Banks are “prisoners of the status quo”

Nothing to do with the band, but much more to do with being constrained when it comes to innovation, a subject that is getting more and more focus amongst the Finanser community.

In this instance, it's a survey on innovation in payments and banking, and repeats a survey from 2008.

Back then, FSClub friend John Chaplin – expert in card based payments and President of Ixaris – published a survey on innovations in payments based upon experts’ views, and I was one of those experts.

It proved quite popular and, as a result, John has just repeated the survey again this year, and called on me to participate once more.

Along with yours truly, the report includes views from executives from leading payments innovators such as MasterCard, Visa, SWIFT, PayPal, Amazon, First Data, American Express and IBM.

John has called this ensemble his “Innovation Jury”.

Here's a brief summary of the conclusions:

In 2011, the Jury forecasts that new players from diverse industry sectors will have the greatest impact on the payments market, with companies such as Facebook, Apple and telecoms organisations posing a threat to the incumbents. In stark contrast, retail banks are identified as least likely to drive innovation, and are described by one member of the jury as “prisoners of the status quo”.

Pressure from competitors is the number one driver of innovation, compared to other factors such as cost reduction and customer retention. However, the inability to guarantee customer uptake is seen as the biggest barrier to innovation today. In fact, as one juror noted “the barriers that are set by many banks are impossible to surmount, not even their existing business lines would pass these tests.” As traditional financial institutions are often unwilling to invest in something that doesn’t have a proven business case, this clearly illustrates why innovation is being driven by new market entrants and technology providers.

Commenting on the findings, John Chaplin, President at Ixaris and chair of the Global Innovation Jury, said: “This report highlights that the tough economic climate has not stifled payments innovation. In fact, there are several notable developments that are rapidly advancing in the industry, from the explosion in mobile applications to the growing focus on open payment platforms. However, increasing competitive pressures mean that organisations with a heritage in payments are now in a precarious position as they attempt to compete with non-traditional payments companies keen to snap up a share of the market.

“Looking ahead, traditional financial institutions cannot afford to rest on their laurels when it comes to innovation. Where possible, they should aim to work with the new wave of entrepreneurs to deliver really meaningful innovation whilst minimising their own reputational risk. In 2011, I expect we’ll start to see more partnerships between financial institutions and new entrants in order to bring innovative new services and products to market.”

If you would like a copy of this year’s report, let me know.