Technology To Enable Middle Sized Banks To Overtake The Megabanks

Biggest is best isn’t it? For the past few years the prevailing logic in the world’s foreign exchange markets is that the bigger the size of a bank’s trading operation and depth of clients, then the greater the profitability.

But, as Anthony Hourihan, the influential banking strategist and University College, Dublin professor, argues the megabanks currently being formed through large-scale acquisitions and mergers will be eclipsed over the next 10 years by technologically enabled medium-sized banks, as well as non-bank competitors from the technology industry.

"In 60 per cent of all European bank mergers in the last 10 years, shareholder returns of the acquiring bank underperformed in the sector by up to 17 per cent in the two years following the deal."

Central to Hourihan’s idea is the enabling power of technology--specifically internet technology--to allow medium sized banks to enjoy the levels of efficiency, product innovation and customer relationship management of much bigger institutions.

"New technologies, like Cognotec’s AutoDeal LITE will quickly give medium-sized banks all the advantages of large-scale banks. Economies of scale are now delivered at a much lower size. With the disadvantages of medium-scale eliminated, by 2010 many of the mid-sized banks will have proven to have been the pacesetters," he says.

Medium-sized banks also have important advantages over the megabanks which makes them more able to easily adapt to the changing competitive environment, says Hourihan. They have less complex legacy structures to dismantle--for instance, large branch networks and internal operations running on dated technical platforms.

They are also likely to have gone through a demotivating and expensive merger process. "Medium sized banks can afford the investment in technology and take these into the future without legacy problems," he says.

However, there are important dangers for medium-sized banks as the threat of disintermediation forms a challenge for all areas of the financial industry.

Because the banking industry does not sell a physical product, and the internet enhances price and service transparency between competing product offerings, the way is open for internet companies like AOL and Microsoft to move into financial services.

This is especially the case with internet banking, as time to market (as well as the cost effectiveness of establishing a business) is greatly enhanced when a physical presence doesn’t have to be established.

Another challenger is fulfillment, leading to Hourihan describing the competitive arena of the next 10 years as "f-commerce" rather than "e-commerce". This will form an important challenge to banks in all areas of their activities, as no matter how innovative their products are, they must be backed up by the operational efficiency to deliver them to the client in a timely manner.

Customer relationship management will be key in enabling banks to retain the 20 per cent of their customers which currently account for, on average, 140 per cent of their profits.

This will require a cultural revolution which sees sales skills more highly valued, as well as investment in product innovation and delivery.