How Banks Can Change ‘Innovation’ from Buzzword to Differentiator

While almost every financial institution states that they prioritize innovation as a corporate focus, there is little consensus on the definition of innovation, the rationale for innovation, or how the impact should be measured.

Dilbert feasted on innovation in business for years. The popular comic strip by Scott Adams didn’t pillory banks in particular, but it could have because too often innovation in buttoned-down banking has been more buzzword than reality.

Banking is a creature of structure, risk avoidance, regulation and following rather than leading. But in the digital age, consumers want it all — security and instant, seamless response — and they’re increasingly willing to go outside of banking to find it.

So banks and credit unions can no longer treat innovation as a “project.” But to turn innovation into a driving force they need to overcome cultural and institutional roadblocks. Right now, innovation is mostly viewed as a destination as opposed to an ongoing process for achieving a specific form of change.

As a result, innovation’s focus is often narrow: a new product, method of delivery or operating process that can positively impact value and growth. That’s part of it, of course, but increasingly leading institutions are realizing it’s much more.

Rather than limiting innovation to the creation of something entirely new, they recognize that with the introduction of new technologies innovation should include ways to create new value through improved deployment of what already exists.

What It Means:

Innovation can and should encompass such things as improving current results, reimagining strategy or completely reinventing the business model.

According to a MasterClass article, there are three distinct approaches to innovating within an organization:

  • Revenue-model innovation – This involves innovating products and services, the prices of these products and services, and the customers targeted for an overall positive revenue impact.
  • Business-model innovation – This involves adjusting business models, business processes, business strategies, technologies used, and third-party partnerships to drive efficiencies and effectiveness.
  • Industry-model innovation – This involves looking beyond existing business models for new industry opportunities. This would align with many current strategies around open banking.

Even further, the value of innovation does not need to be solely financial, but can include contributions to the betterment of the environment, society and other definitions of value.

Not everyone will agree on what innovation really is or how it should be owned, funded and structured, but no one in banking should disagree that the concept has never been more vital. There are in fact several “innovation truths” that should not be up for debate.

Read More: Banking Innovation Push without Cultural Shift is a Failing Formula

1. Get Going

Organizations that are successful with innovation have a bias towards forward progress and concrete outcomes. In other words, there needs to be less talk about the process and more emphasis on speed, scalability and cooperation. According to Deloitte, high-growth companies tend to have a formal innovation process, that correlates to innovation maturity and positive revenue impacts.

It is often better to have an imperfect innovation today than to overthink the process to the degree that a delay of 12 to 18 months occurs. It is also better to avoid tentativeness in implementation as it relates to the size of the endeavor. That is, high-growth companies commit larger sums of money to innovation and are bold in their commitments to change and improvement.

Finally, the best performing organizations have an innovation mentality that is not centralized in a single department, but shared throughout the organization with top-down leadership support. Having the C-suite completely aligned with all innovation initiatives is directly correlated to success.

2. Keep Going

With innovation, success is far from guaranteed. This creates challenges, especially in banking where risk avoidance (as opposed to risk management) is the foundation for a great deal of the legacy thought process. The Deloitte research found that success of innovation was directly correlated to the length of time spent on the innovation. In other words, patience pays.

Innovation Long Game:

Innovation shouldn’t be pursued as a quick win – it often takes years for a new idea to be profitable.

An organization with a ‘challenger mindset’ realizes that ‘failures’ are learning opportunities that precede earning opportunities. This is definitely a paradigm shift for many financial institutions that have historically punished failure and discouraged risk taking. According to Deloitte, “Innovation leaders engender an abundance, rather than scarcity, mindset, with a recognition that failure isn’t money wasted, but instead, money invested.”

3. Let it Go

Against the normal thinking within banking, success with innovation requires the avoidance of micromanaging. The reconditioning of managers to become coaches of the innovation process, allowing lower levels of the organization to guide the decision-making process, produces better results. Spreading the ownership of innovation throughout the organization is a key component of successful growth organizations.

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6 Innovation Choices Need to Be Made

For a bank or credit union to embrace innovation as a corporate-wide imperative, several critical choices need to be made that will provide the foundation for immediate growth and ongoing innovation maturity. In the Deloitte research, Innovation Study 2021: Beyond the Buzzword, there is a discussion around six choices each organization must make. These are:

1. Ambition. Is your organization protecting existing products, services, customers and processes? This defensive posture would focus on cutting costs and creating efficiencies. If your organization has the ambition of playing offense, the focus will most likely be on creating differentiated growth and financial performance that may also include rethinking the culture and brand. The highest performers usually play to win as opposed to playing not to lose.


2. Starting Point. While the majority of organizations begin their innovation process by optimizing existing products, services and processes (supply), the highest growth companies focus their innovation efforts on customer and marketplace needs (demand).

Lead with Need:

The most successful innovation programs uncover opportunities worth winning, or problems worth solving, and then move on to the process of creating solutions.

3. Funding. Does funding for your innovation come from the top as an allocation for R&D based on a percentage of revenues, or is each innovation initiative funded as a project-based request based on potential impact? As can be expected, the highest performing companies fund innovation on a business case basis as opposed to a recurring annual allotment. According to Deloitte, this form of funding creates an urgency to deliver on metrics-based milestones.

4. Ownership. Traditionally, the ownership of innovation has resided within the technology and strategy areas of an organization exclusively, often focusing on product performance and customer experience enhancements. In the highest growth organizations, finance departments are more likely to help drive innovation efforts, with ownership of innovation more widely spread across the organization.

5. Structure. The research by Deloitte did not find a definitive differentiation between the success of centralized or decentralized innovation structures, but did determine that a centralized structure was better in organizations that demanded the deepest level of specific expertise. In banking, it could be assumed that a decentralized or hybrid model would work best, leveraging the combination of skilled specialists and marketplace leaders.

6. Measurement. With regard to measurement of results, patience is encouraged. Not only should there be a measurement of the conversion rate of ideas into solutions, but also the measurement of ongoing results. Caution is encouraged, however, so as not to measure a new innovation against an established line of business.

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