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We explored strategic options for a small retail bank to go up against large established banks – Hong Kong case study

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The challenger bank scenario – Introduction

The challenger bank scenario is one contemplated by many small and mid-sized banks as they seek opportunities to expand their customer base and deposited assets.  Longstanding service providers with excess cash on hand may consider high-scale growth opportunities and seek avenues to gain a higher rate of return on existing assets over time.

This project explored potential growth strategies for small-sized banks in the Hong Kong banking market.  The full report for this client included detailed analysis of strategic channels of growth by leveraging existing routine transactions with customers, and fulfilling demand for improved online services among a wider target market than the bank’s traditional customer base.

This article is a summary of the report, focused on high-level strategies, and excludes specific activities and references to the client organization.  It is summarized here with permission of the client.  While its focus is on the Hong Kong banking sector, much of the strategies described herein can be applicable across geographies.

Summary

Expanding the scale of operations for small and mid-sized banks, particularly in the Hong Kong banking sector, involves a combination of strategic initiatives that leverage technology, partnerships, regulatory advantages, and market opportunities. The following is a summary of high-level strategies to seize large incremental growth opportunities in the Hong Kong banking sector.

  • Enhance and optimize Digital Banking impact – both customers and operations
  • Leverage Fintech Partnerships to rapidly bring capabilities to market
  • Target Niche Markets and Segments (examples include SME, high net worth, charitable organizations, start-up entrepreneurs, and gig economy workers).
  • Push the envelope on innovation via the regulatory sandbox
  • Apply innovation to overlay the basic services with enhanced customer experience
  • Acquire innovative assets

Leverage Digital Banking and Fintech Partnerships

Broad market appeal for banking services fundamentally requires a maximization of digital banking services.  Therefore, as a minimum starting point, retail bank managers must be ready to undertake a thorough and comprehensive digital transformation.  Small banks must invest in digital core banking solutions to enable continued enhancement of the customer experience at all levels of contact, while at the same time leveraging digital assets to optimize operational efficiency. This objective includes developing user-friendly mobile banking apps, online banking platforms, and digital payment solutions, all of which must be aligned to the bank’s high-level strategy and customer segment targets.

While these capabilities can be developed and implemented over time, the fastest way to market is through collaboration with existing fintech players.  Partnering with fintech companies can help small banks offer innovative products and services. For instance, leveraging fintech solutions for automated lending, AI-driven customer service, and blockchain for secure transactions.

Target Niche Markets and Segments

As banking service capabilities increase in complexity, the opportunities to leverage niche segments also increases.  Digitally enabled banking solutions are often under-developed and under-sold among major banking institutions who are slow to respond to market demands and can miss out on unique market opportunities due to their continued focus on mass market banking – creating perfect opportunities for small banks to carve out specialty services.

One such area is in small business services.  Small businesses often complain about poor customer service, including long response times and lack of personalized attention. They face high fees for transactions, account maintenance, and services like wire transfers. Many find large banks inflexible, with rigid loan requirements and limited customization of financial products. Additionally, small businesses may struggle with complex and time-consuming account management processes, and often feel overlooked compared to larger corporate clients, receiving less tailored advice and support for their specific needs.

Therein lies the opportunity.  Focusing on SMEs can jump-start a bank’s strategic focus on specialized services.  This segment require tailored banking solutions and can provide a steady stream of business in adjacent services.  SME-focused service offers can be leveraged by small and medium-sized banks seeking to fulfil a niche role.  At the core of this capability is leadership by an agile and ambitious management team which has the capability to direct the organizational investment toward the provision of innovative and segment-friendly services.  Here are some examples:

  • SME loans and lines of Credit: For funding operations, expansion, and managing seasonal cash flow needs.
  • Cash Management Services: Including payroll services, bill payment, and wire transfers to streamline financial operations. These are areas where online-based fintech players are making substantial inroads into SME market share, often bundling service packages with CRM, sales, and project management services.
  • Foreign Exchange Services: Facilitating international trade and managing currency risk.
  • Treasury and Risk Management: Helping businesses manage liquidity and financial risks.
  • Mobile and Online Banking: Enabling easy access to accounts, transactions, and financial management tools on the go.
  • Investment Services: Offering business investment accounts and financial planning for growth and capital management.
  • Advisory Services: Providing expert advice on business financial planning, tax strategies, and regulatory compliance.

