What does “innovation” mean in finance?

I recently was invited to be the keynote at some innovation awards in Ireland. It got me thinking about what innovation means in finance, so here are the notes from my speech. I trust it's useful ...

 

Thank you for inviting me here to join you here for the first Innovation Awards in Dublin.

I’ve been coming to Ireland for many years. I had a network here for almost 10 years, in financial services and technology, so I do know a little bit about the history and the markets of Ireland.

I’m going to reflect today on specifically innovation. I write and talk a lot about digital and Fintech, but innovation is something that I think is a focus that’s come through very strongly in the past 20 years. In fact, the first time I remember the innovation focus was at the end of the 1990s when I was in a US conference where Clayton Christensen stood up and gave a presentation around The Innovators Dilemma. If you don’t know Clayton and that book, I recommend you read it, it’s a very good book. Even though its twenty years old the key message was how large companies fail when new technologies appear because they don’t see the impact of the technological change.

In banking we’ve talked about innovation, disintermediation and disruption for a long time. It hasn’t actually happened. 25 years ago, Bill Gates said we need banking, but we don’t need banks anymore. 25 years later, the banks are actually a lot bigger than they were 25 years ago in most marketplaces, but innovation did become a thing.

I’ve been writing my blog, theFinanser.com, every single day for over twelve years, and I’ve been writing about technology and the future of banking for over twenty years. In particular, I remember a statistic that came out at the end of 2007 which was analysing the top 100 banks’ annual reports. The typical large bank’s annual report mentioned innovation 1.3 times in 2001. By 2007 it had risen to 6.2 times. A six-fold increase over six years in the supposed focus on innovation in banking during the early 2000s. Then it all went away in 2008, for some reason that I can’t remember.

[Pause]

Well, maybe I do remember. Maybe there was a crisis.

The crisis meant that innovation went off the agenda. Even before it went off the agenda, it wasn’t well understood. For example, a lot of the financial institutions had a Chief Innovation Officer. Typically, those Chief Innovation Officers would last in their role an average of fifteen months before they were ejected. Many of them were actually saying that we appear to be some form of virus in the institution, where the institution attacked us. So, they rolled over these Chief Innovation Officers regularly.

When the crisis hit, a lot of change in the industry’s mentality started to happen, as you all know and I know, through bitter experiences. A lot of FinTech companies began to appear in the late 2000s, and particularly, this decade because they could see the weakness in bank innovation and that banks were giving lip-service to innovation. They weren’t innovating. They were just trying to do innovation theatre and saying, ‘look we’re cool and trendy – we can wear jeans and take our ties off’.

Real innovation went off the agenda and, as a result, it spawned this whole thing called FinTech. FinTech has grown from the seeds of change to a massive change in the last decade. So much so that, last year, depending on which statistics you read, the figures are astounding to think that something around $111 billion worldwide was invested in new technology start-up companies in finance, of which there are over 12,000 companies worldwide. That’s more than double the figure the year before, which was around $50 billion.

I see this innovation culture of start-ups everywhere around the world, not just here in Dublin and London but everywhere. I’ve just been to Vladivostok in Russia. There is an innovation hub there. There is an innovation hub across many of the cities of China, across all of South East Asia, across South America –Colombia to Argentina to Mexico – across all of Africa - Rwanda, Kenya and Zimbabwe.

Wherever you go there is innovation around technology in finance because, a decade ago when the crisis hit the banking industry, cloud and mobile apps and APIs came to fruition, allowing these companies to launch with no capital investment at all.

So, I could launch an API on the network, with no money involved. Just an idea and an access to the internet. Many of the FinTech successes are start-ups who come from that world. They start with an idea, they can execute the idea with just an API, which you could never do in banking before. It is why one of the new banks in Britain was launched by a 21-year-old drop-out from university. Whoever would have thought of dropping out of university to launch a bank twenty years ago? It would have been impossible. Today you can do it with apps, APIs and cloud computing. I think that has been the fundamental shift. So, while the banks took their eye off the ball, had a crisis and were trying to find out how to rectify the issue, we’ve seen this flourishing of new ideas.

My favourite innovation start-up is Stripe, which I’m not saying because I’m in Ireland. I talk about them all the time, because of the fact that two brothers from the west coast of Ireland are now the youngest multi-billionaires in the world. They are very humble still. I met Patrick Collison recently at Money2020. He’s still just a normal guy, so down to earth. But the reason why I talk about them so much is because, in October 2016, they were valued at $9.2 billion with 400 employees. In October 2018, they were valued at $20 billion with 1,000 employees. Today, they are valued at $35 billion, less than a year later with 1,500 employees. The growth of $9.2 billion to $20 billion in two years, to $35 billion a year after that, is phenomenal.

