9 Realities for Financial Innovators

It seems everywhere you turn, someone is complaining about how little innovation there is in the financial industry: “Banks need to be more innovative,” or “innovation is the key to the financial industry’s future.” True, banks and credit unions may not be bustling hubs of innovation and new ideas, but here are nine points to consider before your financial institution deploys a “strategy of innovation.”

1. There is no value in simply being innovative. You can be innovative but that doesn’t mean your innovations are worthwhile and relevant. (Mortgage-backed-securities and credit default swaps were innovative after all.) Being innovative is not a competitive advantage unless your innovations solve meaningful problems in meaningful ways. Consumers don’t care if you have a “new” or “different” approach. Real innovation is about doing things “better” and “easier.”

2. Your success as an innovator hinges on your ability to recognize and identify problems. Real innovation always starts with the problem: What problem are you trying to solve? Every problem, every complaint, every closed account, every lost loan, every inefficient internal procedure is an opportunity to innovate. As Martin Reed with Central 1 in Canada notes, “Problems are brand opportunities. Huge brand experience opportunities.” Your financial institution doesn’t need a Chief Innovation Officer. It needs a Chief Problem Solver.

3. Most ideas fail. Truly creative people will admit that most of their ideas aren’t very good. Indeed the only way to have a good idea is to have lots of ideas. Thomas Edison confessed to 10,000 failures before finding success. Innovation requires a culture that supports experimentation and embraces failure, because you aren’t going to hit a home run every time. You not only need a thick skin, you need the wisdom to know when it’s time to walk away.

4. Financial institutions’ operational model does not support a culture of innovation. Financial institutions deal in tightly-managed guaranteed rates of return. They are — by their nature — risk averse. Financial institutions generally lack the resources to shoulder a large R&D burden and the risks involved with innovation. Your financial institution needs the ability to absorb fruitless investments of time, energy and money.

5. The best ideas in the financial industry come from outsiders — mostly startups. Eight of the 10 most innovative companies in the financial industry aren’t banks. In fact, the majority of financial innovators haven’t even been in business for more than a decade (you can find them at any Finovate conference). Admit it: If you could start over today, you’d do things differently at your financial institution. That’s the advantage startups enjoy. Startups — along with nimble credit unions who can invest their not-for-profit surpluses — may often serve as incubators of financial innovations, but banks are frequently the ones with the scale, resources and operational acumen to really execute and perfect a concept.

6. Any idea that works will be stolen. Any innovation that proves viable will be subsequently deployed, purchased and/or stolen by other players in the financial space. You can come up with great ideas all day long and your competitors will steal them. In fact, your competitors may even get all the credit. Apple is heralded around the world as being an innovative company, yet the Cupertino-based technology company didn’t come up with the graphical user interface for Macs, they didn’t invent the MP3 player (iPod) nor did they come up with touch-screen portables (iPads). Every time you innovate something that your competitors steal, you are subsidizing their R&D costs ideas.

7. You can steal any idea that works. You don’t have to be on the bleeding edge when there are other players willing to innovate on behalf of the industry. You can still be on the leading edge by learning from their failures and stealing their successes. (Further Reading: “Defend Your Research: Imitation Is More Valuable Than Innovation,” Harvard Business Review, April 2010.)

8. Most innovations aren’t big, wholly unique ideas. Big innovations that transform the financial industry — like ATMs in the 80s and the internet in the 90s — are few and far between. Most innovation is typically a process of fusion or evolution. Someone looks at someone else’s idea and says, “Hey, I like that. How can I make it better?” Or someone looks at a new technology, or what someone else is doing, and says, “I wonder how I can make that work for me.” This is how 99% of percent of innovation works in any industry.

9. Most people don’t like change. They like things that are familiar. Most people fear change and need to be reassured. This includes consumers as well as people inside your financial institution. This is also why surveys asking consumers questions like, “Would you be willing to try [new financial service X]?” never generate accurate predictions. Consumers don’t know what they want nor what they would use until they see it.

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