Innovation is a word we hear a lot in the financial services industry. We’ve all read articles and have heard people talk about “the need to innovate” as a solution to many of the industry’s challenges. And this weekend, a panel of well-respected industry professionals at a South by Southwest session went so far to present the topic as an ultimatum for banks: Innovate or Die.
What Does it Mean?
“Innovate or Die” is a strong statement. Are there really only two choices: innovate or die? While there has been some debate, I’d argue that the answer is, yes. Banks that do not innovate will die.
In fairness, I can see how some would disagree. After all, the definition of innovation is pretty broad. Consider this one:
Innovation is a new way of doing something. It may refer to incremental and emergent or radical and revolutionary changes in thinking, products, processes, or organizations.
While there may be a better definition than this one, I think we can agree that this definition is acceptable. This definition is revealing; innovation can be really big, or it can be really small. It might affect an entire industry or one small aspect of a single business. Innovation means something different to everyone. And that’s one of the biggest problems we must address in talking about innovation.
Buzzwords are Buzzwords
It’s easy for people to dismiss buzzwords. We hear them all the time, and as a result, they often lose meaning. Innovation has become a buzzword. People throw it around, often without any definition, and expect that others understand what they’re talking about. But that’s not the case. I can see bankers easily dismissing the innovate or die concept because it doesn’t offer any specific course of action; it’s too vague.
A Lack of Urgency
The innovate or die concept will also likely be dismissed by those who recognize that it’s not immediate. Failure to innovate will not lead to death overnight. Rather, it will happen over a period of time. There’s an alarming level of comfort among many in the industry with the status quo. Many like business as usual. There’s no sense of urgency or desire to change because, in recent years, change has not been required to realize success. But that is no longer the case.
Incremental Innovation vs. Invention
As the definition suggests, innovation covers a broad spectrum. Many think of innovation as an extreme. They equate innovation to invention. But innovation doesn’t need to be radical, revolutionary or disruptive. In reality, most financial institutions aren’t prepared to manage that kind of innovation. Instead, they’re better equipped to manage incremental innovation. Radical innovation isn’t required (from most institutions); incremental innovation is.
Sense and Respond
As markets and consumer behaviors continue to change, financial institutions must do the same to maintain parity. In other words, financial institutions must tend to the issue of relevance. In many cases, external change is outpacing the necessary response. These institutions are on the fast-track to irrelevance. And in today’s marketplace, where consumers have access to a growing number of financial services alternatives and choices, irrelevance isn’t tolerated.
The necessary response to external changes varies between markets and between institutions. And ultimately, success is dependent on an institution’s ability to sense change and respond accordingly. This requires innovation. Prompting institutions to think about innovation is a good starting point. Prompting action, however, is more important. Here are a few steps to guide your choices and actions:
- Acknowledgment: Markets are changing. Consumer behaviors are changing. An acknowledgment must be made: internal change will be required to sustain a viable business amidst external changes.
- Measurement: Once that acknowledgment has been made, measures must be put in place to determine the level of change that has happened, is happening, and/or will happen within your markets and among your customer base. This involves the collection and analysis of relevant customer and market data.
- Adjustment: Measures will indicate deficits and opportunities. Based on data and information, appropriate adjustments should be made to any aspect of your business that will close the deficits and allow you to take advantage of opportunities.
- Experiment: Beyond making adjustments, don’t be afraid to experiment. Identify unmet consumer needs or market opportunities and make a move to fill those needs. Do something new. Monitor the results. And make adjustments along the way.
- Alignment: The goal of innovation should be strategic alignment between your institution, your markets, and your customers. Strategic alignment requires constant attention. And as things change, the cycle repeats.
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{ 11 comments… read them below or add one }
Ok, as someone who said that “innovate or die is BS”, perhaps I should explain myself. What I’m really objecting to is the implicit assertion that banks must “innovate EVERYTHING RIGHT THIS VERY MINUTE or they will die WITHIN THE NBXT THREE TO FIVE YEARS!”
Now, I realize I may be wrong that the INNOVATE OR DIE proponents aren’t advocating that — but the problem is that I don’t hear a lot of specificity in terms of speed of innovation, recognition that not all innovation is technology based, or timeframe to extinction.
The other ironic thing is that I’ve written and spoken a lot about how banks need a new marketing competency which I’ve referred to as a sense-and-respond competency (http://marketingteaparty.com/2010/08/10/sense-and-respond-marketing-an-update/).
Banks that don’t create this competency may very well survive for a long time. I don’t think that they’ll be one of the leaders in the industry.
“Innovate or die” is a great title for a book. It’s a lousy recommendation to a bank executive, however.
Thanks for your comment, Ron. Your tweet about it being B.S. actually got me thinking about the points I’ve made here. I also saw some of the other discussions and summaries about the “Innovate or Die” session and wanted to make the same distinction you’ve made in this comment with respect to book title vs. recommendation to a bank executive.
I hadn’t previously seen your sense and respond post, but obviously, I completely agree. Whether we’re talking about innovation, engagement, marketing, or sales, the sense-and-respond competency, as you call it, is necessary.
Brady: As usual, great post with lots of well made points. Two things came to mind as I read this:
1) One problem, in my experience, is that many financial institutions think they are actually innovative now…which of course limits their sense of urgency. That’s partly because of the loose, up-for-interpretation definition of innovation, as you’ve pointed out. But I think it’s also because for most of the members of the financial industry, all they really want are new ways to do the same old things. I don’t feel like that’s really innovation–it’s just repackaging old ideas in a new wrapper. For instance, I’ve heard many a banker say things like, “we are innovative–we were among the first in our market to have mobile banking.” To these people, I say, “it’s not like YOU INVENTED mobile banking…you just bought it from a vendor. Signing a contract and writing a check that allows you to offer an additional channel to your SAME OLD BUSINESS MODEL doesn’t make you innovative.”
