What you'll learn
- How have companies outside the US innovated Small Business banking?
- Some key innovations including AI that could change US small business banking.
- Building an innovation culture – so you don't get left behind
Transcription:
Isio Nelson (00:10):
First of all, I want to introduce myself. I'm Isio Nelson. I'm the Managing Director at ProSight, responsible for research thought leadership, fraud and strategy for ProSight. My real name is Isio. It's not short for anything. My mom was a hippie and she just decided to make my first 18 years of life a little challenging. But one of the things I did learn in life that I've embraced it in my 30 plus years career in financial services. It's interesting that we happen to be in Vegas. I actually, I distinctly remember in my career, one of my first innovations that I contributed to at a company I was working at household Retail Services. Anybody remember them? They got bought by HSBC and Cap One and they're moving their operation center out of Chicago into Vegas. Vegas was trying to diversify and it happened to be that they said, can you come out for two weeks and help us do the migration?
(01:10):
I said, sure, because it was the two weeks, one week before my 21st birthday and one week after my 21st birthday. So why not As I got here? And one of the things we went through was how we did decline letters to our customers and back in Chicago we used a typewriter with a carbon copy form. For those of you who are younger in the room, a typewriter is a laptop that doesn't get plugged in, and we actually had to spend a lot of dollars on those forms and a lot of people going through it manually. As I went through the process, one of the things that happened was we actually forgot the typewriter back in Chicago, so we had to find a way to get this done. We had operations to continue to go and we figured out how to do a mail merge and how to automate that process as they were declining. We could go ahead and do the mail merge printout and get it out. So one of the things you'll hear me talk about as we go through innovation is innovation a lot of times is based off of the need that's actually happening at the time. Finding that gap. You'll see that we've actually done a lot of innovating here in small medium business side, but sometimes we don't take that perspective of where is the need of the client and how do we think outside of the box.
(02:19):
Real quick, a little bit about ProSight. We are the strategic combination of two 100 year plus old nonprofit organizations that most of you're probably familiar with, BAI and then Risk Management Association or RMA. We officially merged earlier this year in January and recently announced our new name of ProSight. Combined. We are the largest non lobbying nonprofit organization that serves the financial services industry. We have deep complimentary experience in risk compliance and deposits across retail, small business and commercial banking. The pro signifies the proactive and professional ways we support the industry and the site references our foresight as an organization and the insights we provide leaders such as our benchmarking and numerous roundtables that we have. So today, let's see if this works. It does great. Today I'm going to be covering emerging small business innovation and some strategies to embrace innovation within your businesses. Before I start, quick show of hands, how many of you think you're great or your company is great at innovation? Alright, we got a couple. How many of you think you're okay in innovation? Couple more. And how many of you would say you're struggling with innovation?
(03:38):
A lot more? Okay, so that's pretty common actually. Some of the research that we do is where it's probably actually about less than 20% who feel that they're good or great at innovation, and especially within the US and the small medium business side. There's a lot of reasons for that. Struggling with innovation. First of all, it's constantly changing, right? I mean, how many times do we have the differences of what's commercial or what's small business? How do we think about it from 10 million or 20 million or 5 million what we're serving? It's a lot of change that's going on in the small business even within the company many different times as different strategies come through. There's also a limited view not looking holistically at the overall. Brian Haney to get a great presentation last year from Comerica about how they were starting to look at the differences between not just a small business and the performance of it, but looking at the consumer impact too and what that was doing for the overall bank.
(04:31):
So how you look at it consistently across the bank. Of course, regulations don't help in innovation. Most bankers say they spend about 70% of their time just dealing with regulation that doesn't leave a lot of time for innovation and focused on contribution to the bank. And one of the things you'll hear me continue to look at is are we really thinking about what we're going to do for the bank, which means we need to grow fast profitably with a lot of revenues, or are we thinking about how we serve the client? And if we think about the client first, and I've heard it through many presentations, it's not new, but if we think about the client first, the revenues and the profits will come. And so how do we go ahead and change some of that mindset? And then it is challenging and Bobby and the team were up here just a little bit ago, but it's challenging to be experts in so many different industries of the customers you're serving.
