Sep 24, 2020
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Banks Don’t Have To Innovate

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OBSERVATIONS FROM THE FINTECH SNARK TANK How mostly have you heard something to the effect: If banks don t innovate they ll be disrupted. If it s under one million then crawl out from the rock you re under and put away your Iron Butterfly 8-track cassette


Experts providing innovation advice to banks make it sound so simple. Pymnts. com says banks must think like fintech firms. KPMG has a slight variation on that take: Banks don t must innovate exactly like fintechs do but embody its principles. Fintech principles? You mean like not earning profits and breaking things fast and worrying in regards to the consequences later? Maybe Banks Don t Must Innovate The possibility that banks would be Kodaked may be overstated


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After Beirut s Deadly Explosions Youth Work To Rebuild Their City Disruptive innovations need not bring about an incumbent s fall


Startups introducing disruptive technologies are much more likely to emerge as licensing to incumbents or being acquired as opposed to becoming rivals. Once the technology is proven startups tend to form alliances or merge with market leaders preserving the status quo. The authors of the study called a startup s switch from competition to cooperation a dynamic technology commercialization strategy


The rest of us call it selling out. The study advised incumbents to do three things: Monitor and assess technological innovations and their market potential;
Acquire (i. e. invest in) those innovations at the right time; and
Deploy the acquired innovations. Most banks and credit unions already do this. Through vendors banks have invested in and deployed innovations like ATMs online banking mobile banking ITMs online bill pay eStatements etc


The Innovation Communication Problem Bank execs aren t going to read the headline banks don t must innovate and cancel their (so-called) innovation efforts however. If they did they d be left with the terror that by continuing to do what they ve been doing—i. e. monitoring acquiring deploying—they ll fall (further) behind


So they feel they must innovate. But what we ve got here is a failure to communicate. When execs say we have to innovate they frequently mean we have to do something different. What the rank and file hear is we have to create something new. And then they freak out because they: Know that they re not good at creating new things (they re good at deploying and executing);
Have no time to create new things (they re busy fighting fires and doing their real jobs); and
Don t know where to start


Banks Marketing Problem So where do they start? With a brainstorming session (you know where no idea is a bad idea! ). Ideas proposed in brainstorming sessions will not be bad ideas but they re often the wrong ideas for the point of innovation. Why? Because they focus on what should we do? as opposed to what problem should we solve? Determining the Starting Point is Key In his book The Innovator s Dilemma Clayton Christensen argued that incumbents should: Innovate for the right set of customers (which will not be their current customers) and
Organizationally separate innovation efforts from the rest of the company


Number two is easy. Number one isn t. Ask bank execs who the right set of customers to innovate for are and you ll likely get one in all two answers: 1) Millennials or 2) We don t know. Neither answer is an efficient answer. Millennials (or any generation) is a bad answer because they re an undifferentiated set of consumers—their needs and behaviors are too diverse to be a targeted segment for innovation efforts


So what’s the right answer? There are plenty of right answers but the question to address is why banks don t have the right answer. Marketing is the Problem Remember back once you were in college (yeah me neither) and they offered two intro to economics classes—microeconomics and macroeconomics? But only 1 intro to marketing class? Academic experts should split the promoting discipline into two areas: Micro-marketing


Micro-marketing is set finding needles inside the haystack. The main focus is on individual customers or prospects—what their needs are and what to sell them. This is what the vast majority of banks do today. Macro-marketing. Macro-marketing studies the haystack and how it s changing. It s a focus for sale as a whole and how consumers needs and behaviors are evolving


This is what s missing in a majority of banks. With no macro-marketing capability banks are at a loss to figure out who the next right set of customers should be—and what problems have to be solved. If they are able to t try this then it doesn t matter if they bring a separate innovation group and it would not matter what that group comes up with


A macro-marketing capability could start banks off at the right route to innovation but it still won t help them resolve three innovation challenges. Banks Innovation Challenges Banks face a few innovation challenges: 1) Buying it. Challenger bank Chime raised more than $100 million between August 2013 and May 2018—and another $900 million in two raises ago 18 months


Compared banks with $1 billion in assets spend about $3 million on IT and about $1 million on marketing each year per Cornerstone Advisors. How can a mid-size institution with $1 billion in assets—or even one ten times larger—sustain the type of spending that innovation needs? 2) Getting it done. The vast majority of financial institutions place confidence in third-parties for technology development and deployment


Their technology staffs aren t loaded up with developers and they have little experience with emerging technologies. In addition other than the very largest institutions few have new product development people inside the lines of business. How can banks innovate with emerging technologies after they don t have the breadth and depth of staff internally? 3) There s risk involved


Face it: Most bankers want riskless innovation. Despite each of the proclamations of the desire for change and to take risks when it comes time to put in writing the check risk aversion wins. As Patrick Sells Chief Innovation Officer at Quontic Bank posted on LinkedIn: If you re going to yell at someone for signing a $10 000 contract that ends up being a dud how can you expect employees to come up with a new million dollar product idea? Banks Innovation Reality Here s the cold hard truth about innovation and banking: Banks could innovate and still get Kodaked


Imagine you were running a stagecoach company inside the early 1800s right before the construction of railways. What innovations could you’ve come up with that could have prevented your extinction? How about an electric escalator that made it easier for folk to get into the stagecoach? That added convenience would have helped a number of customers no? That s what the banking industry sounds like right now


Banks think they re innovating because they ve deployed digital account opening. Meanwhile: Credit Karma innovates by developing a credit management platform. Google innovates by developing an AI-driven bank account (or so they claim). Amazon innovates by embedding small business lending into its platform. What good is innovating if you don t out-innovate the innovators? Banks don t have to innovate—they have to adapt (and catch up)


Better yet they need an adaptation process. Waiting until strategic planning season rolls around each year doesn t work (especially when such a lot of strategic planning processes are little more than glorified budget allocation exercises). Reestablishing value and relevance is what banks have to do. And it doesn t require them to develop technology innovations


Instead it requires them to find creative ways of deploying others innovations. Like they ve done for the past 50 years. What s different in today s environment though is the nature of the adaptation that banks have to do. There s been a progression over the last 50 years inside the nature of innovation adaptation: Internal productivity (1960 to today)


The 1st round of innovation adaptation focused on improving banks internal processes. Digital delivery of existing services (1995 to today). Online banking mobile banking bill pay etc. were all great innovations but really just digitized existing services. Digital delivery of new services (2015 to today). The opportunity in banking isn t adding more features to mobile banking apps or developing a voice interface that lets people do what they already do


The opportunity is adding new services that enable consumers to do things they are able to t already do. Who s creating those new services? Not banks. Predominantly it being done by fintech startups. But the startups find it difficult to: Scale innovations without the help of banks or some other established entities (e


g. Big Tech) and/or
Customize innovations for specific segments of the market—because they don t have insights into the several segments needs. And that s where banks come in: To help the innovators scale by customizing (i. e. adapting) the innovations for their current and future customer base. Granted—there will always be exceptions and some banks will succeed at creating and nurturing true innovations


But most don t have to innovate. Now let me go read my hate mail from chief innovation officers. Huge attributable to Jason Henrichs CEO of Alloy Labs Alliance a consortium of innovating banks for his thoughts and concepts in this topic

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