Financial Institutions Must Innovate or They Will Fail

Alistair Newton stresses out the innovation potential for banks. In his opinion, innovation is an imperative, not a luxury.

Innovation is dictated by changes in the market: new business models and new entrants (which, by the way, are difficult to identify quickly with the usual competitive intelligence), consumers being more informed about products and prices than the bank staff…

For example, there is a change driven by the giant internet retailers (eBay, Amazon...), who are the catalysts for some innovation, e.g. on payments. New trends, such as the social networks or the new social finance services, are even more difficult to predict. One recommendation would be to assess possible partnerships with these new entrants.

In the current economic conditions, we can choose between innovating or hibernating (as a conscious choice, while still preparing for action). But the in-between choice, incremental modernization, is plainly wrong (does not provide a clear value).

Generally speaking, innovation can derive either from distress (reaction to poor condition, e.g. Xerox) or success (e.g. Google). This can be represented as an innovation curve with a trough between distress and success. Banks are traditionnally in the middle of this trough, thus not very innovative (even if the financial crisis tends to increase the level of distress): the average level of innovation must be raised through emulating distress (e.g. creating tension and healthy competition) or success (e.g. allocating dedicated "think" time à la Google).

Customer-driven innovation and new "uses" of staff (example: let staff open accounts at competitors and report about the experience) are good practices. For example, Smarty Pig was created because some people could not find the products they wanted at banks.

5 proposed key steps:

• Core banking renewal: it helps transform the business model (like ICICI), provide new agility…
• Branch renewal, built to sell and advise (like Umpqua Bank or Deustche Bank whose new branches are used by customers as networking places).
  
• Web banking personalization, for example on an Amazon recommendation model. But be careful, it may not be adequate for all users.
  
• P2P finance: partnering may be a good option.
  
• Payments (cards and and also less visible parts in the payment ecosystems).