Historically, the banking industry in the U.S. has been slow to innovate compared to other industries. When asked why this may be, most industry studies found legacy back office infrastructures, the lack of leadership commitment (culture), regulations and compliance, organizational silos and the lack of budget to be inhibitors.
Despite these limitations, the U.S. banking industry has tried to increase their focus on innovation through upper management commitment and support of innovation initiatives, development of innovation labs, increases in dedicated financing, and even an openness to invest in, or partner with, fintech firms. Some may question if the increased level of attention has had any measurable impact.
Just look at the numbers. Over the years, multiple global trade organizations like Efma and BAI have sponsored innovation competitions. With very few exceptions, banks from the US have been absent from the winners’ circle and even when they do win, it is usually for improvements to traditional distribution networks or completely new banking organizations like Simple, Moven or BankMobile. Conspicuously absent are the big five banking organizations in most cases.
Some non-U.S. institutions are recognized regularly for their efforts, with select regions being hotbeds for new ideas and innovation. Regions with ‘newer’ financial economies seem to be over-represented, with firms like CaixaBank, DenizBank, Fidor Bank, Idea Bank, mBank, and Nedbank being consistent winners. Soon, fintech firms outside the U.S., such as Atom, Monzo, Starling and N26 will also take the stage.
Outside the awards designation, there is some innovation occurring in the U.S., but the majority appears to come from U.S. organizations with overseas ownership (BBVA and Santander), smaller digital banking organizations (Simple, Moven and Bank Mobile) and U.S. based fintech firms. In fact, 35 of the KPMG Fintech100 global fintech innovators were from the Americas.
The lack of meaningful innovation in the U.S. is a threat going forward. With expectations of the digital consumer rising rapidly, and competition from fintech firms and global financial innovators increasing, the need to ‘move the needle’ by legacy banks can’t be overemphasized. And while the largest banks in the U.S. are seeing very positive customer satisfaction results from their digital banking improvements, there is a question of that will be enough in the future.
Insights from Financial Innovation Insiders
So why is it that in the USA, where more banks and some of the largest banks in the world exist, is true innovation so difficult to find? “Many U.S. banks are so invested in their legacy business models that it makes it very hard to undertake truly disruptive innovation projects,” says JP Nicols, Managing Director of FinTech Forge. “Banks in emerging markets have to be innovative to reach their customers, many of whom don’t have access to the broad range of choices that Americans have.”
Bradley Leimer, former head of fintech strategy and innovation at Santander US says: “While there are many reasons US banks are innovation laggards, I think legacy technology, regulation, compliance, and risk aversion have to top the list of reasons why we’re not seeing more movement.”
“The US is a major leader in Internet innovations but, outside this, it has been behind most other regions of the world on mobile developments, adds Chris Skinner, CEO at The Finanser Ltd. “This is largely due to the tariffs and state splits between cellphone usage and providers which, when you get to China or Africa is a totally different position. These newer markets do not have the old systems in place and therefore saw mobile as a leapfrog for digital services to the customer. American banks just don’t see it that way, and see it more as an overlay to what’s already there.”
Barriers to Innovation
In contrast to the other regions, the main barrier to innovation for the Americas seems to be culture rather than IT systems or lack of funding. While regulation and compliance issues are more of a challenge in the U.S. than most other regions of the world, this challenge is less of an issue today than it was just a couple years ago.
“Innovation is simply not in the DNA of most bankers,” explains Nicols. “They’ve been trained throughout their whole career to identify and avoid risks, and innovation is about taking small risks and failing fast and cheaply and learning from those mistakes to get to the right answer quickly.” Nicols continues, “Another challenge is analysis paralysis. Most banks have too many silos with conflicting agendas, and that makes it hard to actually put new ideas into action. Consequently, those few innovators who do exist in banks find themselves surrounded by the ‘business prevention department’.”
“The U.S. market is plagued with many more problems than its international peers, states Leimer. “We have a more complicated system of financial players, embedded legacy technology and processes for everything from acquisition to money movement, from telcos to payment providers – and in spite of changing client behavior – we continue to prop up legacy financial services like paper checks.”
Finally, Chris Skinner adds, “Lethargy and lack of competitiveness plagues the majority of the banking industry. Lethargy embraces everything from ‘oh, the regulators won’t allow it’ to ‘if ain’t broke, don’t fix it’ to ‘but the legacy, the legacy, the legacy’. There is more perceived risk in changing what is already in place than the risk surrounding doing nothing at most organizations.”
The Future of Bank Innovation in the U.S.
Looking ahead, we will certainly see more examples of innovation in the U.S., either by traditional financial institutions, by one of the many newer neo banks that have been created, or from some of the financial intermediaries that are providing the tools for U.S. banks to serve customers better.
One of the major changes that will need to be embraced will be to move what is being developed in the newly outfitted innovation labs to customer-facing environments. In research done over the past year, The Financial Brand and Digital Banking Report found that, while new ideas are being tested in many organizations, few make it out of the lab.
One banker admitted, “Our innovation lab looks great for the investor public, but in reality, the best ideas are coming from the front line and from our test branches. The digital banking areas of the bank think completely different than the legacy banking departments and even the innovation lab … they get ideas to the consumer faster.”
Most importantly, the biggest adjustment that will be needed in the U.S. is a much stronger culture of innovation and acceptance of tolerable risk. Just read some of the annual reports from banking organizations like BBVA, where it is clear that the innovation culture starts from the top. Without this level of commitment, innovation will come slow.
Many bankers became bankers because of the promise of a lifelong career, where advancement was guaranteed with tenure and change came slow. That is not a recipe for success in today’s banking environment.
The barbarians are at the gate, and these are the digital consumers who expect the kind of innovation (and digital experience) they receive from large technology firms like Google, Amazon, Facebook and Apple. If the U.S. banking organizations continue to be complacent, eventually the digital consumer will notice that the grass is truly greener across the street and they will switch providers.
This article also appeared in the Efma Review 2017.