The Place for Banking Innovation Is Not Channels, But Ecosystems

Innovation in digital banking is about more than transplanting in-person services into an app. It requires banks and credit unions to examine, understand and then drastically change their relationships to the people and businesses they serve, who now function daily in a digital ecosystem.

The word “innovation” has been so overused in recent years that it’s lost much of its meaning and most of its power. That said, the concept of innovation is beyond important — it’s necessary.

Part of what’s watered it down is its vagueness. “Innovate” as an imperative offers very little direction and no discrete action items. It leaves financial institutions asking, “But how? What’s the magic bullet, API integration, or a morsel of data that begets ‘innovation?'”

Where to Begin on the Road to True Innovation?

In 1960 a machine called the Bankograph — a predecessor of the modern ATM — found its way into the lobby of a New York bank. It was an impressive piece of technology for the time, automating deposits and providing photographic receipts to account holders. Unfortunately, it didn’t catch on. Even the machine’s inventor, Luther Simjiam, admitted it was a failure. The only people using it, he said, were unsavory types and gamblers, “who didn’t want to deal with tellers face to face.”

The point being that innovation isn’t about creating technology for the sake of creating technology. It needs to solve a real problem in a new way. The Bankograph didn’t solve anything; no one had a problem being face to face with tellers (other than those few unsavory types) — particularly because they had to come into the branch anyway. The “innovation” was neither necessary nor scalable. It was putting the app before the iPhone, so to speak.

Key Indicator:

Americans who would rather manage their finances digitally than in person
4 out of 5

Today, financial institutions face a 180 degree reversal of this situation. Users are lined up to use the 21st century equivalent of the Bankograph — the digital channel — and ignoring teller windows. Four-fifths of Americans would rather manage their finances digitally rather than in person and over 80% feel like digital banking saves them time, according to study by Chase.

The lesson here is that innovation needs to start where your account holders are, or where they want to be. Investing in your core, next-generation ATMs, or interactive tech in brick-and-mortar lobbies is a kind of innovation — it’s the adoption of technology at least — but it’s the Bankograph kind of innovation. Wrong time, wrong place, and wrong investment.

In our current context, innovation should occur in the digital channel — where account holders live. And it can’t be for its own sake. In recent years, we’ve seen a lot of cool widgets with well-designed UIs that just didn’t address any fundamental pain points. With limited resources to invest in technology, banks and credit unions have to be sure that a prospective innovation solves a problem for their institution or account holders.

Get to the Root:

Banking can't just introduce new products and features that don't address real issues. Find the pain points in the customer journey and solve them with innovation.

How To Continue Down the Road?

The good news is that financial institutions are in a position of strength. They have a lot in the asset column, with robust customer bases and all the basic check boxes ticked: Core elements, like the ability to insure deposits, keep money safe, make loans, help their account holders spend and save, and so forth. And they have a lot of online and mobile features to help them extend those services to their account holders, wherever they are.

A bank or credit union’s ability to excel at these things, though, doesn’t equal innovation. It really just means they were an excellent banking provider a decade ago. As far as the check boxes go, most institutions of similar size are on similar footing, with equivalent features, apps, and online experiences. Differences are differences of degrees and are rarely enough to make them stand apart from other institutions. In other words, it’s hard to compete on features alone.

Most financial institutions would counter this by claiming that it’s their customer service, not their collection of features or services, that differentiates them. To this point, there are two obvious responses: 1. If everyone’s claiming customer service as a differentiator, it’s not one; and 2. Perhaps the most pressing question of the day is, what does customer service really mean in the digital channel? How far can that customer or member relationship go? In other words, once you have the digital boxes checked, what’s next?

Q2 Innovation Studio

Moving from Channel to Ecosystem Thinking

Account holders don’t live in check boxes. They’re all over the digital channel — so much so that, in some ways, it does digital a disservice to even call it a channel. It’s an ecosystem. It’s the environment your customers spend a significant portion of their lives in. They listen, watch, read, shop, search, hire, connect, everything — all digitally. To thrive in this ecosystem, banks and credit unions need to fully inhabit it.

With market share shrinking, financial institutions needs to think outside the check boxes and offer additional services. It’s going to take more than adding transactional features to become the center of account holders’ financial lives. If innovation requires solutions to problems, and today’s financial needs and challenges exist outside of traditional banking, then the proposition becomes simpler for banks and credit unions: How can they use their expertise and existing relationships to help solve these “new” financial problems?

Imagine an Amazon-like marketplace where consumers can shop for insurance or businesses can purchase accounting software. Or offering an experience where parents can automate allowances on prepaid cards, or where gig workers can manage their microbusiness, or where offices can manage payroll or corporate cards. From one point of view, it’s a no-brainer: Marketplaces have worked to create robust and profitable open ecosystems in other industries, so why not banking?

This kind of marketplace ecosystem can allow users to engage with new services from within their online or mobile banking login. More time spent in the digital branch creates more engagement. It also creates more data, which can help banks and credit unions better understand their account holders.

Great Equalizer:

Institutions without a lot of technology budget or bandwidth will be able to take advantage of pre-built fintech integrations without additional cost or dev time.

Because fintech partnerships can be built around a standard and simple integration that would work for any bank or credit union on the hosting digital banking platform, there’s none of the usual vetting. Rollout is immediate, ROI is fast, and it’s effortlessly scalable.

Take cryptocurrency, for example. It’s new, it’s exciting, and it’s certainly not accounted for in traditional banking — either physical or digital. Can every bank become a registered crypto custodian overnight? Probably not. But can financial institutions use technology to seamlessly add an established crypto app to their digital offerings? Today the answer should be — and in the case of some vendors, is — yes.

The timing for this approach is perfect, thanks in part to the increased focus on digital during the pandemic. In 2021, the fintech sector collected more than $90 billion in funding, according to CB Insights — more than doubling its 2020 funding. They’re building sleek, modern experiences. Banks and credit unions alike, for their part, can bring a lot of end users into the bank + fintech equation. Half of U.S. banks and 60% of credit unions believe these partnerships are crucial and many are already working with them rather than against them, Tipalti notes.

The Takeaway

Innovation is and always has been about solving account holder pain points. There’s a parallel and a lesson in the story of the Bankograph. It, like so many otherwise-impressive individual features inside the digital banking channel, didn’t improve the relationship between banker and account holder. It didn’t solve any real problem or address any significant need. It wasn’t a solution.

Innovation in the digital channel is about more than transplanting in-person services into an app or browser. It takes a new kind of problem solving — one that requires financial institutions to examine, understand, and then drastically change their relationships to the people and businesses they serve.

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