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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.


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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  • A good point is made – content providers such as Facebook, Apple and telcos certainly have an advantage in the payments space. After all, telcos have been settling multi-content transactions for the last decade and content providers like Apple have over 160 million customers with digital wallets to tap into. For these service providers, growing their m-payments offering through partnerships with other retailers is a no brainer.
    However, to state that retail banks are least likely to drive innovation and are ‘prisoners of the status quo’ is a little extreme. Sure, many retail banks are weighed down with the legacy of bureaucracy and out-dated infrastructures, but they are aware of this and are making every effort to breathe innovation into their business.
    A recent study, which was conducted by Infosys and the European Financial Market, revealed that 61 per cent of all surveyed banks across EMEA have increased their level of investment in innovation in 2010. In addition, 80 per cent of all surveyed banks see IT as a key enabler of innovation, and new approaches such as crowd sourcing and customer insight-driven product and service development are being adopted to bring the customer into the innovation process. Clearly, mobile banking and payments is a clear innovation focus area for retail banks, it’s just going to take a while for them to play catch up with the more forward thinking content providers.

  • “However, to state that (incumbent) retail banks are least likely to drive innovation and are ‘prisoners of the status quo’ is a little extreme”
    Totally disagree. It’s spot on. The core DNA of these organisations is anathema to innovation. Their culture, their leadership, their goals are all diametrically opposed to true disruptive innovation. And we’ve seen this movie before in industry after industry: entertainment, publishing, telecoms, etc.
    Sure you’ll see lots of pretty press releases and a few bits of interesting kit (produced at costs that would make any startup founder marvel at the insanity…) I agree with John that the only hope the incumbents have is to partner with innovative new entrants if they can (don’t wait too long or they won’t need you anymore!) But even this is hard given the hubris that seems to permeate the attitude of the middle management of these firms (for it is they ultimately – not the CEOs – that have the power to champion or kill anything new or disruptive.

  • perhaps more true for banks from developed economies than those in emerging ones. See this: http://experience.fedex.com/gb/en/#/data/default/topic/social_media. Which banks are best placed to leverage social media? Maybe those in countries whose nationals (including emigres of course) are massive users….? On the whole they’re smaller banks, with less legacy IT, fewer silos and a radically different attitude.

  • Neil – I agree, the emerging markets, who are not bound by legacy, tend to be more innovative in nature and early adopters of new technology. This is especially true when it comes to embracing mobile payments.
    A recent report cited that emerging countries such as China, India, and Brazil found that over 70% of their consumers favoured using their mobile phones to make most payments. In the UK and USA, only 26% of respondents did.
    The banks in the developed countries have also been faced, however, with the consumer not as willing to adopt the new technologies. It’s probable that the banks need to educate their customers about mobile payments. It’s also likely that the customer has lost faith in their bank, and this is where banks need to do some work; not only with innovation but also with restoring some faith in their customer base.
    Hemant Lamba, Banking and Capital Markets Practice