We are entering an era of digital transformation that is significantly changing the relationship between legacy banking organizations and the consumer. While the traditional banking functions will remain intact — capturing deposits, issuing loans and processing transactions — the way banking will be consumed will change dramatically, reflecting a major shift in consumer expectations caused by digital technology.
As expectations change, the ability to attract long-term depositors and issue loans to a broad marketplace at a sufficient margin becomes more difficult. This is especially true as fintech and big tech providers are improving the delivery of banking services with a much lower cost structure and significantly better experiences than legacy banking organizations.
Adding to the challenge is the reality that legacy systems and cultures inhibit traditional banks and credit unions from innovating at the speed of the new non-bank competition. In fact, research from the Digital Banking Report found that only 17% of traditional institutions considered themselves to be ‘innovation pioneers’. In a nutshell, while other industries have embraced change and disrupted themselves, the banking industry has remained comparatively complacent.
Understanding that consumer expectations are increasingly divergent from what legacy financial institutions provide today, existing banks and credit unions must find a way to innovate at scale, rethink distribution, better integrate new technologies and change existing culture to reflect a new paradigm of digital banking that begins at the very core of the banking model. And, this transformation must occur immediately, since the competition from small fintech players and large digital giants such as Google, Amazon, Facebook and Alibaba, will not diminish.
In a Banking Transformed podcast, Rohit Bhargava, author and professor of global marketing at Georgetown University, the future of innovation is not defined by technology alone, but by the ability of organizations to do something new and different that works. Beyond simply adding something new, Bhargarva believes organizations should consider the elimination of old paradigms.
We asked Bhargava about the importance of innovation, leadership and new marketing strategies in the banking industry. Here’s some of what he had to say.
What do you see as the biggest innovation challenge in banking today?
Bhargava: First of all, innovation is not defined by technology. Innovation is defined by doing something new and different that works. And I think the challenge is that there’s a lot of what I call ‘innovation envy’, which occurs when we look at companies like Google, or we look at other companies that have ping pong tables, and we think ‘Oh, if we just slapped in some ping pong tables and had a hackathon we would be innovative’. That doesn’t work.
The challenge is figuring out what purposeful innovation means, and where do we need to change the way that we think. Realistically, that may mean, ‘What do we need to stop doing’? What are we doing now that doesn’t work anymore that we have to rethink?
Too often, organizations think about what needs to be added. What do we layer on top in order to be more innovative? Do we create an innovation lab over here? Do we create some sort of digital think tank?
Like the old saying of putting lipstick on a pig?
Bhargava: Or, you assume that you always have to have a pig in the first place. That is the biggest thing that needs to be rethought from a leadership perspective. Because when you get to a leadership role, you’ve been in the organization for long enough that you know what’s worked and you have an established point of view. You’re paid for your point of view and you’re not paid to listen. You’re paid to decide.
Unfortunately, when you’re paid to decide, then nobody’s paid to listen. I believe leaders need to listen first then speak. And I think from a leadership mindset, if we adopted that more as leaders we would come up with more innovation because we wouldn’t assume that we always have the answer.
So old leadership paradigms can impede innovation?
Bhargava: That’s right. I think that a lot of times what ends up happening is leaders feel the pressure to know every solution. I deal with a lot of really senior level people who will bring in an outside person because they can’t ask anybody on their team. Thinking leaders should know ‘everything about everything’ is unrealistic. Sometimes the only way to get around this is to find places where a leader can authentically ask the questions you need to ask without feeling like an idiot.
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How can leaders ‘disrupt themselves’ to enable change?
Bhargava: It’s tough. I think part of the reason it’s tough is because there’s a lot of biased advice. When you bring in a consultant, they’re going to consult and tell you what you should do based on a very narrow perspective. This is why I now see a lot of senior level people turning to folks who are positioning themselves as ‘coaches’ as opposed to ‘consultants’.
Coaches will say, “I’ll help you decide what to do and help you get smart about this, but I don’t sell the solution. I can open your mind and help you go through these thought patterns.” More and more really successful senior level people are bringing in someone who is a coach or a peer to help them decide who they should be paying attention to.
Does it take fear to stimulate change?
Bhargava: I don’t think fear is the right way to position change or disruption, because leading from fear causes you to just do what somebody else has done. The first question can’t be to show you a case study, because if it’s innovative, there’s no case study.
A lot of times we look at an innovative idea and we think it’s too risky. And the risk is that it fails. The risk isn’t public scrutiny, because nobody cares and nobody is paying attention to it. The question becomes, how do you fail quietly or innovate in a way that if it fails, nobody has even heard about it? That’s the best way to fail, right? I’d much rather trip when nobody else is looking.
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What else is needed to innovate better?
Bhargava: Organizations must be more open minded and see things from outside their industry. One of my favorite ways to do this is when I’m traveling. I go through an airport and I pick up a magazine that’s not targeted to me. When I do that, there’s a couple of things that happen. First, I get to see the language that they’re using for someone who’s not like me. I see the ads and who’s advertising and what the pitch is to them. But most importantly, I see exactly what the intended target audience sees.
Online, all I see are things that agree with what I think. This makes us assume that others are stupid because you’re not being fed the same digital content. In a magazine that’s impossible, because when you pick up a magazine it’s the same for everyone. We need to intentionally choose to do that because the algorithms won’t do it for us.
How will marketing change in a digital ecosystem?
Bhargava: Data and personalization will become increasingly important for both advertisers and the consumer. Consumers are starting to get smarter about the equation around the value of their personal data. They realize that the benefit they’re getting is not equal to how much money is being made on their data. As a result, many people are starting to talk about being able to monetize their personalized data.
For instance, if I’m generating a lot of content for Facebook, and they’re selling advertising against that content, I should be able to get some revenue for that. That’s an idea that I think is really starting to take off. And one that solves the problem for Facebook and other tech companies because it doesn’t require them to have more regulation or change the way that they’re doing their business model. All it requires them to do is take x billion dollars that they have and share some of it with the people whose data they’re using.