The current Business Week magazine features an article by Jena McGregor titled, “The World’s Most Innovative Companies” and lists the top 25 innovators based upon a survey of over 1,000 executives in 63 countries. It will not be a surprise that the list does not include a bank.
Mention innovation to some bankers and eyes roll. My experience suggests that only a very small handful of banks are innovative to any extent, with innovative practices usually limited to specific lines of business rather than to the overall bank. If anything, most banks implicitly discourage innovation. However, doing so is at their own peril.
Keys to Innovation
The article states that a company needs to operate with several key characteristics if it expects to promote internal innovation. Let’s evaluate how banks measure up versus these criteria.
Speed to market and fast cycle times. To quote the article, “The No.1 obstacle [to innovation]…is slow development times. Fast-changing consumer demands, global outsourcing, and open-source software make speed to market paramount today…Fast cycle times require taking bets even when huge payoffs aren’t a certainty.”
Banks seem almost to pride themselves on slow decision making. Remarkably, small banks can take just as long (sometimes even longer) to make decisions than larger banks. Unless it is managing through an immediate crisis (for example, losses, bad earnings, an unsolicited takeover), it is very difficult to create a sense of urgency. And, while we frequently suggest trying various initiatives on a pilot basis, the pilots themselves too often take a very long time to launch.
Internal coordination and collaboration. The article states: “The best innovators reroute reporting lines and create physical spaces for collaboration. They team up people from across the org chart and link rewards to innovation.”
Virtually every time we work with a bank client, the issue of internal cooperation needs to be addressed. It might be the branch not working well with small business or small business and the middle market facing off, wealth management and commercial fighting over customers or IT or marketing failing to support certain line groups (in the view of the line group management). Banks spend tremendous energy and time addressing (or, oftentimes failing to address) these internal issues.
Culture of risk taking. Companies that succeed at innovation encourage risk taking. By their very nature commercial banks focus on controlling risk, and they attract personnel who are risk mitigators rather than risk takers. Up to a point that is both understandable and desirable. But, too many banks operate with an implicit climate of fear, whereby, if you stick out your head too far, it can get chopped off.
Few banks encourage employees to push new ideas, take chances, or challenge the established approach. Even recently, I have seen an employee who did challenge management find himself without a job largely because he did not fit in culturally. Frequently, it is the senior manager who says “I want to be challenged” who most quickly dampens innovation. This manager may even believe that he wants to be challenged; however, the reality is different. Bankers quickly learn what the real appetite for change is at their banks and adjust their approaches accordingly.
Emphasis on gaining customer insight. McGregor writes, “A close watch of customer insights can also bring innovation to even the most iconic and established products.” Senior bank management seldom skimps on investing in customer research, whether proprietary or syndicated. The problem is that the questions asked often miss the point and/or the implications of the research are not acted upon. Unfortunately, many banks appear more interested in customer satisfaction scores rather than using research to change the fundamental approach of the bank. Market research houses feed this metric dependency rather than promoting meaningful self-examination and change. If the researchers push too much, they, like the employee mentioned above, risk termination.
Self-image. I think one additional characteristic, not mentioned in the article, is of critical importance. The leading innovators view themselves and are widely viewed by others as innovators. Without reading the article, we could guess most of the top companies named: Apple, Google, 3M, Toyota, GE, Starbucks, Virgin. These companies emphasize innovation both internally and externally.
The vast majority of banks deemphasize innovation. Many banks operate with the view that “we are all selling the same thing,” at best a self-defeating and margin eroding perspective. Banks need to believe that innovation, whether in product, channels, market positioning, or other areas is both possible and necessary if a climate of innovation is to thrive.
Promoting Innovation
The above paints a negative landscape for the banking industry today and, unaddressed, future scenarios for bank innovation are bleak. As with almost all other initiatives, senior management needs to step up to become the innovation promoter and innovation barrier slasher. However, while it is easy to put the onus on them, in many instances, management lacks either the experience or “gut” to do so. At a minimum, however, they need to allow innovation to happen, sometimes even stifling their concerns in the interest of experimentation and culture change.
In our next newsletter, we will suggest some approaches to promoting bank innovation. In the meantime, please email me (cwendel@ficinc.com) with approaches that you believe have been effective or other issues that need to be addressed before innovation can flourish.
One final comment. Much of the innovation within banking is happening in the developing world rather than in developed countries. Lack of information transparency, sketchy landline technology, and fast growth, among other factors, have combined to encourage and perhaps even require innovation.