Judgment on Innovation

Bankers in any one country may be excused for thinking the challenges they face are unique but the fact is that retail financial institutions across the globe are struggling with common problems in the wake of the recent financial crisis – such as restoring the trust of customers.

Innovation in developing products and services better targeted to customer needs provides one way of restoring this trust and fending off non-bank competitors, according to experts from around the world recently interviewed by BAI Banking Strategies.  Matt Calman, research & development executive, Charlotte, N.C.-based Bank of America Corp.; Patrick Desmares, president and CEO, European Financial Management Association (EFMA); Jan Hendrik Kraus, general manager, group strategy, Emirates NBD, Dubai; and Alexey Marey, member of the executive board, head of retail business, Moscow-based Alfa-Bank are members of a larger group of bankers and banking experts assembled by BAI to judge the 2011 BAI-Finacle Global Banking Innovation Awards at this year’s BAI Retail Delivery.

“It is clear that banks need to innovate in order to stay ahead in the race for customer relationships,” Desmares said. “Customers are becoming more demanding and more ready to shop around, so banks cannot afford to stand still and rely on customer inertia as much as they have in the past.”

Q: Why is innovation so important in today’s financial industry?

Desmares: Retail banking has been through a difficult period in the financial crisis and global recession. There are signs that the environment has improved for many banks though there are still challenges ahead. What we can see is that competition from new entrants and from new business models is starting to increase and it is clear that banks need to innovate in order to stay ahead in the race for customer relationships. Customers are becoming more demanding and more ready to shop around, so banks cannot afford to stand still and rely on customer inertia as much as they have in the past.

Marey: It’s a fact that social media, the Internet era and a younger generation — who are digital natives — force banks to innovate new products and services, which will be built into Internet and mobile, be accessible 24 hours/365 days a year. This will save people’s time for doing something that they really enjoy — and banking is typically not on the enjoyment list. Also, investors and shareholders demand growth and strong financial results every quarter and every year, which also leads to “innovation,” sometimes very dangerous, mostly in the field of lending products.

Kraus: Innovation is important as the world is moving faster and faster. Technological progress is accelerating, transparency is increasing and customers’ expectations are rising. However, it is important to keep in mind that innovation should always be viewed through the customers’ eyes by focusing on their needs. It should make their lives simpler and interacting with the bank more convenient.

Calman: Our customers expect us to continuously improve their retail banking experience as new technologies are developed. We are responding by offering customers more simplicity, clarity, security and accessibility to help them meet all their financial needs. Bank of America has a long tradition of customer-focused innovation and we see this as a critical part of the way we help our customers to fulfill their financial goals.

Q: In what areas of retail banking do you think innovation is most required or necessary?

Kraus: A lot of our research shows that customers are looking for trusted relationships and a superior experience in interacting with their bank. In the retail banking space, most customers have relatively simple product needs and therefore innovation in the services and distribution area appears to be most promising. Customers are looking for “individualized solutions” that take their own situation and history with the bank into consideration. Capturing and managing data across all customer touch points and translating that data into meaningful conversations and commercial actions becomes absolutely essential.

Given the increasing importance of alternative channels, channel integration (especially of digital media) in order to make customer’s life as convenient as possible is key. Individualization of interactions, especially in alternative channels like the Internet, ATMs or smart phones can contribute significantly to enhance the customer experience.

Calman: Innovation is meaningful across all aspects of retail banking, whether advising customers with expert help, matching their needs with new products, servicing their transactions or providing increased accessibility to their finances through new technologies. As our customers move toward new channels for many of their interactions, we must innovate to maintain the convenience and effective security they expect.

Desmares: Innovation is actually required across the whole business – products, channels, processes – and in how banks deal with customers. However, probably the most visible areas of innovation are in channels, with, for example, new mobile technologies (smartphones and tablets) providing opportunities to significantly enhance the customer experience. A small number of banks, usually start-ups, have been able to innovate across the whole business model which can produce a much lower-cost operation or a much better customer experience (or possibly both).

Marey: What we sometimes forget is that we are in relationship with our customers and every relationship is built on trust. Perhaps finding new and innovative ways of reiventing trust is what banks need to concentrate on.

Q: Does the heightened level of regulation in most countries today hinder or help the efforts by banks to innovate?

Desmares: Our research on this issue has not been conclusive. On one hand, regulation can hinder innovation by making it difficult to do things in a customer-friendly way or in rapid response to trends. On the other hand, the threat of greater regulation is one of the factors driving banks to innovate in order to find new ways to grow their business. Many factors can act as barriers to the level of innovation in any particular institution, and I think it would be wrong to assume that regulation is the most important factor.

Marey: By definition, innovation is very forward-looking and sometimes risky, while regulation is much more conservative and protective. Succesful cooperation between banks and regulators, in my view, lies in the earlier inclusion of regulators in developing products, processes and services for the changing customer needs. If regulators understand the objective and the bank is careful about risks and transparently explains what this innovation aims at, I think regulators can help “responsible innovation.”

Calman: Regulatory changes are a strong stimulant to innovation, as are other forces, such as evolving customer preferences and the proliferation of smartphones. Changes in the environment create new opportunities for us to evolve to meet the needs of our customers and the demands of the marketplace.

Kraus: The increased regulation in the financial services sector will further increase the pressure on banks as transparency increases and pricing as a lever will be constrained. Especially in the retail space, products will be commodities to a large extent. In this context, innovation will gain even further importance in order to intensify customer relationships and improve customer loyalty. Customers value trusted relationships and banks need to do everything to know their customers, serve them better and increase their loyalty in order create a win-win-situation.

Mr. Cline is managing editor of BAI Banking Strategies. He can be reached at [email protected].