To counter stiff competition, banks in the developing world are working hard to get their costs down. Those capable of using mergers and acquisitions to capture economies of scale from their staff, IT, and back-office functions usually do so, much like their Western counterparts. But banks in small emerging markets and in markets with limited M&A possibilities can’t lower unit costs by these means.

Scale isn’t the only route to cost efficiency in banking, however, and some smaller institutions in Western countries have used more efficient processes to match or even beat much bigger competitors. Can banks in other parts of the world copy these state-of-the-art skills? Gross domestic product per head in emerging markets is much lower, so average customers generate substantially less income for their banks and are proportionately more costly to serve. In addition, most banks in emerging markets still process many transactions (mainly payments) by hand—an expensive undertaking.

Yet Chilean commercial banks have proved that world-class cost efficiency is indeed possible in emerging markets. With only 15 million inhabitants, Chile is one of Latin America’s least populous countries, but in 2001 its five biggest banks boasted an average cost-to-income ratio of 59 percent, far better...