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What is innovation in banking?

I spent all day yesterday with a group of bankers in Portugal.

Why?

Well, it is the annual Infosys customer conference and they were kind enough to invite me over to give a keynote, which I will post here shortly.

It was also run under Chatham House rules … so here’s who said what.

Actually, I can’t do that … but what I can do is share with you something that intrigued me.

The theme of the whole day yesterday was innovation in banking.

Now many of you will know that I don’t believe there is much innovation in banking and, where there is any innovation in banking, it is driven by people who believe they can make a buck.

Unfortunately, thanks to the innovations of CDOs, SIVs, MBAs, etc, it can also lose a buck or two ($10 trillion + to be exact), but hey-ho let’s not go there.

During the conference I noted a whole list of observations and comments however on innovation.

These came from bank CEOs representing small, mid and large scale banks from USA, Asia, Middle East, Latin America, Africa and Europe.

In other words, pretty much global coverage.

Here are the notes I made:

The financial crisis was caused by “creative destruction through unregulated innovation”.

“We need to return to good old-fashioned banking.”

“Banking is ‘boring’ … let’s bring the fun back into banking.” (doesn’t this contradict what was just said by the other speaker?)

“If your house is burning down you won’t be thinking about remodelling the kitchen”, e.g. innovation ain’t where it’s at when you’re going bankrupt.

“The next ten years will be very different to the last ten. The last ten saw leaps and bounds in financial markets innovation with little relationship or reference to the social impact of such innovations. The next ten will see innovation with a social conscience.”

Not sure about that comment as I don’t think the cutting-edge of investment banking has a social conscience.  After all, it is survival of the richest and any social conscience would stop the innovation in investment banking that creates arbitrage. However, it does resonate strongly with the words of Stephen Green, Chairman of HSBC, from his speech on September 8th about Good Value in Banking:

“Capitalism generally, and banking specifically, needs to reaffirm its commitment to contributing to social and economic development.”

In fact between these comments and those of Lord Turner of the FSA, who wants to make banks ‘socially useful’, I think the social and sustainable aspects of finance will become critical.

This was echoed by one panellists' comment that he sees the future being a blend of traditional capitalism, focused upon using Islamic banking ideals with an Asian leadership.

In other words, the greed of Western banking Anglo-Saxon business models will be tempered by the non-usury Islamic principles, with China’s banks leading the way.

Mmmm … so where does the Continental European banking model fit?

"Is it innovate or die, or innovate and die.”

Yea, come on. That’s just an excuse to say why you don’t innovate.

“Regulators are ganging up globally to regulate.”

Oooohhh. Dem regs are in da hood.

Of course the regulators are ganging up globally. That’s the point of the G20 isn’t it?

The issue however was elaborated on…

“Regulatory reform is serious and we have no idea how it will pan out. That’s frightening.”

There’s the rub and it echoes my feelings from SIBOS (the big bank tradeshow) a couple of weeks ago. Banks have no idea how regulated they are going to be. In an industry that has been heavily regulated for decades, the concern right now is how the next decade’s regulations are developed.

Bottom-line: if you aren’t fit for rapid compliance with new regulatory requirements, then get out of this financial kitchen and go and do something else.

Agility is going to be key.

“The key driver of innovation is technology.”

Really?

This is a common view and assumption.

Technology is seen as being the innovative drive because technology is always changing and adapting but, to be honest, the innovative driver is customers isn’t it?

If customers and customer needs change, then that’s the innovative drive, not technology.

Now technology may trigger customer’s needs to change but so can markets. For example, right now, the #1 need for customers is to have someone to talk to and trust in a bank. That’s nothing to do with technology, although the technology can help, but far more to do with having good staff supported by good technology.

“Is it possible to innovate in a highly regulated market?”

Yea, and we don’t innovate because we don’t need to … because no-one can come in and compete with us … because they can’t get a banking licence. Nah-nah-neh-nah-nah.

Whoops. Am I sinking into childish baiting again?

Now it got interesting as one banker recounted a recent tale of a new product launch.

The regulator said that the bank could not launch this product without explaining it.

This is the ‘ten-year old test’ in action.

If you can’t explain it to a ten-year old, then don’t do it.

The regulator said they wanted to meet the bank’s CEO and Chief Risk Officer to discuss the product and the bank pitched in with a presentation and discussion of their idea.

The meeting lasted for four hours apparently and the bank’s CEO and CRO covered all the bases.

But the regulator’s position was not one of saying you cannot innovate or launch new products, but one of saying that you must convince us as regulators that your new product will not bust the bank. Show us the upside and the downside, the opportunity and the risks …

… after four hours, the bank decided to postpone the product launch and said that this showed how the regulators are there as partners, not as threats to the banking system. The regulator showed the bank the pitfalls of their product and, through this dialogue, the bank has launched a far more robust product.

Interesting.

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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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  • Daniele Astarita

    That interesting note leaves me with a final question : might it be “promote innovation through regulation” the way ahead ? The customer push that is certainly the first reason for innovation is now expressing itself at a global level; one example I am thinking of is the real need of “fast payments” and the evidence that no one bank, however big, can launch such an innovative products on a significant scale on its own, without regulators setting a proper framework. From the same point of view, and I know some of my British friends will disagree, I am fully convinced SEPA will eventually bring more innovation opportunities than would have otherwise been possible. Back to the “social values” of banking, and building on the “more coooperation is needed” message coming out of SIBOS this year I would be interested to understand how much the boundaries between competition and cooperation can be blurred , in order to promote more innovation at industry level : cannot this be seen as another way of discussing “innovation in banking” ?