Variations on these services can target sub-segments of the SME niche market, focusing on small product manufacturers, retailers, and independent service providers.

Other niche market segments with unique banking service requirements include the following:

  • Startups and Entrepreneurs: Having a strong need for seed funding, venture capital, tailored loan products and financial advisory services, banks may seek to partnership with external or high-risk lenders to build a community of financing for entrepreneurial endeavors.  Banks may also provide startup-specific loans, business incubator partnerships, networking events, and mentorship programs.
  • Freelancers and Gig Workers: Primary service needs include easy invoicing, payment processing, tax management, and financial planning.  Niche services may include customized accounts with no minimum balance, instant payment solutions, expense tracking tools, and retirement savings plans.
  • High-Net-Worth Individuals (HNWIs): While there are many specialty banks or upper-tier service offerings already made available by large banks, some unique service opportunities remain in the areas of wealth management, investment advisory, estate planning, tax optimization, and exclusive personalized banking services.  Service offers include tailored investment portfolios, dedicated relationship managers, and concierge services.
  • Non-Profit Organizations and Charities: These organizations have a strong demand for fund management, donation processing, compliance assistance, and support in compliance with respect to financial transparency.  Services may include grant management, donation tracking systems, and specialized financial reporting tools.

Push the envelope on innovation via the regulatory sandbox

With respect to the regulatory environment, the Hong Kong Monetary Authority (HKMA) as implemented a framework through which banks may establish a regulatory sandbox to test and develop innovative financial products in a controlled environment.  Small banks with agile and forward-thinking management teams are well-positioned to undertake innovative activities to pursue unique and differentiating services.

Where there is currently limited regulatory clarity in such areas, small banks may have the opportunity to push toward market leadership.  Some examples of this type of innovation include the following:

  • AI-Driven Financial Advisory Services: While the market has seen significant discussion over the application of AI-enabled services, financial institutions are just beginning to see the possibilities, and regulators are playing continual catch-up.  Some specific areas of development include personalized investment advice and financial planning using artificial intelligence and machine learning.  Small banks may implement a hybrid personalized approach assisted by AI, and provide tailored financial strategies based on real-time data and predictive analytics.
  • Blockchain-Based Payment Solutions: Over the past year, AI has overtaken the hubris of distributed ledger technology, however opportunities remain and in many cases are potentially underutilized, particularly in the areas of secure, transparent, and efficient cross-border payments using blockchain technology. There remains some friction in international transactions, therefore banks which help to reduce transaction times and costs while enhancing security and traceability can bring an added benefit to the market for customers whose business requires frequent and efficient cross-border transactions.
  • Green Finance Products: Green financial solutions include loans and investment products specifically designed for environmentally sustainable projects.  Banks may distinguish their services offers by providing reliable sustainability audit services and ratings, which can enable better investment into sustainable practices while attracting eco-conscious investors, businesses, and consumers.
  • Digital Onboarding and KYC: Many banks are seeking ways to streamline customer onboarding and Know Your Customer (KYC) processes using digital identification and verification technologies.  Banks may enhance their customer experience by significantly reducing the time and effort required to open an account and carry out transactions.  Furthermore, Integrating banking services into non-financial platforms (e.g., e-commerce, ride-sharing apps) can help banks provide seamless financial services directly within the platforms customers use daily, enhancing convenience and accessibility.
  • Compliance Efficiency: banks must remain ever-vigilant of regulatory compliance, and can also better-support their customers in the same. Expansion of niche services in robust compliance systems will enable better adherence to regulatory requirements, which can build trust and credibility with customers and investors.

Apply innovation to overlay the basic services with enhanced customer experience

From good “old fashioned” data analytics to AI chat bots, banks now have more opportunities than ever to improve their customer experience and demonstrate a commitment to long run relationship building.  Here are a few highlights:

