How Smaller Banks Can Use Their Size as a Competitive Advantage

A great thing about the tech industry is that it allows new entrants to quickly become a dominating force in the market. Think of all the companies that seemed like they ruled the world at a time only to be supplanted by a new competitor. There was a time when Myspace seemed unstoppable, until a new social website called Facebook got everyone excited. Every few years we get a new service that dominates everywhere. Businesses like Snapchat, Instagram, and Spotify have competed with much bigger businesses and came out winners. However, we don’t see the same happen as often in the banking industry.

Why the Tech Industry is Easy to Disrupt

The tech industry is not the norm – other industries tend to have a much more stable presence and division of market share all around the world. Businesses like Coca Cola, Nestle, McDonald’s, and Nike have been a dominant force for decades and will remain a dominant force for the foreseeable future. It is important to understand why the tech industry is different in order to understand how smaller banks can act as disruptors similar to tech companies.

The most important factor which differentiates the tech industry with other industries is the infrastructure needed to compete. Imagine a small business that tries to compete with Nestle. Nestle, even if their global presence is ignored and only its American businesses are considered, has manufacturing units and supply chains all over the country. Any small business that wants to compete with Nestle will have to build a national infrastructure of supply chains, manufacturing units, retailers, and much more. This is an extremely difficult task that requires a major investment which small businesses cannot afford.

The same barriers to entry are not present in the tech world. If another business wants to create a competitor to Facebook, they simply need to create the product and host it online. Any potential customer in the world can use their app or website easily. The absence of any physical infrastructure requirements enables the tech industry to have competition that is based more on the usefulness of a product instead of existing infrastructures.

Why Smaller Banks Don’t Use Disruptive Strategies

The banking industry is somewhat similar to the tech industry in many ways. Banks don’t just compete on the infrastructure that they have, but on the services they can provide. It is possible for banks to outmaneuver the competition purely with a better idea or service. The problem, however, is that smaller banks are not as agile as other small businesses. In other industries when a smaller business is competing with a larger business, it uses its small size as an advantage because it is more agile and can thus adapt to changes in the market faster than the bigger business.

In the banking industry we can sometimes see the opposite happen – the biggest banks are coming out with new services, faster turnarounds, and better placements while smaller banks are moving much slower. The main reason behind this difference in the banking and tech industry is the lack of technology in smaller banks.

Technology as a Competitive Advantage

Smaller banks are at a major disadvantage because large banks use technology to be agile. Risk prediction is a great example of a technology that enables larger banks react faster than smaller banks. Risk prediction technology uses internal and external metrics to predict emerging risks. The technology may look at the number of new customers requesting mortgages, compare it to real estate prices, and highlight the fact that a downturn seems to be coming. The larger banks that use such technology will know about the downturn months in advance and will be able to plan accordingly. Smaller banks, on the other hand, will find out about the downturn when it occurs and will have to react quickly to manage investments.

The cost of bank tech solutions was a major reason for the technology gap between large and smaller banks. The largest banks in the nation paid legacy vendors billions of dollars for bespoke solutions that enable smarter banking. The smaller banks obviously couldn’t afford a similar level of investment and were left behind.

However, what smaller banks need to realize now is that this technology gap no longer needs to exist, because bank technology is now less expensive than it ever was. The million dollar bespoke solutions have been replaced by leaner cloud solutions that deliver better technology at a fraction of the cost. This means that smaller businesses can now use technology to disrupt the local market and leave the competition behind.

Interested in seeing how banks can use dynamic and disruptive strategies for bank growth? Join the ABA webinar How Today’s Risk Leaders Drive Innovation: From Risk Mitigation to Dynamic Growth, presented by 360factors, for insights into how banks can drive innovation and use it as a competitive advantage.