Disrupting the disruptors: banks learning to do innovation right

The banking industry has innovated steadily and carefully in a myriad of ways, but normally in collaboration and, broadly, in step with each other. Given the institutional role which banks play as the cornerstones of the financial transaction system this perhaps should not be surprising. Indeed, it served the development of international trade and domestic enterprise well over many centuries

However, the acceleration of technological change since the 1990s started to change banks’ sense of the possible and, since the turn of the century has moved, relative to its history, at warp speed. Specifically since around 2009, the astonishingly rapid global diffusion of mobile devices, accompanied by the multiplication of web services and creation of ever more sophisticated portable digital devices has created an innovative wave unlike any seen before.

Customer behaviour has significantly changed since then due to the lack of trust in large financial institutions and introduction of game-changing technologies that allow customers immense flexibility to manage their finances and finally integrating banking with lifestyle management. What has also helped is the emergence of digital in everything “retail” that has made use cases relevant across all industries.

The game has changed
On the 4 January 2015, Tencent, China’s largest ISP launched the country’s first online-only bank with the goal of having over 600 million accounts by the end of 2016. That’s probably more than the total number of current accounts across the whole of Europe and they are not even a bank! South Korea is opening up a new round of banking licences to non-traditional players, such as telecoms providers, to become consortium ‘anchors’ for new banking ventures.

Large banking institutions are therefore now looking to reinvent themselves in order to counter the digital threat and the key ingredient to the reinvention is Innovation. Whilst many existing banks now wish to promote their innovation credentials, far fewer have taken the steps to become true digital ventures. One European example which stands out is Spain’s BBVA whose chairman Francisco González has mapped out a new future for his organisation, not as a bank, but as a software company.

Banking leadership across the globe are desperately in search for the magic formula to systematically create a set of differentiating ideas, invest in the right models and make it available to clients quickly. Over and above, this needs to be a continuous process to embrace new ways of working in order to stay ahead of the game.

How banks have traditionally approached innovation
Banks have over the last few years invested in innovation through three primary sources: Today’s employees – where banks reach out to employees in order to generate ideas to better serve clients / improve operational efficiencies. These ideas are then taken through a set of selection criteria before any investment is made. Key tools used for these include incentive mechanisms for successful ideas, creating a work environment that stimulates creative thinking and recruiting “digital” trained resources especially from creative agencies

Today’s employees and customers – it’s the same as above but the sourcing of ideas is extended to a wider community to include customers and demands a highly flexible collaboration and communication platform to work effectively. Banks have used monetary incentive mechanisms, gamification etc. to encourage ideation through this model.

Building an innovation infrastructure – this is one area that larger financial institutions have focused heavily on over the last couple of years. Banks have spent millions of pounds to build design studios and innovations labs across the globe to encourage internal staff and other external bodies to help create and develop actionable ideas. These include hackathons, service design sessions etc.

While advancement in technologies that allow banks to quickly test and learn (or indeed fail) has accelerated the introduction of new features and experiences, has it really produced any substantial innovation? … a game changer of sorts? The answer really has to be a resounding “no”.

Whilst the likes of BBVA have been clever enough to introduce new digital features quickly in order to build greater cohesion with their markets and delivered complex concepts like a mobile wallet in collaboration with telecom providers, they have however not yet managed to deliver anything yet that can be described as game-changing within the prevailing institutional and regulatory framework, like Apple did to the mobile phone industry, Uber did to the Taxi industry, Air B&B to the hotel industry…So the key question really is - even within the prevailing frameworks, how can banks do innovation better? How can they deliver innovation as a continuum?

How banks should approach innovation?
The answer to that question lies in intelligent sourcing. The trick is to enable the sourcing of innovation rather than innovating yourself. In the digital age, where investments in innovation revolve around the customer and customer behaviour, the ability to leverage good ideas across industries is extremely high. For example, a restaurant app for booking can very easily be leveraged by payment companies to pay and receive receipts digitally.

