By Joe Kay & Toby Lyons
“The banks have millions of customers, centuries of history and billions in capital and that is their strength. Their weakness, however, is their lack of vision”
As the banking industry continues to increase investment in innovation strategies, the above quote from Chris Skinner; one of the Wall Street Journal’s top 40 most influential people in Fintech, points to a lack of innovation in the banking industry.
According to Capgemini, 87% of financial service firms have an innovation lab, or at least dedicate certain resources towards innovation. The number of innovation labs in financial service firms has been growing over the past 5 years, but what effect is it having on exciting existing customers and attracting new ones?
Giving a nod to innovation doesn’t automatically amount to disruption.
According to Skinner, banks are merely paying lip service to the concept of innovation, and this explains why large tech companies as well as smaller Fintech start-ups are considered to be the biggest catalysts to disruption in the financial sector.
This article explores three barriers to innovation in the banking industry, highlighting that cultural changes need to take place in order for banks to bring out innovative products and services and ultimately remain competitive.
Barrier 1: Playing it safe
“The parent is all about safety, stability and security, whereas the child is all about breaking things apart and rebuilding again”
The relationship between traditional banks and Fintech start-ups is very much like that between a parent and child. The risk averse culture in the banking industry is a real barrier to innovation, especially in comparison with start-up culture of having the freedom to take risks, fail fast, and iterate.
To create an innovative culture:
- Determine an innovation strategy that can be integrated with the overall strategy of the organisation
- Create a culture of innovation that can be implemented from the very top to encourage out-of-the-box thinking all the way through the organisation
- Carve out and ringfence time for employees to actively explore new ideas
- Align incentive schemes with innovative ideas
Barrier 2: Systems Integration & Legacy Technology
On a 7- point scale, systems integration (5.17), legacy technology (4.93) and the resources of time and cost (4.91) were the areas of biggest struggles. (The Financial Brand)
Banks are burdened by their legacy systems and are focused on complying with regulations rather than meeting evolving needs and expectations of customers. These regulatory requirements limit a bank’s ability to provide innovative and differentiated products and services, making it extremely difficult to compete. (Capgemini)
More than one third of financial institutions say that their IT systems make innovation extremely difficult, while banks with flexible IT infrastructures say that 70% of their recent innovations were extremely successful (The Financial Brand). It is clear therefore that flexibility in IT infrastructure is an essential pillar for innovation within a bank.
Capgemini recommends that banks focus on 3 goals to innovate:
- Digitize the back office or automate manual processes
- Use data and insights to capture and manage customer information effectively
- Use multiple systems to regain agility
Barrier 3: Lack of Talent
62% of senior leaders in the banking industry believe the digital talent gap has been widening in the past couple of years (Capgemini)
Banks are not best known as hotbeds of technology or innovation, while other industries are seen as more technologically savvy, and are therefore more attractive to job seekers. Critical roles such as data analytics, UX design, or AI development are not only key to creating innovation, but are also where the banking industry is lacking talent – other industries are absorbing much of the IT talent that banking providers require to be innovative.
Possible reasons for not being able to attract talent include; the vilification of financial institutions, strict hierarchical structure that is unattractive to younger generations, higher salary, added perks and ‘sexiness’ of working for tech giants such as Google, Amazon or AirBnB.
Here are some suggestions for banks to more effectively hire, develop and retain digital professionals:
- Encourage management to be serious about developing a talent strategy that will help to succeed with digital transformation
- Diversify recruiting approach and look for smart people coming out of non-IT focused programmes who can be trained in data analytics, business intelligence and other skills
- Create an environment in which learning and training is a priority
The winners in the future will be defined by those organizations that can leverage digital technologies to deliver a customer experience that goes beyond the ordinary
In order for the big banks to remain players in an increasingly competitive environment, there needs to be a focus on bringing out disruptive digital products and services.
To be innovative, banks need to execute fantastic original ideas quickly, which is unlikely to happen with inflexible technology, a risk averse culture, and a talent pool that is lacking.
Exploring innovation in the banking industry highlights that there are real cultural barriers that need to be addressed for banks to compete against larger tech companies and more agile Fintech organisations.
The banking industry needs a revolution more than an evolution.
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