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Why innovation is so difficult in banks

I said yesterday that the other topic that keeps coming up is innovation.

Innovation is something that comes and goes in banking like Chief Executives and Heads of Risk … as in it appears and disappears pretty often.

During the build up to the financial crisis, innovation was everywhere.

Then it disappeared for a while.

For example, in 2000 the Top 10 American banks annual reports mentioned the word “innovation” an average of 1.2 times.  By 2006, that had risen to an average 6.5 mentions per report.  By 2009, it hardly appeared at all, averaging a general 0.3 mentions per report.*

Now it’s on the way back.

I talk about innovation a lot, as demonstrated by the interviews I regularly perform for Infosys in their Finacle Connect Quarterly Journal.

Equally, JP Rangaswami recently spoke at the Financial Services Club about innovation, and said that banking is the last place where innovation occurs because of risk.  When he was CIO of Dresdner for example, he was told to innovate but only in areas that wouldn’t disrupt the bank or create risk.  In other words, innovate in areas that don’t matter.

This is a complex dilemma and not an easy one to solve.

For example, in our annual survey of banks, we found that most believe regulation occurs outside the industry but not inside.  Industry innovation only happens when regulators force banks to innovate, such as when SEPA or Same-Day Payments is forced upon us.

But there are two questions that came up recently which illustrate the issues with innovation in banks well.

The first was: how to measure the business value of innovation.

The second was: we want to innovate, but have to choose something easy.

Let’s tackle that first area: how do you measure the business value of innovation?

Many people say that you cannot be innovative if you have a business case.

If it has a business case, then it’s been done before therefore it’s not innovative.

But that doesn’t wash with a bank.

Banks need to know the cost and returns, the timescales and technologies, the impact and implications … banks need the I’s dotted and the T’s crossed.

That stifles innovation obviously but it doesn’t matter as banks only need to fast follow. 

Fast following is the heart of the art of banking, not innovation.

So, I would propose that if you want to measure the business value of innovation then measure what others are doing and if it looks worthwhile, copy it.

That’s what banks do well and proves to be the reliable pulse of most innovations in banking.

See if it works elsewhere and, if yes, copy it.

The alternative approach is of course to suck it and see.

Banks will willingly put a toe in the water of innovation and try things out.

Oh it looks worthwhile, let’s suck it and see in a pilot and, if yes, roll it out.

They have pilot programs all over the place. 

Some have so many pilots, they should run an airline.

The problem with pilot programs however, is that there’s no commitment to it.

So they often fail to prove a business case this way and it gets shelved.

That’s the reason so many bankers will turn around to you and say: “been there, done that, tried it, failed” … sure. 

If Steve Jobs viewed the world that way, we’d never have seen an iPod, iPhone or iPad.

The real art of innovation is therefore to look at things that seem to work and then absorb them into something that really does work.

Not easy, especially if you don’t take innovation seriously, but it is practicable.

Then we have that second area: innovate in an area that’s easy.

The issue for most bankers is that they want to innovate, but there are forbidden zones all over the bank.

Oh and just for a gratuitous moment, it gives me a chance to post a tune:

You can’t touch this.

All over the bank: “You can’t touch this”.

That’s required by regulation: you can’t touch this.

There’s a compliance issue here: you can’t touch this.

This is subject to audit: you can’t touch this.

We have to have this for legal reasons: you can’t touch this.

I could go on, but the point is clearly made in today’s comment from Iain G. Mitchell, QC, on cloud computing from my post yesterday:

“Functionally, it might not matter where the data is stored, but it's hugely important legally. Most cloud computing providers will use a network of servers distributed all over the world and will not be able to say where, at any given time, your data is stored. It is normally a breach of data protection regulations for data to be exported out of the EU, so, unless you know that all of your cloud computing provider's servers are physically located in the EU, you might well find yourself in breach of data protection regulations.”

You can’t touch this.