So who are these innovators that are able continuously deliver new experiences for consumers? With the emergence of Open Source technologies, they are everywhere really…the two person organisation in Silicon Valley, the really smart geek working out of a garage in Cambridge, the college drop-out in Mumbai … and they are crying out to test their ideas with “real” businesses and “real” data.

To be smart innovators, banks need to build and enable a platform to engage with these innovators in order to provide their customers with a better experience. This platform is really a combination of Application Programing Interfaces to expose the bank’s systems, a set of creatives that are bank specific and an environment with “real” data to test. The bank’s role can then evolve to audit quality, effectiveness and compliance before new innovations are exposed to their clients. Much like an Apps Store.

Setting up the platform
Setting up a platform like this obviously isn’t as simple as that in practice. This will require thinking in six key areas. Engaging the ecosystem partners – Where to source these innovators from? Fintech firms, Organisations that perform hackathons, people who build open APIs are a few examples

Creating the initial momentum – Investing early in some ideas to build momentum is key to success. This may mean investing in a differentiated FinTech firm as well to deliver value quickly or even to create mechanisms like a payment gateway to facilitate the deployment of a good idea. Microsoft is possibly one example where lack of investment in creating the initial momentum has led to unusually low adoption of their digital store. Consequently, most of the apps in their store are developed by Microsoft.

Commercial and legal mechanisms – Banks have to demonstrate behaviour to share benefits of innovation generated by their new ecosystem of partners through a light-touch legal and commercial model. Innovators will often steer clear of complex and cumbersome engagement models as they need to maintain the highest degree of flexibility to exploit their intellectual property in the market place.

Understanding and keeping ahead of competition – This is a business where the competition isn’t really traditional. Digital giants like Google, Amazon and Apple are the real competitors in this space. So the opportunity is there to disrupt the disruptors!

Innovation cycle. In order to manage a portfolio of ideas, a short-cycle innovation cycle needs to be adopted which drives the discovery of ideas as well as governs the allocation of investments.

Service Management and Optimisation – Banks will need a process to continuously optimise the experience delivered by these innovation partners through effective service management. This would include the regular updates through a structured deployment process and the associated communications

Architecture is key – Given the regulated nature of the financial services business it is essential to balance business need, technical feasibility, regulatory boundaries and speed to market. A robust architecture with a nimble but auditable process can enable that balance to happen.

The time is now
Banks embarking on this journey should jump in, learn and collaborate quickly. This is one of the fastest moving ideas marketplaces in the world. To participate in the ride you have to jump on. Find your most agile people, and place them on the edge of the organisational operating model in order to protect them from legacy and inherent “antibodies” that kill disruption. We aren’t aware of a bank who has managed to set up a platform like this as yet. So the one that does this first will have a distinct advantage.

Much has been written on the importance of nourishing unconventional ideas, those whose spark comes from somewhere well outside the conventional frame of reference. We would add only that the fuel to ignite the spark is most likely to come from continuing exposure to multi-disciplinary thinking outside the domain; networking relentlessly with the wider innovation ecosystem, seeking out cross-industry groups, academics, and specialists from other industries (e.g retail, defence, medicine, manufacturing, media).

There is no substitute for testing the strength of a proposition than giving it the oxygen of the marketplace. Build the demonstration. Expose it to customers, employees, analysts and academics. Evolve the concept, improve understanding of the critical differentiators, rebuild and re-expose.

Finally, think like a venture capitalist. But if it breaks the mould completely, treat it as a new business venture for which different hurdle rates, longer time horizons and periodic capital injections will be needed. Money, as ever, is the object, but the risk appetite and ROI expectations will need to reflect what is at stake. The changes you are making are not just an experiment but will become the normal way in which new value is identified and created. This is perhaps the most important change of all and, over time, will distinguish the long distance runners from the sprinters who fall by the wayside.

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