(05:19):
And so as you're trying to be experts in dental or a flower shop or you think about all the different types of industries you have to understand and your bankers need to understand it is difficult. So it is difficult to innovate when it comes to small medium businesses, but we know innovation's possible. Right? During Covid, the crisis became evident that when focus and need to identify by the industry could in fact innovate in areas like PPP, you guys were able to stand up things in months that used to be years. So when the events happen, it is possible when people have that focus and they know that there's a purpose to make that change in innovation. A couple of other sessions have also touched on innovation, including the opening session, but I'm going to take a slightly different approach here. I want to take us outside of the US into a more global view.
(06:09):
We can see what kind of emerging trends will happen in the US if you look back at what other parts of the globe have been focusing on, because often they're three to five years ahead of the us. So one of the things we did for the last 13 years, BAI, we had the Global Innovation Awards or the gs, they become well-known in one of the financial services industries, leading honors, celebrating achievements, innovation, including advancing customer experience, implementing new technologies and improving the lives of customers and employees and communities too. Collectively, the winners represent outstanding contributions by teams and businesses lines and provide inspiration for around the world. Now, the BAI Global Innovation Award connects the most innovative and impactful solutions in the banking industry and providing a platform for creating and sharing unique and valuable content. So we got other places we can learn from.
(07:05):
Over the just last five years, the program, so 2019 to 2023, there have been 935 submissions and 48 winners, both domestic, international and across many different parts of the bank we look at. So I went back and looked at some of the small business innovations that were finalists and winners and to see if there were some innovations that we are starting to see now domestically that were prevalent in other countries years ago. So by doing so, we can start to think about how to get in front of the emerging trends and widen our lens for innovation inspiration. So let's talk about some of the ones that we have here. There are four main trends that emerge when I looked at these and many of the global banks focused on, and we're just starting to see now the tip of the iceberg here. And so while some of these seem relevant right now to what we're all working on, and I've seen it in some of the panels, these were five years ago, starting with some of the global companies I'll talk about.
(08:03):
So the first one was the use of AI. Of course, that's all everybody talks about now. We saw this progress with one submission including AI in 2018, growing into a handful in 2019. And in 2023, I think almost every global submission has some mention of ai. Now, we all know there's different kinds of ai, and most of this started with machine learning. And the other thing that I saw in there was finding ways to scale and parse through large amounts of data to serve high volume, low value. So think micro segments efficiently. So that's really again, what was the need? What could we do to help that? And then what can we do to make sure we're serving that? And AI was the answer starting in other countries mobile banking. Now most of the world, especially in South America and South Africa and parts of Asia, skipped the desktop and online banking process, right?
(08:59):
They went right to mobile, lots of different reasons for that, and that's what happened with a lot of the innovation on mobile in other countries. One of the challenges we see with innovation, similar to my typewriter experience, is that many firms try to retrofit existing manual or desktop processes into the newest distribution like mobile, and they don't start from scratch and they build mobile first and then try to retro other distribution channels. So we got a lot around open banking, and I know there's been a big topic here in the US especially as regulators are trying to do more in open banking. We saw it in the uk. There seems to be some fear and there's also some hope around open banking. One thing to think about is a difference between the use cases of open banking for consumers where there's a pretty small segment of consumers who are looking for their bank to integrate with a PFM or multiple type of banking relationships for small businesses.
(10:02):
However, embedded banking is a critical for how small businesses operate. They want to operate their businesses seamlessly from inventory to payments and payroll and receivables, while also while we call on banking services about products, we think about checking and savings and merchant services and loans as products. They don't think about them as products. They think about them as enablers to their business. And so we think about open banking and how it can help enable a lot of the type of embedded financing and the embedded banking that's needed to operate the small businesses. There's a real opportunity, we'll talk about some examples here. And the last one that sounds simple, it's kind of a pun intended, is the processes, especially for micro businesses, simplifying those processes. The main reasons for this seem to be obviously the ability to scale, right? And competing for customer satisfaction. Who in here has abandoned a clunky digital experience or gotten frustrated with a person from a call center or even an in-person experience that seemed unnecessarily redundant or meandering?
(11:12):
Yes. It's one of those things to where we have a lot of things where we say, well, we need to get all this information. But there has been some other sessions we saw too that says, how do you simplify it? How do you take out the unnecessary and how do you continue to be able to do that to be able to have that better customer experience? Everyone wants that Amazon and Apple experience and even willing to pay a little bit more for it. So let's walk through a couple of examples. So the first example here focuses on AI tech and came from Lufax Xingyun Smart Loan Solution out of China. Now, limited access to financing for small and micro enterprises is an issue for the Chinese FinTech industry.
