What’s it going to take for retail banks to survive in this post-financial crisis, increasingly digital world? “The dual strategy of ‘New and Renew’ will be critical,” says Michael Reh, senior vice president and global head of Infosys Finacle. “Banks must look to infuse new life into existing lines of business, while innovating into new ones.”
Innovation is a major strategic imperative for Infosys Finacle, which partners with BAI in the BAI-Finacle Global Banking Innovation Awards 2014, the winners of which will be announced at BAI Retail Delivery 2014 on November 12. In anticipation of that event, we conducted the following interview with Reh, who took his position at Infosys Finacle on October 1 after serving as an executive vice president at SAP AG, where he was responsible for the development of SAP’s advanced analytics portfolio, and mobile- and user interface-related technologies.
Q: What trends in innovation are you seeing in the financial industry on a global basis?
Reh: At Infosys Finacle, we have the privilege of working with banks in 84 countries and I clearly see innovation transforming banking very rapidly in all these geographies. To me, broadly, there are four key forces that are accelerating innovations in banking.
The first driving force is rapidly evolving customer preferences and demands. Today, banks are dealing with the most informed, connected and sophisticated customer in history. Progressive banks are responding to this by making their business truly customer-specific and are aiming to delight customers with contextual products and services. Big data analytics will play a major role here. To succeed, banks need to manage all three dimensions of big data, the three Vs: volume, variety and velocity. Effective usage of data will empower banks with enhanced customer insights and better decision making.
The next big trend shaping the innovation agenda at banks is clearly the rapid evolution of technology itself, in the form of mobility, big data, social, commerce and cloud. Mobility is currently the most important theme for banks, closely followed by big data and social channels. These technologies are disrupting the way consumers interact with banks and the way businesses are run. Banks that effectively use new technologies to better understand and serve their customers will emerge as leaders in the industry and continue to gain a competitive advantage.
These technologies will also disrupt the traditional business models and lower the entry barriers for new competition. For instance, LendUp, an online lender, focuses on financial education and gamification to encourage responsible lending behavior. LendUp also uses big data to do instant risk analysis and evaluate creditworthiness so that approved loans can be deposited in a customer account in 15 minutes.
This brings me to the next key force: the changing competitive landscape. Today’s banking landscape has not only grown fiercely competitive, but also developed facets that never existed earlier. One of these is the entry of non-banking players, especially from the tech, retail and telecom space, riding on nimble, cost efficient business models. Banks are indeed taking new entrants very seriously, especially tech companies. In our “Innovation in Retail Banking 2014” survey, banks told us they were particularly concerned about the threat from tech companies such as Google, Apple and Facebook, with 45% of the banks indicating the threat as high. To counter this, banks need a superior capacity for innovation – which means bringing innovations to market faster and continuously. Banks also need to develop value-based partnerships with other ecosystem players.
The last critical driver for innovation is continued pressures on margins and profitability. Banks are focusing on enhancing return on equity by maximizing revenue and reducing operating costs. They recognize continuous innovation is the key to success. More banks now have a focused innovation strategy. In 2014, 61% of banks in our research indicated they have an innovation strategy, a significant increase from 37% in 2009.
These forces are reshaping business of every organization. While banks need new capabilities to help their businesses grow in new ways, they also need to renew their existing systems, opening them up to benefits of mobility, analytics, cloud computing and connected systems. We see this as a great opportunity to help banks renew the core of their business as well as to expand into new frontiers.
Q: What are the primary obstacles to innovation that you’ve observed? What holds banks back from the necessary investment of time and resources?
Reh: Regulatory caution, risk aversion, legacy systems and unfavorable culture are some of the barriers to innovation. Increasing regulation has made it even more difficult for a historically regulated industry to plunge into something new swiftly.
So, clearly a large number of banks choose to remain fast followers. For them, the most important thing is to stay abreast of unfolding trends, and once these are proven and established, act quickly to adopt. Awareness of the market environment is key, therefore, for the success of a fast follower strategy.
Lower profitability and higher regulatory costs in the last few years have also impacted budget allocations for innovative programs. In many cases, over 80% of annual Information Technology (IT) budgets are spent on simply supporting existing business operations and enabling organic growth, leaving little for business transformation for the creation of new revenue streams.
However, this is clearly getting better now. To succeed, banks need to leverage modern technology to generate new revenue sources and accelerate profitable growth. It is important that banks move their investments from “keep the lights on” to “driving and adopting innovations.”
Q: What qualities do the innovators have that enable them to overcome these obstacles? What does it take to be an innovative bank in today’s environment and stand out from the pack?
Reh: We have seen various approaches to fostering innovation at banks that are leading the game. Most progressive banks recognize innovation as a key management priority; they have well defined innovation strategies and create a culture of co-innovation across business functions, they invest in R&D and focus on building strong partnerships with ecosystems and are even crowdsourcing ideas.
Leading banks choose to act as catalysts, creating a conducive, stable and encouraging environment for innovation, while also leveraging external talent to further their innovations. Open innovation techniques, such as relationships with academic institutions, investment in start-ups, strong partnering with IT companies or other suppliers and competitions for staff and non-staff, gives them a platform for doing this. Consider Israel’s Bank Leumi, which has augmented its internal efforts by partnering with Elevator Fund to specifically identify financial technology start-ups to invest in. Bank Leumi hopes to gain early access to financial technology innovation and an opportunity to help shape product efforts to support its biggest needs.
Building strong partnerships with IT companies is another significant option. The ING Customer Experience Centre in Amsterdam leverages the R&D budgets of suppliers, but brings a customer focus to what otherwise could be a technology driven innovation initiative.
Some banks are also starting to organize hackathons, or innovation competitions open to the public. TEB in Turkey has been running an innovation competition for several years and this has been growing in popularity; the most recent competition generated over 10,000 ideas.
Whatever the innovation approach, the dual strategy of “New and Renew” will be critical. Banks must look to infuse new life into existing lines of business, while innovating into new ones. The world around us is being reshaped by technology in fundamental and profound ways. As we look to innovating into new areas, there is also a need for renewal of our existing offerings, operations and business functions. The renewal will be led by technology-enabled innovation, by automation-leveraging modern technologies and by operational excellence.
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