It came up again recently in an interview with Financial Services Club friend Aden Davies, innovation technician at HSBC:

“Ever wondered why banks don't respond when you send irate tweets about problems with your account? You might think they're silently hoping you'll be sucked back into the cyber-ether. But it's more likely concerns about compliance are keeping them quiet. Case law from 1924 means financial services companies can't publicly identify an individual who has an account with them – which makes responding to customer queries via quasi-public forums such as Twitter a legal minefield, according to Aden Davies, innovation technician at HSBC.”

You can’t touch this.

If innovation is to occur, you have to touch everything with no sacred cows and, between legal, compliance, regulatory and financial measures, innovating within a bank will always be the most difficult thing you can try to do.


*note: there’s lies, darned lies and statistics in there somewhere lol 


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • I appreciate your observations on innovation in banks. I share your views. What I’d like to weigh in, however, is that banks often pretend to be more conservative than they really are. Being conservative is part of their brand to soothe customers, shareholders and regulators alike. Internally, however, I see a lot of innovation (in the traditional sense of novelty and risk-taking), especially in the back-office processes and technologies. They just don’t call it that because banks are supposed to be the traditional guardians of our money.
    How would you see this?

  • “banking is the last place where innovation occurs because of risk. ”
    This can’t be right – banks take incredible risks (eg, subprime mortgages). The explanation for why I can’t use my Barclays dongle to log in to my Barclaycard account must be more complicated than that.

  • Alexandra Larsen

    ‘Fast following is the heart of the art of banking, not innovation’
    As a representative of a banking software vendor, the concept of being a fast follower is well known and frustrating. We regularly come up with ideas for solutions but have to hunt for that first taker. There seems to be a general industry desire to be #2

  • John Burton

    I think there is also a wider issue about innovation and adaptation in big companies whatever sector they are in. Incremental change along a consistent path with increasing efficiency is what companies regiment their employees to adhere to with processes and procedures. They thrive on doing what they do better. Disruptive change is different and requires different thinking, different approaches and does not suit the incremental change employees are regimented into.
    Innovation departments often have great ideas, but they are still on the periphery of the organisation and not connected to the levers of power to actually implement change. Opportunities are often in the ‘too hard’ category for most employees to push, and thus the status quo pervades.
    Regulation is certainly an issue as you outline, but there will be evangelists within the banks who tackle those and force regulators to amend or change frameworks, then things will happen. Regulators will respond, not lead on innovation when their doors are pushed hard enough.
    Ideas are easy; we can all see what the future should look like – its the implementation of innovation that comes from the talented and driven employees who don’t fear change; but fear the status quo. The challenge is for big companies and banks to create enough flexibility within their regimentation to nurture and motivate these talented employees who can effect disruptive change and innovation, whilst still maintaining sufficient rigidity to continue with the processes, procedures, and incremental change of every day business.

  • Chris Skinner

    OK guys … banks do take risks, particularly in investment banks, but that is calculated risk-based innovation rather than the form I like, which is tech.
    It also needs a definition of innovation.
    My definition is: “anything that disrupts the incumbent’s business model with a way of doing things that proves to appeal to the incumbent’s mainstream client base so that they switch”, or something like that.
    In this case, name the banks that have innovated and when …
    … JPMorgan creating Credit Default Swaps that led to subprime: http://thefinanser.co.uk/fsclub/2009/02/jp-morgans-premature-evacuation.html
    … urrmmmm …
    Yes, of course there are a few other examples but first mover, bank-led innovation examples are few and far between.

  • Banks are generally not keen on innovation. This can be a problem for the networked economy – where banks could play a big role with their ready strong e-id, naturally all sorts of payments, e-invoicing and 4th generation services with electronic bank statements (VAT-directive based automated cash-based accounting..) etc.
    But some banks are making good progress – problem is that the extended payments area requires industry level involvement.

  • There is an interesting piece on a local civic association web site that addresses innovation from a whole different vantage point: http://www.rydal-meadowbrook.org/financial-crisis
    At its core, the article reflects on one of the causes of the financial crisis stemming to a conservative/follow-the-crowd approach to both data collection (at loan origination) as well as use of flawed models that everyone else also used.
    Bankers are rewarded for making money, not sticking their neck out. Whatever works is what matters, even it it only works for seven years of plenty.