(11:55):
The lending process can be convoluted and drawn out requiring numerous application forms in a long wait time. The LFI holding recognized this area as a bottleneck, preventing credible enterprises from accessing capital and sought to lower the barriers and revolutionize the processes for small and micro enterprises. Xingyun Smart Loan Solution leverages AI technology to streamline loan applications for small micro enterprises in China and reduces the average time spent on loan application processes by over 44%. Borrowers can experience a remote facing face-to-face communication throughout the whole lending process, and I've heard about some of those ideas around here. This conference and services provided effectively reducing the borrow wait times and ensuring a smooth lending and credit granting process. The next one is HSBC. I saw a couple examples of HSBC earlier, they do some interesting things in different parts of the countries, but Kinetics was based out of the UK developed for the unique mobile banking services app after recognizing that the small medium enterprises, by the way, I found that each different country calls it different SMBs, SMEs, MEIs, there's different names for it, but it's all the same as far as how they think about it in the UK and especially in the British economy.
(13:16):
They looked at the small businesses as a cornerstone of the British economy. That sound familiar? We've talked about that here during the entire conference about how these small businesses are cornerstone to the US economy. And over there there's about three fifths of the population's workers are based off of those small medium enterprises. So they collaborated with the business owners and for the building of this thing that they call Kinetics labs to leverage collective experience over 3000 SMEs. Again, one of the themes I keep on hearing at this conference is listen to the clients, and that's what they did. They brought the clients in to listen to them about what they needed, provide input and feedback during the entire build process. The app has evolved to become a full service banking app with in-app features that include fast intuitive onboarding while maintaining a high standard of KYC.
(14:07):
Again, making sure our regulators and compliance folks are happy. Use real-time data in the cloud to give clients in-depth analysis of their cash flows and spending patterns. Again, similar themes to the things we're hearing here. Remember, this was happening five years ago. This isn't happening just now and automatically categorizing transactions in line with the HMRC. Anybody know what that is? I had to look it up. That's her Majesty's Revenue and Customs. So that's basically our IRS. So they made sure that they simplified that to make sure the IRS codes or HMRC codes simplify the tax planning process for their small customers. And then of course, the ability to freeze and unfreeze cards. So again, one of those things that listening to the customers, how did they go ahead and apply some technology to it using mobile first and then thinking about the things that they needed to run their business, not about the banking products that they wanted to sell.
(15:02):
So Bank of Pro Desco in Brazil is the first bank to offer open banking model platform. This is an interesting one. If you get a chance to go look at them again back in 2022 here, free of charge with all the necessary solutions for individual they call micro entrepreneurs. Again, SMEs, the MEI portal, the first platform that was built on open banking model at bsco delivers an attractive and substantial experience to the customer through financial and non-financial products and services according to their needs, different from the experience of going to the bank and just opening up an account. So again, trying to think about not just the banking products, but the other things that those small, medium micro enterprises needed. And the last one here is G, and they're out of the Philippines is one of the great examples that we've seen of simplifying processes for the small and micro businesses so that they can be more efficient and cut down on costs that normally eat into a big portion of profit.
(15:58):
So G, they went out and they built to help small Filipino store owners build a long-term sustainable model and become financially independent. They simplified the inventory and delivery model by taking out the middleman and then instead of using technology to pass the savings to the stores, they went ahead and helped them as they developed this financial services arm then and they could qualify their stores for short-term credit and digitize the payments that mitigated the cash handling. So the one thing I would say that is consistent through here, and I'm going to talk about a couple more, is you saw a lot of this trying to help with the micro and smaller businesses, and we've heard again throughout here, it's hard to win those established businesses. It's hard to differentiate yourself in there. So how do you go after the down market, but it's fairly costly go down market.
(16:48):
It's hard to be able to get to those customers. So a lot of these we're finding ways to be able to do that efficiently, do it effectively, and then grow with those customers as they were growing, as they were helping them grow. So that's another theme you saw in here as we went back and looked again. This is three to five years ago. So we're going to dive into just two more real quick. One is called Tribal and is Emerging Market. Small medium enterprises. We're looking for better ways to pay global expenses and optimized financial management. And now despite a growing need to make payments digitally, many lacked access to modern financial services like corporate cards, payment solutions, and spend management. So tribal credit designed a proprietary, again, ai. So I'm going to mix a couple of these different themes into some of these last two AI driven approval process, which is used to underwrite and approve the small medium enterprises for virtual and physical cards.
