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Which forces drive the banks to new investments?
Innovation mechanisms banks use to succeed challenges
Worked: 1.Orkida Ilollari (Findiku) PhDc
2.Gentiana Gjino PhDc
April 2013
Competition has created a fast-paced system where banks are
changing in order to survive. This force of change is felt nowhere more
strongly than in financial services offered by Retail Industry.
Innovation in the banking system stands more in the organizational
changes process than in new product development in a traditional
The structure of Retail has gone under dramatic change.
The main factors of this dramatic change are the augmented
international competition, rapid innovations in new financial
New electronic tools of banking transactions continue to develop due
to their relative cost advantage with the paper-based banking system.
The most important force of change in the banking industry is the
rapid evolution of consumer needs and desires.
Innovation and Banks Challenges
The competition is increasing from other agents in the financial
services industry continues to waste the market-share of banks.
This competition, sideways with the big changes in information
technology, brings the banks to the need to innovate in products,
services, and delivery channels.
This change has brought an increased pressure on managers and
employees to improve productivity and financial performance
Obviously the question is raised: how do banks manage to bridge
these challenges, keeping in mind the increasing competition in the
retail banking system and the rapid technological evolution?
It must be known that not all innovations are necessarily good and
even if the innovation is a good idea, its execution can cost much
more than its profits.
Changing of Consumer Behavior
The force of change in the banking industry is the rapid
evolution of consumer wants and needs.
As a result, banks can lose market share if they do not invest in
technologies and innovations.
The change in the consumer behavior will bring the utmost
profit to the banks by reducing costs.
Consequently, banks must continue to innovate in order to
reach the changing needs and desires of the consumer, while at
the same time evolving new fee structures to transfer consumers
away from high cost delivery systems.
This mixture of innovation and behavior change
should lie at the heart of the modern banking
Change and Consolidation of Rules
Initially, the regulations that restricted banks interests and the
expansion of product lines of the banks started to weaken
The bank holding companies are progressively procuring similar
financial companies, brokerage companies, and insurance
companies in order to offer a full spectrum of financial products to
their customers.
The key factors in every bank are “The Shared Wallet with
others” and the will to attract and retain the financial business of
the consumer.
However, several
studies of efficiency in the
banking industry show that neither scale
economies nor range efficiency is the core
cause of inefficiency.
Strategies applied by the Banks
Observations show clearly that in a few years the banking market
has undergone through essential transformations.
The crucial element is the adaptation to the new characteristics of
the market and not to see them as an obstacle to change.
All this often requires a modification of the basis strategies that
take into account the new prospects of the market evolution.
There is no need to decide to change, given that our competitors
change, considering the situation as a trend.
The real crucial factor of success for a bank is that the bank
should be clear in the strategic plan that it will follow. From this
point come :
the technological choices,
the reference indicators,
the products that will be distributed,
how the communication will be done​​,
the “pricing” policies, the workflow,
the human resources employment,
the formatting that will be implemented and the process of counters and
staff retraining.
Having a clear strategic plan the bank knows the path to follow by
anticipating and solving problems before they are encountered.
Strategies applied by the Banks
Using Porter's classification there are two types of strategies:
Cost Leadership
Technology is evaluating at a very fast pace and to follow its
rhythm, as well as to maintain and improve the quality of
providing services it is needed to continuously update
Cost Leadership Strategy
"Cost leadership" is an aggressive strategy practiced especially by
virtual banks as a new entry in the banking industry.
In these cases a “cost leadership” strategy has a double benefit.
It is crucial not to reduce the quality level of services, as this risk giving
a negative image and reputation .
This strategy is difficult to be followed by other traditional banks.
. •
For the customer there is a risk that this might be only a "decoration",
which has the function of catching attention without offering after wise
services at really advantageous prices.
A bank that intends to pursue this strategy should take into account that
it has to deal with a very "wicked” clientele, who goes where it is
economically more lucrative, and that the policy of making them
"loyal" is hardly giving great results.
Strategy builders know very well that one cannot continue like this for
a long time. Once the objective of raising the image in the market has
been achieved, banks should think of new strategies.
One strategy that can be taken into consideration at this point is the one
of the "differentiated" offer.
Differentiation strategy
This strategy can be used by banks that decide to differentiate services
passing through the virtual channels. “Differentiation" does not mean
only passing to various distribution channels of products and services,
but above all, to being able to create a quality differentiation from the
offered services.
. •
A real differentiation policy is based on the capacity of offering a range
of services, the capacity to supply added-value information, the
capacity to utilize all the powers that technology offers and the
perception of those advantages by customers, the capacity of listening
to customer needs and assisting step by step on using these new
From this analysis, it comes clear that the choice between these two strategies should be
made after a careful study of the objectives, the type of customer, the traditions, the image,
the resources and competencies of a bank. A mistake at this stage can have many negative
effects and influence operationally for a long period.
New Technologies and Information Delivery
Technology plays a key role in the performance of banks. It is still
difficult to ascertain the profits brought by big investments in
The performance improvements will be noticed in the integration of
front- and back-office functions.
Instead of seeing the bank as a gathering line provider of standardized
services, it can be viewed as a point of sale with flexible production
capabilities. At the core of the bank there is a wide-ranging customer
database and a product profit database.
Prior to this innovation, it was not possible for an employee to view
the entire customer relationship at once.
Why is this important?
A total (or single) view lets the employees understand how important a
customer is based on their portfolio of products, rather than on their
current accounts balance.
Banks have many alternatives available with this new channel, and
with these alternatives come managerial decisions regarding alliances,
outsourcing, developing new products that will affect future
Technologies have become significant components for banking
institutions, as much as it is noticed a convergence between banking
and technology sector, composed of alliances and acquisitions.
Using technology does not mean changing the habits of using
money. (Instead, with the help of information and communication technologies, it
is enabled the overcoming of schedules, loss of time and bureaucratic aspects of
traditional banking, to administrate faster and more efficiently personal finances.)
Firstly computer technology seemed to be only a support for the lifestyle and working style in
industrial societies, rather than a changing factor. Likewise, for the bank losing or winning
customers is faster than in the past, products are levied by "pull" type method.
Integration with innovation helps banks to gain competitive advantage through rapid
development of innovative products, enhancing the customer experience by responding to
customer requests in a uniform way through various channels, increased benefits through
"cross sell".
Each cost should be seen as a separate investment, making sure that any money cashed out
of the bank will go back there.
Retail banking cannot judge only in terms of working and number of counters, but
by investing in technology, it will strengthen its distribution activities through
electronic channels and new systems, where the main goal is meeting customer
requirements by planning strategies that will determine the future,
"Customer oriented".
Thank You!
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