  • Personalized Services: using data analytics to understand customer preferences and offer personalized banking solutions can improve customer loyalty.
  • Customer Support: Providing exceptional customer service through multiple channels, including 24/7 online support and dedicated relationship managers, can differentiate a bank from its competitors.
  • AI-driven Personal Financial Advisors: providing personalized financial advice based on a customer’s spending habits, saving goals, and financial history. For example, apps like Cleo or Olivia use AI to help users manage their finances more effectively.
  • Customized Savings Plans: Offering tailored savings plans that automatically adjust based on the customer’s income, expenses, and financial goals, which can help customers save more effectively. For instance, apps such as Qapital allow users to set saving rules that trigger transfers to their savings account based on specific actions (e.g., rounding up purchases) and can be overlayed on top of the bank’s own customer service points.  The Revolut app is another example of technology which enables a smooth user interface and allows users to manage multiple currencies, crypto trading, and budgeting tools.
  • Biometric Authentication: Implementing biometric authentication (fingerprint, facial recognition) for secure and quick access to accounts can reduce time to access.
  • Peer-to-Peer (P2P) Payment Services: Enabling quick and easy P2P payments through mobile apps or integrated services, such as Zelle or Venmo, which have set a standard for seamless P2P transactions.
  • Dynamic Loyalty Programs: Creating reward programs that adapt to customer preferences and behaviors can drive engagement. For instance, some banks offer cashback or points for spending in categories that align with the customer’s spending patterns.
  • Educational Content: Providing customers with access to financial literacy resources, such as webinars, articles, and interactive tools, can empower them to make better financial decisions. Online gurus can be leveraged through partnerships to develop content on specific topics. Their existing market credibility generates positive association between customers and the bank’s brand reputation.
  • Gamification of Savings and Investments: Introducing gamified elements in savings and investment platforms can make financial management more engaging. Apps like Acorns use gamification to encourage users to save and invest by rounding up purchases to the nearest dollar and investing the difference.
  • Expand Product Offerings: not the least significant of the list, providing new and improved products – backed up by rigorous analysis of customers via surveys, interviews and focus group discussions, can help to distinguish a bank’s overall customer service reputation and identify market gaps at an early stage of trend development.

Purchase innovative assets via strategic mergers and acquisitions

Beyond formation of strategic partnerships, if the balance sheet allows, acquisition is still the go-to strategy for large-scale incremental growth. For example, banks can acquire fintech startups to quickly integrate new technologies and expand their service offerings.  Merging with other small banks can create economies of scale, reduce operational costs, and expand the customer base.  Acquisition examples below demonstrate how smaller banks can strategically acquire other companies and integrate innovative technologies, to stay competitive in the rapidly evolving banking industry and enable long run market growth.

First Midwest Bank Acquires Bridgeview Bank Group (2019):

  • Innovation Acquired: Along with the acquisition, First Midwest Bank gained access to Bridgeview’s mobile banking platform and digital tools, which enhanced their own digital banking capabilities. This acquisition allowed First Midwest to offer improved online and mobile banking services to its customers.

Live Oak Bank Acquires Acorn Finance (2021):

  • Innovation Acquired: Acorn Finance is a fintech company specializing in providing a platform for point-of-sale financing solutions. By acquiring Acorn Finance, Live Oak Bank expanded its reach into the fintech space and enhanced its capabilities in loan solutions for home improvement.

Seacoast Banking Corporation Acquires First Green Bancorp (2018):

  • Innovation Acquired: First Green Bancorp was known for its strong commitment to sustainability and its green banking initiatives. Through this acquisition, Seacoast Bank not only expanded its market presence but also integrated First Green’s innovative green banking products.

Valley National Bank Acquires Oritani Bank (2019):

  • Innovation Acquired: Oritani Bank had developed a robust digital banking platform with improved online and mobile banking features.

Customers Bank Acquires BankMobile Technologies (2016):

  • Innovation Acquired: BankMobile Technologies is a digital banking platform focused on providing a completely digital banking experience. Its acquisition of BankMobile enabled digital banking capabilities and implementation of mobile banking, digital account opening, and financial wellness tools.

Conclusion

Many small and mid-sized banks are considering transformation of their business model and service offer to enable expansion of their customer base and increase deposited assets. Established service providers with surplus cash may look for high-growth opportunities to achieve higher returns on existing assets over time.

While this project examined potential growth strategies and was focused on small bank growth in the Hong Kong market, the report also provided details on specific merger opportunities, high-level implementation plans to pursue acquisitions as well as organically expand customer services. The report also highlighted how strategic growth channels can by improved by leveraging existing customer transactions across functions and technology platforms, to meet the demand for enhanced online services while pursuing a broader customer market beyond the bank’s traditional focus areas.