slow-starter in emerging economies on account
Head - Solutions Architecture and
of the infrastructure that it calls for. Likewise, Design Group, Finacle
mobile money transfer, a super hit amongst the Infosys Limited
unbanked classes of Africa and South Asia,
Banking Innovation: What's Same, What's Different,
in the Developed and Developing World