(17:42):
In addition, here's what I thought was interesting. They rolled out a full suite of payment solutions including treble, pay, treble and travel cash. So they started to build out multiple services that they saw from the needs of their customers. Travel pay allows customers to send local international B2B and B2C payments. So thinking both ways about what they need to do to operate their businesses. And tribal payroll allows companies to run payroll at 15 and 30 day repayment terms. So again, how do they go ahead and help to get that capital inflow for the small businesses? Tribal cash allows customers to earn returns on their deposits. With tribal, it's gaining greater flexibility when it comes to potential credit line increases. And then that the ability to make global payments on additional rails just beyond the cards. They also expanded their open market applications to include enhancements such as mobile app, bank statements, review automation, and then more API integrations.
(18:42):
So I thought that was an interesting one. The one last one I'm going to share with you, it's kind of fun, but once you give us the whole cow part, the innovation's pretty inspirational. mpe, has anybody heard of pay before? No. I don't know. We'll see it here in the us, but MU Pay is an innovative data-driven, embedded financial services company. They offer financial products tailored to dairy farmers and MPE is focused on improving financial inclusion and economic empowerment of small farmers. So more than 65% of farmers in India really have a hard time getting any type of institutional loan, what that could be a bank or a financial institution. And that's they're considered subprime by most lenders. So using the historical data of the quality and quantity of milk that farmers pour, mu pay has developed an alternative credit worthiness score called Moose Score in conjunction with Equifax that helped them to build it using AI driven credit risk models.
(19:45):
MPE assesses historical flow data and provides details to its banking partners that help underwrite credit risk, thus expanding lending capacity by originating new clients. So with the analytics and eligibility list is generated and shared with the farmers showing what kind of loan products every farmer is eligible for. And then the lending products including milk receivable financing, small loans, cattle loans and farm improvement, farm loans are made available to them. So it's just an example I think of ways that you can think about different ways to think about what they need to grow. And then there's also a good community benefit to it too. Within India, they think about it from a financial inclusion perspective, providing access to affordable and timely credit. They contribute to financial inclusion of the dairy farmers who often face those challenges with getting that financing. And then the loans are enabling the farmers to invest in dairy businesses, purchasing livestock and improving infrastructure.
(20:46):
And that in turn drives economic growth. And then the rural communities that they're in. And the last part that I thought was interesting too is that the technology adoption, the focus on technology driven solutions for payments. So you think about it, okay, they're doing the technology as a bank, but what's also doing is it's helping those dairy farmers to go ahead and adopt technology and integrate that into their own services and promotes innovation, efficiency and sustainability of that dairy sector. So these are a couple of examples that we look back on and you can see some of the emerging innovations from global providers and I can tell you as we continue to look at what else is happening outside of the US and outside of our traditional competitors, you'll find things that we'll be talking about here in three to five years. So how can we go ahead and think about that a little bit more externally?
(21:38):
So now I think it's be good to look at some strategies that you can take home with you on building an innovative culture. To be clear, these are not strategies that I or ProSight develop, but they do come from a couple of authors. I've worked closely with my career prior to my time at BAI and ProSight. I worked for an industry provider of data and analytics that was very inwardly focused. Maybe some of you have been there before and they're stuck on When it came to innovation, we spent more time suing some of our partners than working with them on finding ways to innovate, and my boss at the time asked me to and our general counsel to go to a two week seminar at Harvard and find ways to improve our alliance culture. My favorite quote, and he was Brazilian, so don't mind the accent.
(22:28):
It says, apparently suing our partners isn't working. So go figure something else out. So that's where I met Jonathan Hughes and Jess Wa, who are the authors of this article. They had a practice focus on alliance management that was called Vantage Partners. They're now part of BDO. They do a lot of work for us now here at BI and ProSight, but they've done a lot of great work around the practice of alliance management. They recently wrote this great article called Under Learning to Innovate, and it was published in the Ivy Business Journal just earlier this year. Now in that they had primary research on over 50 companies. Not all of 'em are banking, but again, go back to what I talked about earlier. Look outside of banking for some other inspiration and then also secondary research of over seven 50 execs in 300 additional companies. Their findings not surprising.
