The Challenges To Raising The Bar On Banking Innovation

The title of a recent American Banker article claims that financial firms are “behind in innovation.” It quotes James P. Andrew of Boston Consulting Group, who said the financial services industry…

…could do even better if it raised the bar on innovation. Financial services execs shouldn’t take their foot off the gas when it comes to innovation; they should accelerate.”

Do you know of any financial firms that are consciously saying “We need to slow down here — we’re innovating way too much, way too fast”? I don’t. The problem isn’t that financial firms are decelerating, or even considering slowing down their rate of innovation. The issue is threefold:

  1. Defining innovation
  2. Dealing with politics
  3. Establishing business priorities

The BCG article that the AB article cites found that “only 53%” of financial services respondents said innovation is a priority (versus 67% of those from other industries). What the article didn’t say, though (and I can’t find it on BCG’s Web site), is how did the study define “innovation”?

My hunch is that many survey respondents equated innovation with disruptive, strategic change. And — if I’m right — therein lies the problem: Confusing “big I” innovation (large scale, disruptive innovations) with “little I” innovation (feature or functionality improvements).

Introducing revolutionary new products and services is rare to the world of retail financial services. But feature and function improvements — or innovations — are introduced all the time. It would be interesting to know if many within the financial services industry consider this “innovation”.

The second innovation challenge that banks face is political.

According to AB, the BCG study found that “part of the problem in financial services is lack of support among top executives.” James Gardner, who recently joined Lloyds TSB to become Head of Innovation and Research, understands this well. As he wrote on his blog, some members of his firm are hesitant about the results his group will be able to achieve because

they wonder how we will ever get the support of the business to fund any of our initiatives, given that budgets are fixed, and other business-as-usual projects always take precedence.”

Addressing the first issue (definition) and overcoming the second (politics) can only be accomplished by taking care of the third challenge: Strategy.

James said in his blog that Lloyds TSB will go from 1500 ideas to 64 business cases, to 30 pilots, of which 7 or 8 will “see the market and/or go live”. What he doesn’t mention (and I don’t want to imply that he doesn’t have this nailed down) is what the prioritization process looks like. Lloyds might have this down to a science — if it does, it’s in a small, elite group of financial firms.

This is the biggest challenge financial firms (and banks in particular) have when it comes to innovation. They’re not sure where to focus. Capital One recently introduced a new product innovation. Should other large firms follow? Or would service or process innovations better suit their strategies?

Who knows, because few of them have clear, well articulated, well understood strategies to guide their innovation decisions.

No one I know of in the financial services world is taking their “foot off the gas pedal.” But there are some challenges that must be addressed before the innovation engine can be revved up.

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