Banks Don’t Have To Innovate

OBSERVATIONS FROM THE FINTECH SNARK TANK

How many times have you heard something to the effect:

“If banks don’t innovate, they’ll be disrupted.”

If it’s less than a 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 have to innovate exactly like fintechs do, but embody its principles.”

Fintech principles? You mean, like not making money and “breaking things fast” and worrying about the consequences later?

Maybe Banks Don’t Have to Innovate

The likelihood that banks will be “Kodaked” may be overstated. One study concluded:

“Disruptive innovations need not lead to an incumbent’s fall. Startups introducing disruptive technologies are more likely to end up licensing to incumbents or being acquired rather than turning into 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:

1. Monitor and assess technological innovations and their market potential;
2. Acquire (i.e., invest in) those innovations at the right time; and
3. 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 have to innovate” and cancel their (so-called) innovation efforts, however.

If they did, they’d be left with the fear 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 need to innovate” they often mean “we need to do something different.”

What the rank and file hear is “we need to create something new.” And then they freak out, because they:

1. Know that they’re not good at creating new things (they’re good at deploying and executing);
2. Have no time to create new things (they’re busy fighting fires and doing their real jobs); and
3. 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 might not be bad ideas, but they’re often the wrong ideas for the purpose of innovation. Why? Because they focus on “what should we do?” instead of “what problem should we solve?”

Determining the Starting Point is Key

In his book, The Innovator’s Dilemma, Clayton Christensen argued that incumbents should:

1. Innovate for the right set of customers (which might not be their current customers), and
2. 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 of two answers: 1) Millennials, or 2) We don’t know.

Neither answer is a good 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 is 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 when you were in college (yeah, me neither) and they offered two intro to economics classes—microeconomics and macroeconomics? But just one intro to marketing class?

Academic experts should split the marketing discipline into two areas:

• Micro-marketing. Micro-marketing is about finding needles in the haystack. The focus is on individual customers or prospects—what their needs are and what to sell them. This is what the majority of banks do today.
• Macro-marketing. Macro-marketing studies the haystack and how it’s changing. It’s a focus on the market as a whole and how consumers’ needs and behaviors are evolving. This is what’s missing in a majority of banks.

Without a macro-marketing capability, banks are at a loss to figure out who the next right set of customers should be—and what problems need to be solved. If they can’t do that, then it doesn’t matter if they create a separate innovation group, and it might not matter what that group comes up with.

A macro-marketing capability could start banks off on the right path to innovation, but it still won’t help them resolve three innovation challenges.

Banks’ Innovation Challenges

Banks face a few innovation challenges:

1) Paying for it. Challenger bank Chime raised more than $100 million between August 2013 and May 2018—and another $900 million in two raises in the past 18 months. In contrast, banks with $1 billion in assets spend about $3 million on IT and about $1 million on marketing each year, according to Cornerstone Advisors.

How can a mid-size institution with $1 billion in assets—or even one ten times larger—sustain the kind of spending that innovation needs?

2) Getting it done. The vast majority of financial institutions rely on 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 in the lines of business.

How can banks innovate with emerging technologies when they don’t have the breadth and depth of staff internally?

3) There’s risk involved. Face it: Most bankers want “riskless” innovation. Despite all the proclamations of the need for change and to take risks, when it comes time to write 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 in the early 1800s, right before the development of railways. What “innovations” could you have come up with that would have prevented your extinction?

How about an electric escalator that made it easier for people to get into the stagecoach? That added convenience would have helped a lot of customers, no?

That’s what the banking industry feels like right now.

Banks think they’re “innovating” because they’ve deployed digital account opening.

Meanwhile:

• Credit Karma “innovates” by developing a credit score management platform.
• Google “innovates” by developing an AI-driven checking 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 need to innovate—they need 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 so many strategic planning processes are little more than glorified budget allocation exercises).

Reestablishing value and relevance is what banks need 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 need to do. There’s been a progression over the past 50 years in the nature of innovation adaptation:

1. Internal productivity (1960 to today). The first round of innovation adaptation focused on improving banks’ internal processes.
2. 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.
3. 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 can’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 various 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 need to innovate.

Now let me go read my hate mail from chief innovation officers.