During the pandemic in 2020 and early in 2021, financial services firms innovated at a pace much faster than in the past. Banks and credit unions found new ways to connect with prospects, open new accounts, support and service existing relationships, and rethink back office operations. The question is whether legacy banking organizations can sustain this heightened spirit of innovation in a post-pandemic environment?
The challenge is that many of the components that necessitated innovation over the past 18 months are not as apparent as they were. For instance, many organizations may believe that the response to the urgent need to provide digital access for consumers has been resolved. In some organizations, there may not be the belief that innovation needs to be a top priority as it was during the early stages of the pandemic. Finally, leaders may not be accustomed to converting longer-term innovation outcomes into a series of shorter-term sprints that are both manageable and sustainable.
The vast majority of financial institutions place innovation close to the top of their digital transformation priorities, right below improving customer experiences and improving the use of data and advanced analytics. Banks and credit unions also see innovation as one of the keys to ongoing success. Despite understanding the importance of innovation, however, the Digital Banking Report found that only 9% of banking organizations ranked themselves as being “‘innovation pioneers” (with 32% saying they were “fast followers”). Interestingly, both rankings were lower than in the previous year.
An innovation strategy and culture is needed now more than ever to change the way organizations deliver financial services and the way modern technology can support new banking operating models. Often, innovation is required to catch up with both financial and non-financial leaders that have disrupted the banking ecosystem and altered consumer and business expectations.
“The floodgates of innovation in financial services have opened as a result of Covid-19, but the real innovation is down the line, with innovation continuing to accelerate.”
— Sanat Rao, Chief Business Officer and Global Head of Infosys Finacle
Digital transformation is about implementing new employee roles, software, hardware, as-a-Service options (including cloud computing), automation and agile processes in a combination that dramatically changes your business operating model. This often involves modernizing your technology, but digital transformation is not mere modernization. You should be auditing and evaluating overall workflows across all departments, integrating new technologies in ways that deliver more value to customers and stakeholders.
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All Innovation is Not Created Equal
Traditionally defined, innovation is usually considered as something entirely new and disruptive – a new product, delivery process, service or engagement method. Innovation can also represent an improved solution to meet an existing or new market need. In either case, innovation is expected to improve existing processes, products or services to benefit the consumer, the financial institution … or optimally, both. Innovation does not always require new technology. Sometimes, an innovation can be created using existing technology in a new way. And sometimes, an innovation within one organization may be “table stakes” at another.
The innovation process is not just about creating something new or improved. Institutions must usually define a problem or customer need to address. Then, the bank or credit union must create multiple approaches to solve the problem – and do tests to determine the best solution. The solution may be simply following a path that has been taken by other organizations or offered by solution providers.
“Truly innovative organizations are going to recognize that the application of innovation is going to be incumbent on newer technologies like AI. They will also leverage APIs to create an ecosystem that will move from offering banking products to actual business solutions to their end customers.”
— Sanat Rao on Innovation and New Technologies
The challenge is that consumers have changed behaviors significantly during the pandemic. In these instances, the specific consumer or business needs may be still undefined. In these situations, financial institutions may be best served to find a unique solution and then search for a problem. This process is much less common than solving an existing need – especially in financial services where needs are plentiful.
Finally, banks and credit unions should prioritize innovation development by forecasting how long the consumer or business need will exist and how far behind the innovation curve the organization is. Obviously, the potential for lost revenue (or higher costs) needs to be factored into the analysis.
Innovation Success Lacking in Financial Services
As mentioned above, financial institutions understand the importance of innovation. Especially since the pandemic, banks and credit unions realize that meeting the needs of customers and providing digital capabilities similar to what is found in other industries is no longer optional. Organizations also became aware that the ability to quickly adjust to market conditions is possible … even when teams are working remotely.
Unfortunately, when organizations were asked about the success of their innovation strategies, results were anemic. While playing ‘catch up’ with regard to the basics of digital transformation may have proved challenging, less than one-quarter of institutions surveyed by the Digital Banking Report considered their innovation success high or very high. The only area of digital transformation that was ranked lower was in the deployment and use of data and advanced analytics.
Speed and Focus of Innovation Matters
Innovation is one of the key foundations of digital banking transformation, and because so many traditional and non-traditional firms are building new financial solutions, innovation continues to accelerate across the entire industry. The need for rapid and ongoing innovation impacts every component of banking, from new product development, to new ways to deliver services and provide customer support, to back office process rethinking that changes entire banking models.
According to the 2021 Digital Innovation Benchmark Report, the speed at which an organization innovates is a critical factor in determining the overall viability of the business. The report found that 62% of technology leaders across industries reported being concerned that they were at risk of being left behind by competitors if their own organizations innovated too slowly. This number increased significantly from a year earlier. The same report found that more than eight in ten respondents believed their businesses would fail in under six years if they were slow to innovate.
“I think a lot of organizations thought that digital transformation and innovation starts with technology. I would say, both innovation and digital transformation start with executive leadership support and an innovation culture.”
— Sanat Rao on the Importance of an Innovation Culture
Despite an ongoing rallying cry for improving the customer experience by financial institutions of all sizes, research by the Digital Banking Report continues to find that innovation efforts are overwhelmingly focused on improving operational efficiency, reducing costs and enhancing risk and security of applications. While these priorities are obviously very important, the consumer and business customer can’t be ignored in the process. This is especially important as fintech and big tech providers continue to improve their customer-centric solutions.
During this unprecedented period in financial services, some organizations are playing catch up, while others have discovered new opportunities improving business models and/or serving current or prospective customers better. By focusing on an overarching innovation framework, banks and credit unions can leverage innovations for long-term success.
As we move forward, innovation will help financial institutions differentiate products, services and entire organizations from the competition, which is increasingly required in an oversaturated industry or market.