An academic study, reported in [email protected], found that:
“Disruptive innovations need not lead to an incumbent’s fall, despite prevailing academic theory arguing otherwise. Startups introducing disruptive technologies are more likely to end up licensing to incumbents or agreeing to be acquired rather than turning into rivals. Once the technology is proven, among other factors, start-ups tend to form alliances or merge with market leaders, thus preserving the status quo.”
The authors of the study call a startup’s switch from competition to cooperation with incumbents a “dynamic technology commercialization strategy.”
The rest of us call it “selling out.”
My take: Although the authors of the study based their conclusions on an analysis of the automatic speech recognition industry, many of their findings apply to banking.
How many times, in the past year or so, have you heard:
“If banks don’t innovate, they’ll be disrupted.”
“Warning to banks: Innovate or die.”
“Banks have to avoid the innovator’s dilemma, or they’ll get Kodaked’.”
If it’s less than a million times, then come on out from that rock you’re living under, and put down that issue of CB Radio Monthly (good buddy).
What does the research (cited above) say about these Chicken Little pronouncements? That what banks really need to be able to do is:
- Monitor and assess technological innovations and their market potential;
- Acquire (i.e., invest in) those innovations at the right time; and
- Deploy (i.e., assimilate or exploit) the acquired innovations.
Now, you might say that this capability is an “innovation” (i.e., process innovation) in and of itself, but c’mon–you have to admit that what most Chicken Littles refer to when they say “innovation” is technology innovation.
So, maybe banks don’t have to innovate.
But they’re not off the hook. Of the three steps above, #2 is hard and #3 is really difficult. I don’t mean to imply that #1 is easy–but there are firms out there (like the one I work for, or Bank Innovators Council) who can help with it.
Determining the right time to acquire a particular innovation depends on a number of factors, many of which will be hotly contested by various factions within the bank.
One of the more controversial calls I made while working at another analyst came about 12 years ago when I wrote that banks should not be investing in mobile banking in the short-term. My argument was that there were higher priorities that deserved investment.
I had a colleague at the time who wrote the opposite.
The chief technology officer of a very large bank flew both of us down to his office to make our case to him and his team. I won the debate, and the bank chose not to allocate funds to mobile banking in the coming year. About a year later, I got an email from him saying it was the right call, and that I helped him put about $5 million towards things that really needed to be developed/fixed (I actually got an email from the SVP, of eCommerce at another large bank with the same story and thanks).
Why don’t banks and credit unions have this three-step “innovation” capability? A lot of reasons.
One reason: They spend so much of their “innovation” effort “brainstorming.”How many times have you been involved in an innovation effort designed to produce new ideas to feed the desire to innovate? Probably a lot. How many times were those meetings nothing but a waste of time? Probably a lot.
Another reason: Innovation efforts are deemed to be part of the bank’s strategic planning process (“buried” in the process is probably more apt). Strategic planing in too many FIs are simply budget allocation efforts.
I recently participated in a credit union’s strategic planning efforts by presenting (along with another consultant) at a board of directors meeting. The other consultant presented an excellent 90-minute overview of technological developments in payments. After he concluded, one of the board members asked: “So what do we need to DO about all that?” To which the consultant replied: “Right now? Nothing.”
I cringed. The presentation satisfied step #1 (monitor) but did nothing to help with #2 or #3.
Another reason: The split between IT and the business. Even if you have staff dedicated to steps #1 and #2 (as a number of large FIs do), #3 (deploy) is hard. How many years did it take banks to grow adoption of online banking and online bill pay? PFM been around for years, yet penetration is still really low. The ability of banks and credit unions to not just deploy new technology innovations, but to exploit them–that is, grow and profit from them–is a missing capability for many FIs.
Bottom line: One of the things I’ve learned from writing this blog is that words and their definitions matter. How we define “innovation” here is critical. The constant chorus of calls for banks to “innovate” washes over what I think the Innovation Snobs are really calling for: Banks to change and improve.
While the doomsday predictions from these snobs that banks need to “innovate or die” make for good sound bites, they’re terrible advice for bank and credit union executives.
For more on the topic of innovation in banking, see Why Don’t Banks Innovate?