Banks Rarely Innovate but Win by Focusing on Copying and Improving
Disruptive innovations do not necessarily lead to an incumbent’s downfall. Startups introducing disruptive technologies are more likely to agree to be acquired rather than turning into rivals eventually.
How many times have you heard something to the effect:
“If banks don’t innovate, they’ll be disrupted.”
The reality is that Big Banks are so large and powerful that it’s next to impossible to disrupt them.
Startups introducing disruptive technologies are more likely to agree to be acquired rather than turning into rivals eventually. Once the technology is proven, among other factors, startups tend to form alliances or merge with market leaders, and this preserves the status quo.
The best strategy for many startups in the banking industry is to cooperate with them rather than compete.
These doomsday predictions are never going to happen:
- “If banks don’t innovate, they’ll be disrupted.”
- “Warning to banks: Innovate or die.”
- “Banks have to avoid the innovator’s dilemma, or they’ll end up obsolete.”
In reality, Big Banks need to be able to do the following:
- Monitor and assess technological innovations and their market potential;
- Acquire (invest in) those innovations at the right time; and
- Deploy (assimilate or exploit) the acquired innovations.
In actuality, Big Banks do the following:
- Banks invest significant effort into brainstorming that goes nowhere and is a waste of time.
- Innovation efforts become part of the bank’s strategic planning process; “buried” in the process is a more accurate description.
- Strategic planning in Banks is simply a budget allocation effort, and the budget isn’t available because the return on investment isn’t clear or significant enough to warrant investment.
The Innovation Communication Problem
Bank executives aren’t going to read the headline “banks don’t have to innovate” and cancel their (so-called) innovation efforts. However, if they cancel innovation, they’d be left with the fear that by continuing to do what they’ve been doing— monitoring, acquiring, deploying— they’ll fall further behind.
Banks feel they must “innovate.” But what we’ve got here is a failure to communicate.
When executives say “we need to innovate,” they often mean “we need to do something different.”
What the rank and file hear is “we need to create something new.” And then they freak out because they:
- Know that they’re not good at creating new things (they’re good at deploying and executing);
- Have no time to make new things (they’re busy fighting fires and doing their actual jobs); and
- Teams don’t know where to start.
Bank teams think the best place to start is a brainstorming session where “no idea is a bad idea!” is the mantra. Ideas proposed in brainstorming sessions might not be bad ideas, but they are often the wrong ideas for innovation because they focus on “what should be done” instead of “what problem should we solve?”
Bank Innovation Challenges
Banks face a few innovation challenges:
1) Paying for it. According to Cornerstone Advisors, banks with $1 billion in assets spend about $3 million on IT and about $1 million on marketing each year. In other words, they won’t pay for innovation.
How can a mid-size institution with $1 billion in assets—or even one ten times larger—sustain the spending needed to innovate? They won’t.
2) Getting it done. The vast majority of financial institutions rely on third parties for technology development and deployment. Their technology teams aren’t filled with developers, and they have little experience with emerging technologies. Few have new product development people.
How can banks innovate with emerging technologies when they don’t have internal staff able to innovate. They can’t.
3) There’s risk involved. All Bankers want “riskless” innovation. Despite all the announcements about the “need for change” and to “take risks,” when it comes time to write the check, risk aversion wins out every time.
If you’re going to punish someone for signing a $10,000 contract that ends up being a miss, how can you expect employees to come up with a new million-dollar product idea?
Bank Innovation Realities
Banks think they’re “innovating” because they’ve deployed digital account opening meanwhile:
- Credit Karma “innovates” by developing a credit score management platform.
- Google “innovates” by creating an AI-driven chequing account (or so they claim).
- Amazon “innovates” by embedding small business lending into its platform.
What good is “innovating” if you don’t out-innovate the innovators? Banks don’t need to innovate—they need to adapt and catch up. Banks require an adaptation process and don’t demand an innovation management process.
Reestablishing value and relevance is what Banks need to do. In other words, develop technological transformations. Banks must find creative ways of deploying copies of what innovators are doing. Reverse engineer, copy, and find the cheapest way to deploy. This approach is what Big Banks have relied upon for the past 50 years, and it works.
Today’s business environment requires Banks to adapt. History has shown the following phases of Bank adaptation:
- Internal productivity (1960 to today): The first round of innovation adaptation focused on improving banks’ internal processes.
- Digital delivery of existing services (1995 to today): Online banking, mobile banking, bill pay were all significant innovations but just digitized existing services.
- Digital delivery of new services (2015 to today): The opportunity in banking isn’t adding more features to mobile banking apps or developing a voice interface that lets people do what they already do. The available opportunity is adding new services that enable consumers to do things they can’t already do.
Fintechs and startups create these new services; however, they find it difficult to:
- Scale innovations without the help of banks or some other established entities (Big Tech) and;
- Customize innovations for specific market segments—because they don’t have insights into the various segments’ needs.
Big Banks help the innovators scale by customizing and adapting their innovations to align with their current and future customer base.
There will always be rare exceptions, and some Banks will succeed at creating and nurturing genuine innovations; however, most don’t need to innovate.
Banks don’t need to innovate; they need to continue to change, copy, and improve. Giving up on innovation gives Big Banks freedom to focus on what they are good at and to opt out of what they can rarely achieve-- innovation.