Innovation in Retail Banking – A decade in review

Over the years, there has been a growing realisation in banking towards innovation as the proven path to differentiation and competitiveness. While the transformation has been slow, over the last decade the industry witnessed an increasing willingness to discard the traditional short-term focus, functional siloes and risk-averse culture towards more meaningful advancements and open culture.

While traditional banking organisations have lagged other industries with regard to innovative cultures, the challenges over the past decade seem to be more deeply entrenched at financial institutions in the more developed countries. Evidence of this dearth of exciting innovations by banks in the US and Western Europe can be seen when looking at the big winners at annual financial innovation award presentations.

We have seen over the past several years that start-ups embody the core principles of innovation that drive commercial success. They embrace risk-taking and failure, while rewarding success. They are agile and can pivot immediately to meet market demand and are focused on customer needs. Because they are usually small, they can think big. But because they are small, scalability can be a challenge.

The question is whether banking can replicate the best of FinTech start-ups while leveraging their customer base scale advantage to respond to a changing marketplace. Or, will the majority of the industry need to be fast-followers … or laggards, with the inherent risks?

The Challenges of an Innovative Culture

Building a ‘culture of innovation’ is most likely at the top of most banking organisations’ corporate agendas. There is no denying that a firm’s own employees are uniquely positioned to understand both their customers and their own organisation. We have seen movement over the past decade toward a greater commitment to innovation, but we have also seen the lack of commitment doom innovation initiatives.

Unfortunately, while many organisations say they are increasing their efforts to build a work environment that inspires innovation and creativity, research indicates that many corporations may have a surplus of ideas that aren’t being nurtured. Worse yet, a risk-averse approach to innovation creates incremental improvements rather than the level of innovation needed to generate meaningful ROI. Finally, the structure of banking makes the entire process too slow, resulting in lost revenues.

While the research featured here has over the years has found that an innovative culture is very important to the gen­eration of entrepreneurial ideas, and that the investment in innovation has increased every year, many firms still do not view themselves as strong innovators and there is a lack of disruptive innova­tions that ever reach the consumer.

What Makes an Innovation Leader?

Over the past decade of evaluating innovation in banking through its annual report “Innovation in Retail Banking”, several key characteristics have been prevalent in innovation leaders:

• Focus on Customer Experience: Innovative organisations put the consumer first, knowing that a positive customer experience is good business. They increasingly use data and advanced analytics to understand their customers’ needs and behaviours. They invest in capturing insights from internal and external data sources and build models to enable contextual decision making and communication.
• Build an Innovation Culture: The one constant we have seen over the past 10 years is that the most innovative financial institutions have the most evident top-down innovative culture. This goes beyond just support for innovation; to include risk-taking, networking and collaboration (including a meaningful measurement and rewards structure). It is difficult for an organisation to achieve the spirit or success of smaller and more agile FinTech firms without a commitment from the top.
• Encourage Internal and External Collaboration: The most successful innovators take advantage of the best ideas from both inside and outside the organisation. In fact, it is becoming more commonplace for innovation to occur through collaboration with FinTech firms than to be built from within.
• Integrate Innovation with Business Objectives: Investment in innovations must be consistent with overarching business strategies being presented to the public and should be supported by the corporate culture.
• Take a Long-Term View of Innovation: Innovation cannot be held captive to the quarterly reporting of earnings. Over the past 5 years, we have seen banking organisations extend their perspective of how fast innovation must generate a return. This is a good trend.
• Provide a Structured Environment: If the innovation process at a financial institution does not have a defined leader, it will be more difficult to succeed. Many organisations say they are committed to innovation, but lack the leadership and structure needed. To be effective, an innovation process must run quickly and efficiently, and needs to be separated from the normal banking silo structure that slows the process.
• Focus on Speed to Market: Swift execution of innovative ideas is imperative to maximise ROI. Successful organisations aren’t constrained by customary ways of doing things — they remove the words ‘no’ and ‘cannot’ from their vocabularies, and instead focus on finding a way to succeed. They also utilise small, focused project teams.

Moving Forward

With the ongoing onslaught of outside firms competing in all business categories, financial organisations must take steps to centralise, internalise and prioritise the innovation process. Some suggestions include:

• Assess the innovation culture and process within the organisation to determine if new ideas are encouraged and rewarded.
• Determine how innovation can be integrated and aligned within the overall business strategy of the organisation through innovation road-maps, measurement processes and a rewards structure.
• Publicise the innovation culture within and outside the organisation. Make sure this culture begins at the very top of the organisation.
• Create opportunities and incentives for innovation and idea development.

The banking industry is faced with the risk of disruption from many known and unknown sources. How organisations respond is critical to continued success, and ultimately, their existence.

Most banking organisations may need to look no further than their own employees for innovative ideas. While potentially being overwhelmed by ideas that may have limited impact or revenue/cost benefits, it is still imperative to harvest ideas with potential.

If the banking industry is going to keep up with the new upstarts and FinTech entrepreneurs, organisations need to find ways to cultivate, nurture, implement and reward ideas swiftly. The key is to avoid dampening innovative spirit, while aggressively culling ideas with less chance of success, and selecting innovative ideas that will generate returns.

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