(23:21):
Innovative corporate culture requires focusing on people rather than technology. And we've heard that throughout this conference over and over and over. And general principles like learning from failure and being open to collaboration with competitors is essential. So in the paper they outline nine key strategies. I'm going to talk really briefly about them to maximize returns on innovation investments. The first one is embracing smart failures. Part of this is defining the differences between good failures and bad failures. Good, not unexpected, acceptable costs. Mitigations outlined ahead of time, bad come as a surprise, looking to blame others and don't generate new insights. So as we go through and we think about some of the smart failures, it's okay to fail. We've all heard of fail fast. We've heard of other types of approaches like this, but there's different types of failures too. Making sure you get that definition upfront.
(24:19):
Rethink success, the value of learning versus a traditional view of end-to-end perfection is a lot more value to the companies. When is the last time your five-year business plan was actually played out to plan? We look for perfection in these assumptions and the learning that we have in the rolling out is a lot more valuable than making sure we get to the plan that we originally put out. Now don't get me wrong, CFOs are all going to want to make sure you're going to have a good return on investment, but you got to think about some of those things you can learn early on. Pay attention to the people. I've heard this multiple times during this conference, so it's not a surprise. Here's the reality. You can't teach ai, at least right now, how to look at customers in the eyes, listen to their problems and think about new ideas.
(25:06):
Your people are important for you to innovate, and it's not just going to be around technology source ideas, not just stuff. The concept is centered around the difference of creating a requirements list, sourcing vendors and going through the checklist for the low cost provider. If anybody remembers Apollo 13, I believe it was movie that when they were stuck in space and the quote is, my life depends on 150,000 pieces of equipment each bought from the lowest bidder. And we go out to source different things with different partners. Don't be thinking about just the low cost bidder, thinking about sourcing innovation and a partner that can help you through trying to think about new ways to do things. A paradigm shift towards sourcing innovation is required to not just sourcing stuff. Share, don't hoard. This requires thinking that costs and benefits of different strategies for protecting intellectual property, trade secrets and other forms of innovation.
(26:00):
So a lot of us are thinking about, okay, well I can't do this with anybody else because it's going to disrupt what I can do. So think about how you have to shift that paradigm and make sure you are able to bring in others and not just protecting your own ip. Collaborating with competitors, the term competition was actually popularized in 1996, but the practice still remains fairly rare. Many times competition is thought of a zero sum game, but there is a wide array of scenarios where collaborating with competitors drive mutual benefit, and again, the tide rising. All boats, right? There are clear areas in the industry that there's reasonable to start with. And think about things like fraud, where there's opportunity for us to collaborate together. Look outside your company and your industry. Some of the examples I gave earlier are examples of how you look globally, get ahead of trends, but don't be afraid to look outside of the banking industry.
(26:54):
Look at other suppliers like shipping, marketing and wholesalers who innovate the way that they serve your unique space in small, medium business. There's things that they're also struggling with how to serve a large group of people that don't have a lot of revenues, but they can do it through different innovation. So don't just think about looking at other banking, but think about other industries that serve your customers. They'll be on the tangible. Although most banking products are intangible, think about the products like checking loans, merchant services I talked about earlier. Think about the ways to innovate business processes and business models and then emphasize external sources of innovation. Internal innovation, sometimes called exploitation. Innovation by organizational behavior scholars concentrates on improvements to the company's existing product lines. Similar to my typewriter example, I was improving something internally. Then there's also other ways that's called exploration. Innovation focuses on creating new ideas to add to the company's product range and not just enhancing existing ones.
(28:01):
So their work did go on to confirm, and you can bring this back to your CFOs, right? That the companies that had the most or great deal of their innovation through external collaboration, 178% greater increase in the revenues compared to those who had little or none showing 25% of revenue increase coming from those external collaboration innovation companies compared to only 9% of revenue increase coming from those who did not collaborate externally. I'll also tell you we saw similar results from my previous company as we shifted our culture to a more alliances in being more open to looking beyond our traditional competitors. So to wrap things up, a couple of takeaways I have for you. Innovation culture needs to come from the top. Look outside your direct companies and even your industry. Focus on your client's needs first. Remember, banking is not a product to them.
(28:55):
Think about enablers for the business. They don't think about the products that we all describe. Last, think beyond technology and when it comes to innovation, think about the primary role played by those human beings. Thank you for your time. If you've got more information on the GIA awards or on the article I mentioned, you can find me on LinkedIn. I'm the only iio out there. So go ahead and let me know. I can share that with you. I think we have time. Oh, we don't have time for questions. You can find me afterwards. Thank you.