Innovation in Banking: Killer Ideas? Or Idea Killers?
What separates financial institutions that cultivate killer ideas from others who ruthlessly crush the creative spirit out of their employees? Why do most banking providers struggle with innovation while others, like Idea Bank in Poland, are putting ATMs in cars? Or Barclays, who has Pay@Pump, a contactless payment system that allows thirsty customers to get a pint of beer without waiting in line at the pub. If your bank or credit union struggles with innovation, you can turn that around. But only if you address some key issues first.
Hear the word “innovation” and you may conjure up an image of a lab drenched in technology, stuffed full of extremely bright young people chasing the Next Big Idea. Innovation labs in the banking industry have been trending for at least five years, and their numbers are growing. According to Capgemini, 87% of financial services firms say they either have an innovation lab or have at least carved out some real estate for innovations. This represents a 27% increase in the number of innovation centers in the past year.
All large global banks have had innovation centers for many years, says Sankar Krishnan, EVP/Banking and Capital Markets at Capgemini. Krishnan is a proponent of innovation labs, saying that they serve an important purpose in helping financial services firms pilot new technologies in a sandboxed environment prior to an enterprise wide implementation.
“Innovation centers enable rapid prototyping,” he says. “Hardly any investment dollars are wasted since financial institutions can run an innovation center on a variable cost basis.”
Some financial institutions, such as BBVA and Wells Fargo are deeply committed to their innovation labs. Go to Wells Fargo’s Innovation Lab homepage and the first thing you see is a blank space for you to offer feedback or ideas. Wells Fargo also lists some of the innovations it’s currently working on and asks consumers whether or not they would be interested in using the product or service. One is an income tax and savings tool for freelance (1099) workers who often struggle estimating quarterly tax payments. Another is turning the cute Wells Fargo Plush Pony into an Internet of Things (IoT) bank that parents can use to help educate their kids about saving, similar to ASB’s “Clever Kash”digital piggy bank.
But are innovation labs falling out of favor? Some bankers aren’t convinced that these innovation labs pay off. Perhaps they are just flashy PR stunts intended to generate some positive buzz about dull companies often seen as “stuck in the mud”?
“Innovation teams are often solutions looking for a problem,” said one banker who preferred to share their thoughts with Futurion anonymously. “We don’t have an ‘innovation lab’, and I’m not sold on the value. The better way is to get the people in the business groups listening to the customers and getting things done.”
Nine out of ten bankers agree that their organization must innovate at an increasingly rapid pace just to remain competitive.
But even those banks and credits unions that have opened — and spent lots of money on — innovation labs haven’t necessarily been successful. Most of the cool new products and truly disruptive technology still comes out of fintech firms. Why can’t banks and credit unions master innovation?
Financial institutions have a few strikes against them. For starters, the culture of banking isn’t conducive to new ideas.
“Innovation is simply not in the DNA of most bankers,” says JP Nicols, Managing Director of FinTech Forge. “They’ve been trained throughout their whole career to identify and avoid risks, but innovation is about taking small risks and failing fast and cheaply and learning from those mistakes to get to the right answer quickly.”
The second reason innovation lags in financial services firms is legacy technology and lack of systems integration. Simply put, the more flexible your infrastructure, the most likely you’ll be successful at innovation. More than one-third of financial institutions say that their IT systems make innovation either “difficult” or “very difficult,” according to a survey from PYMNTS.com. Those banks and credit unions that do have flexible IT infrastructures say that 70% of their recent innovations were extremely successful —more than twice as high as average.
“What separates the wheat from the chaff is the ability of core technologies to be very flexible,” explains Karen Webster with PYMTS.com. “That’s an enabler of successful innovation. Not having flexibility inhibits the ability of banks to do what they want to do—and what they know they must.”
In the PYMNTS.com survey, the vast majority of banks and credit unions (83.6%) said that their core processing systems lack any kind of sandbox for testing innovations, and 70.6% said that their core system is not configurable.
