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Three innovation tactics for community banks

Oct 27, 2015 / Consumer Banking / Technology

Wells Fargo, Deutsche Bank and JP Morgan Chase have recently attracted attention with their innovation labs. Seems like every large bank has at least one lab in which they experiment with new technologies, business processes and products and services.

It’s not surprising that the word “innovation” has become such a beacon for banks. Now that the dust from the financial crisis has settled, financial institutions are turning their attention from survival to growth. But it’s not a return to business-as-usual. Financial institutions feel pressure from the ever-growing cadre of financial technology (fintech) firms and non-bank competitors that seem to be launching new products and services daily.

The big banks, with their big budgets, are fighting back with their labs, incubators, and technology accelerators dedicated to testing technologies such as wearable payments and biometrics. But where does that leave community and regional banks? Running an innovation lab is expensive and requires resources likely outside the reach of smaller institutions, but innovation cannot be ignored.

From our work with bankers at small institutions, we find that many are intimidated by the i-word. Innovation conjures up thoughts of huge technology and product development efforts, customer focus groups and Ph.D.s whose sole responsibility is to play with technology.

We believe that innovation isn’t driven by asset size, but by mindset. Just because a smaller institution doesn’t have the bandwidth to create its own innovation lab doesn’t mean that they need to abandon innovation. Here are some of the ways that smaller institutions can also drive innovation in their firm:

Look backward as well as forward. Harvard professor Clayton Christensen states that it’s difficult for established organizations to innovate because they don’t understand their current business model well enough to determine how to build a new business model. He suggests breaking down current business models into separate components: the customer value proposition; a profit formula; and the key resources and processes needed to deliver that proposition.

Bank executives that follow Christensen’s wisdom need to take a deeper look at their business model. The results of using this powerful method will lead to redefining the business model and strategy. Bank executives need to reevaluate their business plan by looking through these lenses:

  • Assessment of internal and external forces
  • Evaluation of their services and product performance
  • Identification of new entrants and the opportunities or threats their products produce
  • Recognition of business customer and consumer needs

The process of discovering innovation is through insights – new problems that need solving. Compared to decades past, today’s economy, culture and technology pose new problems for business customers and consumers. Using the above-mentioned checklist will uncover insights that can differentiate your business model.

Let the others do the heavy lifting. Innovation typically implies being first to market, but oftentimes being a fast follower works too. Keep abreast of what your big bank competitors are testing by reading trade publications and attending events dedicated to innovation. Be ready to pounce on a good idea.

While it is important to observe competitors and large banks, community banks can also sharpen their own observational skills to listen and learn from the needs of their business and retail customers. Technological advances have changed the needs of both, therefore changing the way they interact with banking services and products. Going to a bank is replaced by banking anytime through any means.

Data and analysis will play an important role in uncovering and understanding your customers’ behavior. Start by analyzing the data derived from their use of your bank. Where are they spending most of their banking time? What is their experience with your bank? To check your observations from your data analysis, survey a cross section of your customers and consumers to verify your conclusions.

Have a plan of attack. You may have the best intentions of executing a new business process or product but the actual execution is often overwhelming. Look for assistance in creating a roadmap and putting that roadmap in place.

Get perspective; identify someone within your bank to oversee innovation. This person can identify opportunities and strategically develop an innovation road map. Essentially, this is your chief innovation officer.

Take a hint from fintech startups. Keep the innovation team lean and nimble and use open innovation, which means harvesting insights from both internal and external resources. Their insights will lead to new ideas. The focus of the new ideas is to redefine the business model. The outcome isn’t product or technology driven –just yet.

Staying objective is important. And doing so means asking critical thinking questions, like: why is this important, what will this do for the business and who will it serve? Objectivity could be hindered if an innovation mindset is lacking. Ask for help from a trusted outside source to validate the innovation road map, such as a trusted advisor who will be objective.

Innovation is a natural step towards the evolution of a business and needn’t be intimidating for smaller financial institutions; you just have to approach it differently than the big banks.

Ms. Spataro is executive vice president and director of innovation for Phoenix, Ariz.-based CCG Catalyst. She can be reached at [email protected].