The reason why I mention those numbers is that, when you compare that with the banks, it shows how innovation outside finance is striking to the heart of finance. Take a bank like Barclays Bank. In October 2016, Barclays Bank was valued at $30 billion. They are valued at three times the value of Stripe and yet they are a 327 year old company, rather than just seven years old. $30 billion in October 2016 with 130,000 employees. By October 2018, when Stripe was valued at $20 billion, Barclays was valued at $40 billion, so Stripe was half a Barclays Bank.

These numbers start to get interesting. Today, if I can put it in context, Stripe is worth about five Commerzbank’s and Ant Financial and Alipay is worth about ten Deutsche Banks. You get the idea.

These are young companies using technologies to innovate, that are challenging the traditional system of finance. I could talk about that in a lot more depth, but let’s come back to banks themselves. They have changed. Now that many have got through the crisis, they’ve come back to innovation. Now, they take innovation far more seriously and they’re trying to really get to grips with what innovation means. Rather than innovation theatre and paying lip-service to innovation, it’s actually banks asking themselves how they can institutionalise innovation? That may sound ridiculous, because if its new and different and innovative, how can we institutionalise it? However, when we talk about sandboxes and regulatory sandboxes, the idea is to let the kids play before they cause mayhem in the mainstream market. Let them play.

That’s where it gets interesting because the banks are now working on innovation strategies based upon scouting, exploring and discovering new ideas through to working with, fundraising and investing and partnering in those new ideas, through to acquiring and internalising those ideas as innovations for the bank. There’s a process there. I know there’s a process there as I have just been working with some of the biggest banks in the world to understand it. Banks like JPMorgan Chase, BBVA, ING, DBS in Singapore and China Merchants Bank, are all working with innovation to enable digital transformation. They are taking it far more seriously than they have ever taken it before to bring it back inhouse, to work out a process, to encourage and amplify a prolific change in their institutions. One of the main messages that came out of all five of them is if we don’t transform, we die. This sounds dramatic, but it is the law of survival from Charles Darwin. It’s not the fittest, the strongest or the most intelligent that survive, but the ones that adapt and change that survive. The thing is what to adapt and what to change. That’s the hard bit and that’s where banks are starting to internalise innovation by working out this process.

Looking forward, I wanted to give you some take-aways in terms of what can you do to encourage, institutionalise and bring innovation it in to the culture of your organisation. I can share these from the learnings gained from my work with these five and other banks. Out of these banks, there are about thirty different individual items of change that made their organisation work towards embracing digital transformation successfully. Those items of change I’m not am going to talk about now – it will take far too long. There’s lots of unusual things that came into that, such as the real implementation of agile thinking. ING, for example, explained how they’ve moved from 3,000 people to 300 teams of people, because they have flattened the organisation. They’ve flattened it so much to get to those 300 teams that there is no middle management anymore. The teams can get to the CEO in the same day, as it’s such a clear internal structure of decisive decision-making. That’s a radical transformation program, involving massive change to their culture and structure to do that.

There’s lots of integration in business with technology today. Everyone I used to work with had the CIO running technology and the business owning finance. Not anymore. These teams have the business and the technology people working together collaborating, designing, developing and coding together.

But, as I cannot talk about these thirty things that came out of the learnings of these big banks in depth, the main thing I’ll leave you with as a take-away is that these thirty things fell into just four buckets: what to do, how to do it, do it and then do it better. That cycle has taken these banks about ten years of change. It’s years of working out what to do, how to do it, do it and then do it better.

The CFO of one of the banks said to me that the previous Chief Executive and Chairman knew the bank had to innovate but just didn’t know what to do or how to do it. Luckily the new management came in, and they did know. How did they know? Well, what they did in terms of what to do, is said who do we think innovates really well? Who is innovating out there that we respect? Who do we think does innovation as a culture? Let’s go and visit with them and meet with them and find out how they do it. So, they went and saw Netflix, Spotify, Facebook, Amazon, Alibaba and Stripe, and all these people who are innovating well and said, how do you structure your organisation? How have you done this? It’s not rocket science. It’s not magic. It’s just understanding how to do change, and how to organise it well for the digital age. That’s what they then implemented. They could work out how to do it once they knew what to do.

My take-away for you is this: if you are struggling with the innovation culture or how to deal with embracing digital transformation and all the changes that we have in our industry, go and visit the people you are thinking are doing it well to find out how they have done it. Then copy them.

Thank you.