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Unlocking innovation potential: How banks can embrace a culture of experimentation to outsmart tech giants

Financial institutions need to embrace managed risk-taking to compete with the continuous stream of innovations coming from tech companies.

Aug 2, 2023 / Technology

In today’s rapidly evolving digital landscape, banks face a known but increasing threat from the expanding presence of tech companies. To remain competitive, financial institutions must adopt a culture of experimentation similar to those of the tech companies they are up against. 

In recent years, tech companies have been expanding and enhancing their services at a rapid rate, and several have made serious and persistent efforts to expand into financial services. Take the recent Apple savings account for example—the new offering drew in nearly $1 billion in deposits just four days after its launch, and nearly 240,000 new accounts were opened by the end of launch week. And it’s not just Apple. Most of the household name fintechs are offering products traditionally offered by financial institutions but are creating sleeker experiences or profiting in underserved segments to the tune of billions. As these companies expand and become competitive forces in the financial services space, it is essential that banks pay attention to this rapid growth and analyze how these companies may be obtaining it.  

To effectively counter these risks, financial institutions must embrace a culture of experimentation, which can impact talent, technology and processes. But first and foremost, traditional financial institutions must foster an environment where individuals are encouraged to experiment and not penalized for failed experiments or products. Managing not just success, but failure, allows banks to adapt and refine their approaches, further accelerating their growth. While a conservative approach will always be necessary in banking, that does not mean risks will be absent, but rather that risks need to be managed properly. 

Managing the risk of experimentation means anticipating potential pitfalls, identifying and proactively monitoring success and risk metrics and defining acceptable boundaries of performance. Finding the right balance between experimentation and calculated risk can help financial institutions capture more growth potential. It also means aligning goals and incentives with new experiments. 

In addition to facilitating an experimentative environment, many financial institutions will need to build and foster a talent pool skilled in driving transformation, from tech developers to product managers to business executives. Having the talent to drive and implement change is crucial when many financial institutions’ hiring practices prioritize the skills required for maintaining legacy technology. 

While talent and culture are necessary for an innovative culture, ultimately none of that matters if it takes a year to launch a new product or test a new iteration. Financial institutions must embrace technology platforms that both move faster and give them more control over their own roadmaps. When banks are required to invest a year or more of time, capital and institutional focus to launch a product, they won’t make that investment unless they are certain it’s going to pay off. That means segments go unserved, products never get developed and ideas die before they even get started. Additionally, when roadmaps are reliant on external service providers, it handcuffs organizations that are ready to make change. Modern platforms provide more speed and flexibility than the 40-year-old technology often being used for payments and deposits. 

That doesn’t mean financial institutions need to build everything themselves, but their platform must enable partnerships and self-delivery. Forming partnerships with quick-to-market fintechs can help drive innovation, often faster than technologies can be built in-house. These types of collaborations give banks access to state-of-the-art solutions, agile development opportunities and new perspectives. This enables them to quickly roll out new products and services. According to Accenture, tech modernization is a process that essentially lasts forever. However, a convergence of forces and collaborative partnerships will make 2023 a driving year for the start of core modernization efforts. 

By creating a safe environment that still encourages risk-taking, aligning experimentation with strategic goals, managing risk boundaries and creating collaborative partnerships, banks can foster innovation and maintain their competitive edge. Embracing experimentation is not without its challenges, but the rewards of agility, customer-centricity and sustained growth make it essential for banks to navigate the evolving landscape of the digital era successfully. 

Gary Singh, is President at Zeta.