Just about every bank, established or start-up or challenger, says that innovation is at the heart of their operation. Just how fair are such claims and how can lenders, encumbered as they are by their size, culture and regulatory environment – truly be innovative asks Phil Tootell
Innovation. It’s the Holy Grail in banking isn’t it? The golden egg that everyone is set on chasing and understandably so. Innovation sets you apart – it allows you to deliver products and services first, enables you to get ahead of the competition and keeps your customers interested.
Go deeper with GlobalData
And yes, everyone pays lip service and says they are innovative. But are they really?
The answer is a resounding no. But it’s not for the want of trying. Banks by their nature are extremely risk averse – and as a society, that is exactly how we want them to be. Regulation is there to enforce that risk averse culture. But being innovative in a regulatory environment is a bit like trying to juggle whilst having your hands tied behind your back. Risk aversion and innovation aren’t the most natural bedfellows.
Another issue is size. The banks that dominate the global landscape are financial behemoths, with infrastructures to match. Not all innovation is tech-related, but much of it is. Innovation is about being nimble and responsive. The sheer size of banks, the usual complex network of systems, software and processes that underpin them and also their 24/7 availability is the death knell to any flexibility, creativity and innovation they hope to achieve. Innovation relies on the ability to develop and fail, and banking, with its round the clock opening hours, just isn’t an environment that can support that.
Leadership is another important factor. Innovation tends to require an entrepreneurial mindset, but many banking executives have grown up in banks. They might have operated in that environment for 20 or 30 years and its impossible for them to change – they have no other industry experience to channel.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataIn terms of innovation, unsurprisingly challenger banks are forging ahead. Take digital start up, Atom Bank. Launching this year, the fact that it is "digital only" means that it will have lower operating costs than traditional banks and be able to offer more competitive interest rates as a result.
And for true innovation in banking, many analysts think media companies might well enter the fray. Imagine if KYC was mandated on Google. It would be looking at how it could be used as a platform for wider innovation and how it could improve customer service. Companies like Google, Apple and Amazon would be responding to regulation in a very different way to the banks.
So how can banks – encumbered as they are by their size, culture and regulatory environment – be innovative?
One answer is developing innovation hubs. In their essence, these are start-up organisations that operate independently of the principle organisation. They could be created through acquisition (a fin-tech company, for example) or simply setting up a different business, dedicated to innovative thinking and ideas generation.
The important thing is that they are liberated from the bank’s risk averse culture to act in a free-thinking, entrepreneurial way. It is vital that the two organisations are separate and operate independently, so the culture of the bank does not contaminate the start up. And from an organisational point of view, a flat, non-hierarchical structure tends to inspire more innovative thinking than having layers of management.
Senior managers from the bank should not be influencing it in the slightest. In fact, it often works best if a third party manages the innovation operation. If its people start thinking "but what about the constraints of our operation" or "what will shareholders think?" is the day they begin to compromise their start-up spirit.
They must also be allowed to fail. Brainstorming and testing different ideas is an important aspect of innovation. It doesn’t matter if something doesn’t work. From failure, the best ideas come. But in a 24/7 banking environment, banks can’t afford to fail. This further enforces the need for separate hubs, where ideas are allowed to fully mature before being implemented into the wider organisation.
Although this phenomenon has been around for a while, it is still relatively new in banking. Back in June, Deutsche Bank announced that it is setting up innovation hubs to boost technology development in London, Berlin and Silicon Valley.
Through these hubs they will be starting to work with start-ups and academics to come up with digital ideas that will revolutionise customer products and how the bank operates internally. They are aiming for 500 ideas a year – obviously, not all will be taken on board but it underlines the point that prolific idea generation plays a key part in innovative thinking.
It’s a good starting point for banks. They shouldn’t worry about creating innovation directly in the organisation – they need to think about fostering it externally in these hubs, populating them with their most entrepreneurial talent and cross pollenating with external experts.
They need to be given a free reign to come up with the ideas, unencumbered by preconceptions or market perceptions of what others expect.
This is how banks can continue to innovate and develop.
Phil Tootell is a founding director at business change consultancy Certeco