2) I believe another of the challenges that limits innovation in banking is that the term “innovation” is usually tied to bits and bytes. I think most people read “innovate or die” and hear “get new technology or die.” While there can obviously be technology that is tied to innovation in banking, technology is not required for innovation. Innovation, in my mind, is about rethinking the way the industry does things–anything–and finding a new way. It’s about identifying assumptions that the industry has long made, and finding ways to break them (incrementally or radically).
For individual banks, while radical innovation would always be preferred in my book, incremental innovation would be a step in the right direction. But for the banking industry as a whole, there’s really one type of innovation that matters most: business model innovation.
To focus on business model innovation, the banking industry needs to find new ways to do two things. This is quite simple though not necessarily easy (especially if you are a traditionally minded person):
1) Find new ways to add value to somebody
2) Find new ways to get compensated for that added value
To my knowledge there is almost no known example of this in the banking world in decades. Banks have made money in the same way for a long time: arbitrage and service fees, both funded by the consumer.
Great post, Brady. A financial institution’s livelihood has much more to do with the extent to which they are solving problems for existing customers, identifying new problems to solve for the marketplace as a whole, and carefully selecting which of those (and how much) to invest resources into to remain relevant in consumers’ lives. That last piece is a sexy thing to address, generating slews of so-called innovators in the financial services space. However, innovation has been far more incremental than transformational over the last decade. Most innovation has served only to improve technological access to existing services.
Innovating around problems we have neglected, that are far less sexy, are much better choices for financial institutions who worry about “dying” any time soon. Things like helping consumers better understand the impact of financial decisions, affordably getting loans in the hands of people who cannot borrow elsewhere, and helping consumers find some way to build and protect assets in a turbulent economic environment aren’t as cool as a new mobile banking app, but they’re the only sure way to establish relevancy.
Solve old problems in new ways, new problems in old ways, or new problems in new ways. But, cheese and crackers, solve problems.
While I get the innovation part and don’t think that that a bank has to do so or die, I just wonder where regulatory pressures and compliance approvals are in the innovation conversation. For the smaller regional and community banks, it is really hard to focus on innovation if you have to get through regulatory/compliance hurdles. It’s much easier to not reinvent the wheel and just add what you think your customers want (retention) and what your prospects might need your banking organization to have at the flip of a switch from your CORE (FIS, FiServe, etc.). This would also mean that a bank’s compliance department doesn’t have to tread out into uncharted waters (in a black/white compliance world, these would be murky gray waters). Also, we’ve seen how long its taking bank simple to launch, might there be some regulatory hurdles (or hurdles from the banks that will actually hold their deposits)?
Banks more than ever, want to influence behavior to maximize profit. For instance, Chase over the last few years, really focused on the size of their ATM footprint (as “what matters”), but does it really matter or do they need to advertise this so that they pay for their footprint of ATMs and maximize profit without paying for more tellers at brick and mortar locations. It’s the same with the Durbin amendment.
Banks will find a way to influence behavior to get people to do what makes them money (or use what they’ve developed en masse). That’s the real innovation in banking…
…until a large base of users completely revolts (maybe the prepaid card bank account route or something)…
This conversation could go ON and ON. My apologies if I rambled a little…
PS – Is PNC’s virtual wallet really an innovation or just a really good execution of online personal financial management?
Thanks for the comments. Many bankers are complacent. And many would rather “do nothing” than undertake a potentially-risky innovation effort, regardless of whether that effort would be considered incremental or radical. One important point that isn’t offered above, but is worth discussion, is the tendency for many people to think of innovation as “risky.”
The potential negative impact of a “do nothing” scenario may not be immediate. And that’s why the “do nothing” scenario is popular. But I’d argue that doing nothing represents more risk than than innovation – regardless of how innovation is defined.
Good points about incremental innovation. Bank boards historically haven’t really cared that much about what they see as fringe products and channels, and would rather be fast followers of trends that gather enough momentum to be seen as commodity offerings by customers. In the retail banking sector, if a project can’t be demonstrated to have a significant impact on market share for deposits, mortgages or credit card issuance, then at many banks it will probably struggle to get significant senior management buy-in. The problem is that the understanding of how new social and technology developments and competitors will affect market share and profitability in these core areas of the bank is poorly understood.
@NicheBanking hit the nail on the head. The financial industry, especially credit unions (where I come from) need to innovate a new business model. In our case, I think the innovate or die statement is right on the money. Big banks will always have commercial development to fall back on. Alternatively, credit unions (despite attempts at increasing MBL) just never will have that luxury, so we better get going.
@Bankfusion You’re right – most bankers are followers, and as a result, aren’t viewed as innovators. Again, a departure from “what works” represents risk. But it also perpetuates the lack of differentiation among financial institutions.
@Ken I’m an advocate for exploring different business models, however, I don’t think a new business model is required across the board. We can all (both inside and outside the industry) benefit from a variety of financial services business models. Consumers would have more choice and financial institutions would have more obvious points of differentiation. Until then, we’ll continue to experience more of the same as most institutions continue to evolve incrementally, if at all, with the pack.
@Ken Thanks for the comments. While I think this business model innovation could greatly benefit both banks and credit unions, I think two things:
1) Among existing financial institutions, I think credit unions are generally more nimble and might be able to pull it off before banks.
2) In terms of new, soon-to-be-started financial institutions, I think banks have the edge. The entrepreneurial spirit and the desire to make profits is a very strong motivator, and new de novo institutions can handle risk differently than long-established companies.
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