Banking innovation investments not helped by culture and processes

Given the impact of the 2008 economic crisis on the financial markets, it's hardly surprising that we are only just beginning to really focus in on the impact

of digital and innovation on the banking market. Whilst traditional players in retail have been maturing steadily over the past few years, thanks to the threat of new digital-first entrants, the banks have been focused on stabilising.

However, this is no longer the case. As we saw earlier this week, the likes of Lloyds Banking Group in the UK are investing hundreds of millions of pounds in digital initiatives in a bid to keep up with the pace of innovation in the market. And whilst the financial market has typically had very high barriers to entry, new online only and digital-first banks are emerging, with the threat of offering a service that is not only more cost-efficient, but easier for consumers to use.

This being said, it was with interest that I got forwarded a report from the French retail banking association's (EFMA) sixth annual study into innovation in retail banking, which has been produced in collaboration with Infosys. More than 150 banks from nearly fifty countries contributed to the research for the study.

The report identifies that as markets have improved over the past couple of years, the competitive environment has started to change and banks are now facing a number of threats from start-ups, telcos and companies in the technology industry (Google, Apple, Facebook). For example, 193 payments start-ups received venture capital funding in 2013, whilst Facebook has applied for an e-money licence in the European Union.

This graph illustrates the perceived threat from banks of industry disruption from new entrants:

The report states that the changes in the market mean that traditional retail banks are now turning to innovation to remain relevant. But whilst innovation investments are increasing rapidly, it is unclear how successful these investments are to date.

One of the most obvious trends we see is that more banks have an innovation strategy than ever before. We define a strategy as having clear objectives, processes and metrics for innovation. [The research found] that only 37% of banks had an innovation strategy in 2009, but this has now increased to 61%. However, measurement of success is still an area of potential improvement. Most banks do measure the success of specific innovations, but only 31% say that they measure the overall success of their innovation investments, making it difficult to jugde the innovation strategy as a whole.

The other clear trend is that more and more banks are increasing their innovation investment. In 2014, we have found that 84% of banks are increasing innovation investment in comparison to their level of investment in 2013. In 2009 only 13% of banks were increasing innovation investment, so the transformation since then has been dramatic.

According to the report, many banks organise their innovation activities around specific themes – namely mobility, big data, social channels and gamification (with their importance being ranked in that exact order). The following graph shows the proportion of banks rating the importance of each of these innovation themes:

Some of the things the banks are looking at include mobile voice biometrics, mobile personal financial management, recommendation engines based on spending data and the use of social profiles to build up credit worthiness.

However, channel innovation remains the key focus for the innovation efforts of most banks and this is also where they see their own innovation performance improving. Banks are largely investing in channel innovation in order to create a unified user experience across channels, to improve self service tools and to gain actionable customer insight.

The report states:

Creating a unified experience across channels is believed to be the most important capability. Banks are increasingly having to consider how to best integrate innovations across branch, online and mobile so that there is a consistent and powerful customer experience. Innovating in one channel without matching that in other channels is unlikely to lead to longer term success.

However, EFMA and Infosys highlight that making a success of innovation requires a certain amount of focus – it can't just happen randomly through sporadic investments, it needs to be organised. Most banks (63%) now have dedicated resources for innovation, either in a centralised department or within certain business unites.

The report argues that formal processes are essential even for a creative discipline like innovation, and whilst banks have clear processes for idea generation, idea screening and for transition to business-as-usual, slightly less common are processes put in place for prototyping and staging of investment. Not only this, but culture still remains a barrier to innovation in the financial sector.

Overall, more than 40% of banks are not using one or more of these processes and that appears to be a significant weakness which is relatively easy to address. Also of concern is that the majority of banks do not measure the overall success of their innovation efforts, and this needs to be addressed.

We know from previous research that one of the big barriers to innovation, particularly in larger banks, is culture. This year we asked banks to rate their own level on three cultural attributes which can contribute to superior innovation performance. It is clear that 'acceptance of failure' is the cultural attribute which is the least strong, confirming what we have believed twas the case from discussions with banks over the last several years.

My take

In years gone by, switching between banks was always a tricky process and as a result customers typically stuck with their provider – no matter what kind of service they were getting. However, new regulations being brought in have meant that this process is far easier, and as a result, banks are having to work a lot harder to keep their customers.

Combine this with the threat of new entrants that are digital-first and it's no surprise that the traditional players are now looking to digital innovation to support growth.

However, innovating in an an industry and within a culture that has historically not replied upon innovation for success isn't going to be easy and banks will need to ensure that it happens in a defined, measurable way – with the agenda being set from the top down.