Why Banks Struggle with Innovation
Innovation is something that comes and goes in banking like chief executives and heads of risk … as in it appears and disappears pretty often.
During the build up to the financial crisis, innovation was everywhere. Then it disappeared for a while. For example, in 2000, the top 10 U.S. banks mentioned the word “innovation” in their annual reports an average of 1.2 times. By 2006, that had risen to an average 6.5 mentions per report. By 2009, it hardly appeared at all, averaging a general 0.3 mentions per report.
When JP Rangaswami recently spoke at the Financial Services Club about innovation, he observed that banking is the last place where innovation occurs because of risk. When he was global chief information officer of Dresdner Kleinwort Wasserstein, for example, he was told to innovate but only in areas that wouldn’t disrupt the bank or create risk. In other words, innovate in areas that don’t matter.
This is a complex dilemma and not an easy one to solve. For example, in our annual survey of banks, we found that most believe regulation occurs outside the industry, not inside. Industry innovation only happens when regulators force banks to innovate, such as when something like the Single Euro Payments Area (SEPA) or same-day-payments is forced upon us. But there are two other issues as well. The first is: how to measure the business value of innovation. And the second is: we want to innovate, but have to choose something easy.
Let’s tackle that first issue: how do you measure the business value of innovation? Many people say that you cannot be innovative if you have a business case. If something has a business case, then it’s been done before and therefore is not innovative. But that doesn’t wash with a bank. Banks need to know the cost and returns, the timescales and technologies, the impact and implications … banks need the i’s dotted and the t’s crossed.
That stifles innovation obviously but it doesn’t matter as banks only need to fast follow. Fast following is the heart of the art of banking, not innovation. So, I would propose that if you want to measure the business value of innovation then measure what others are doing and if it looks worthwhile, copy it. That’s what banks do well and it proves to be the reliable pulse of most innovations in banking. See if it works elsewhere and, if yes, copy it.
The alternative approach is of course to just try it out. Banks will willingly put a toe into the water of innovation and try things out. Oh, it looks worthwhile, let’s try a pilot and, if yes, roll it out. Banks have pilot programs all over the place; some have so many pilots, they should run an airline.
The problem with pilot programs, however, is that there’s no commitment. They often fail to prove a business case and get shelved. That’s the reason so many bankers will turn around to you and say: “been there, done that, tried it, failed” … sure. If Steve Jobs viewed the world that way, we’d never have seen an iPod, iPhone or iPad.
The real art of innovation is therefore to look at things that seem to work and then absorb them into something that really does work. Not easy, especially if you don’t take innovation seriously, but it is practicable.
Then we have that second issue: innovate in an area that’s easy. The issue for most bankers is that they want to innovate, but face forbidden zones all over the bank, where people say, “You can’t touch this.” That’s required by regulation; you can’t touch this. There’s a compliance issue here; you can’t touch this. This is subject to audit; you can’t touch this. We have to have this for legal reasons; you can’t touch this.
I could go on, but the point is clearly made in this comment from Iain G. Mitchell, QC, on cloud computing:
“Functionally, it might not matter where the data is stored, but it’s hugely important legally. Most cloud computing providers will use a network of servers distributed all over the world and will not be able to say where, at any given time, your data is stored. It is normally a breach of data protection regulations for data to be exported out of the EU, so, unless you know that all of your cloud computing provider’s servers are physically located in the EU, you might well find yourself in breach of data protection regulations.”
You can’t touch this.
It came up again recently in an interview with Financial Services Club friend Aden Davies, innovation technician at HSBC:
“Ever wondered why banks don’t respond when you send irate tweets about problems with your account? You might think they’re silently hoping you’ll be sucked back into the cyber-ether. But it’s more likely concerns about compliance are keeping them quiet. Case law from 1924 means financial services companies can’t publicly identify an individual who has an account with them – which makes responding to customer queries via quasi-public forums such as Twitter a legal minefield.”
You can’t touch this.
If innovation is to occur, you have to touch everything with no sacred cows blocking the way. What with legal, compliance, regulatory and financial obstacles, innovating within a bank will always be the most difficult thing you can try to do.