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Changing the bank means changing the customer

I was having a debate about innovation with a friend. They said that most of what banks were calling innovation is actually business optimisation or, as I call it, incremental improvements. Incremental improvements are doing existing processes cheaper and faster, more effectively and more efficiently, with change. Easy areas to see how this can be applied is in customer onboarding, with many of the newer challenger banks using smartphone pictures, video and biometrics to register users in minutes, rather than demanding that they come into a branch with valid paper identifications. This collapses a process of days to minutes, and is clearly better. But it’s not transformational. It’s just better.

Then there is transformational change. I would personally call this innovation, but colleague disagreed as transformational change is more around re-imagining an existing structure and making it radically better. For example, a transformational change is from institutional lending to peer-to-peer lending.  It is completely different to what was there before, but is still providing the same service, as in loans.

So, I asked why that wasn’t innovation, as I would call that innovation. She said that innovation had to be completely new, not just doing something today better or differently. An example would be Alipay and WeChat Pay, providing a completely mobile micro service for everything from commerce to socialising to paying to saving and borrowing. I thought about it, but felt such nuance was too fine a line, as I would argue that transformational change is the same as innovation.

It is either doing what we do today in a completely new way, or doing something completely new. I would argue that P2P loans, mobile wallets and the Chinese internet giants are doing what we’ve done before in a completely new way, so that’s transformative innovation. Transformative innovation is therefore what I’m always looking for.

The invention of the car to replace horses with carriages, was transformative innovation.

The invention of the airplane to replace car, ship or train journeys, is transformative innovation.

She said that I hadn’t quite got it. What she considered to be transformation is not P2P loans replacing bank loans, but more direct banking replacing branch banking. In other words, it’s not doing what we do today in a completely new way but doing what we do today in a different way.

I got confused, and so the conversation went on for a while and ended up like this.

Most banks start with business optimisation: doing what we do today exactly the same, but faster and cheaper through change.

We then move into business transformation: doing what we do today in a new way that replaces the old way of doing things.

Finally, there is business innovation: doing a completely new thing in a new way that replaces old ways of doing things.

I’m not sure we need such a nuance between transformation and innovation, but the reason I am sharing this here is that I would urge all industrial era companies to strive for transformation and innovation. It is no longer good enough to just do what we’ve always done cheaper and faster with technology. We need to start from scratch with new thinking inspired by technology. That is what digital is doing: creating whole new structures of transformative innovation that shapes the future world. That is what the P2P lenders, roboadvisors, API marketplace players, Chinese and African mobile wallet providers are doing. Creating the next generations of finance that will replace the old generations.

This is what we mean by both transformation and innovation: they replace what was there before.

Now it is fine for banks to watch these developments and deploy services to imitate or compete with such new structures, but the challenge is when to shut down the old ways. This has always been the biggest concern for most banks: they launch new things but never take out the old.

That is why we offer mobile wallets, apps and digital services but still operate branches and process cheques. When can you get rid of the paper and the bricks?

My answer to this challenge is that you have to have developed, nurtured, evolved and mature the digital models in a process that brings the customers along, before you can get rid of the old things customers like and use. You must bring the customer along.

And this is the part that I think we are all culpable of doing badly. After all, why does the media bleat and moan every time a bank shuts a branch or refuses to continue older services, like stamping passbooks (can you believe?).

It’s all to do with a balance between transformative innovation and business optimisation. And that is the core of the discussion I was having with my friend. Whether it’s a transformation, innovation or both, the challenge is not to achieve the change but to achieve the change whilst bringing the customers along with you.

It was an interesting debate.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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