The good news? Even though most banks and credit unions say they will have to continue running their core system for the foreseeable future, their core will be relegated to a transaction-only workhorse and financial services firms are looking to Application Programming Interfaces (APIs) to interface with newer, more innovative systems.
“The core will eventually become the ‘check register’ where you simply archive and store transactions rather than the ‘system of decision’,” noted Tina Giorgio, President and CEO at ICBA Bancard in Futurion’s innovation report.
72% of bankers believe corporate bureaucracies are stifling innovation.
The third reason financial services institutions struggle with innovation is a serious lack of talent. Banks and credit unions aren’t just competing amongst themselves for employees who have the drive and technical skills to be innovation engineers; they are competing against big tech and fintech firms. Most folks gravitate towards a sexy option like Amazon before they even consider working for a financial institution, even one with a household name like Bank of America, HSBC or Goldman Sachs. Banks and credit unions — with their risk averse cultures, aging technology, stodgy brands and bureaucratic hierarchies — simply aren’t attractive landing pads for top talent.
The embedded hierarchy is not only distasteful to young technology talent, but it also hampers innovation. In a typical bank or credit union culture, ideas come from the top and flow downward, and not vice versa. Not only are financial institutions missing out on some really good ideas, but their employees become frustrated and send their resume over to Amazon.
Jim Van Dyke, Founder and CEO of Futurion, says innovation practices at financial services firms are significantly less mature and less productive than those at fintech firms. This represents a risk that traditional institutions will be outmaneuvered.
“Some traditional financial sector firms only allow innovation ideas to originate from top executives,” notes Van Dyke. “At all such firms, demonstrated respondent confidence and morale was markedly lower.”
Even though most banks and credit unions are far from cutting edge, they still believe that they are innovators. A scant 2.8% of financial institutions in the PYMNTS.com survey said they have not focused on innovation in the past three years. More than one-third (37.9%) say that they generally roll out new products before others.
Reality Check: This is self-delusional, and self-defeating.
Nevertheless, PYMTS.com asked banks and credit unions what innovation initiatives are getting their attention. Here are the top five:
- Digital wallets (56.1%)
- P2P payments (42.5%)
- Fraud management (42.1%)
- Loyalty/rewards (36.4%)
- Real time payments (33.2%)
Accenture asked banks and credit unions what specific technologies they thought would change the future of financial services. For both front- and back-office applications, banking providers say they expect to invest in several AI-related technologies extensively over the next three years:
- Embedded AI solutions (40%)
- Computer Vision (40%)
- Machine Learning (38%)
- Natural Language Processing (37%)
- Robotic Process Automation (34%)
Finding Your Innovation Mojo
Being successful at innovation relies on two fundamental things — a great idea followed by the ability to execute it. And (this is important!) the idea must be executed quickly so that it’s still relevant and delivers a competitive advantage… before someone else steals your thunder. Even if you’re not first to market, you certainly don’t want to be last.
Some financial institutions are pretty adroit innovators. They generate ideas quickly and then they test them out in a timely fashion. Others seem to be operating in dog years. Futurion asked bankers how long a “typical” large scale innovation effort takes — from ideation to roll out—and the average was 21.5 months — just slightly under two years. The longest? Five years! At these banks and credit unions, today’s great idea won’t see the light of day until 2023. However, some financial institutions, like BBVA, say they can get a large-scale project done in nine months.
So what do the fast innovators do that slow pokes don’t? Here’s what can speed up the innovation process, culled from Futurion’s interviews with successful financial institutions:
- Use outside resources to reduce cycle by one-third.
- Minimize approval cycles and have them rapid enough to avoid falling into the next year’s fiscal cycle.
- Employ agile development rather than methodologies such as waterfall which take longer to bring products to market.
- Let C-level executives and the board connect directly with your technology staff and vendors.
- Go off-the-shelf, even if it means limiting your choices.
- Get consumer feedback—but not too much—or you’ll clog the output.
- Forget top down ideation unless you want to lengthen your projects and frustrate your employees.