Our last newsletter, titled “Why Banks Can’t Innovate,” built off a Business Week article that listed a number of criteria common to companies (for example, Apple, Google, and Toyota) emphasizing innovation.

Barriers to Innovation

Most banks perform poorly when compared with the key characteristics that the article highlights:

• Speed to market and fast cycle times: Banks move slowly.

 

• Internal coordination and collaboration: Internal silos still prevail at too many banks.

 

• Culture of risk taking: Most banks operate with a culture of risk avoidance.

 

• Emphasis on gaining customer insight: Banks focus more on customer service scores than on gaining in-depth insight.

 

• Self–image: Banks do not view themselves as innovators but, unfortunately, rather as commodity providers.

 

At the end of the newsletter, we asked readers to comment and provide their experience concerning approaches that have worked within their banks to promote innovation. Instead, what we received were a number of comments related to other roadblocks to innovation that exist within banks. Regulations were mentioned most frequently. One writer commented: “The “trail” of risk assessments, compliance, audit, legal and regulatory reviews that always come into play are generally of an intensity that the processes for true innovation are, at best, slowed. I would further argue that these factors subtly erode the institutional appetite for true innovation, as it is just so darned complicated at times to move forward on ideas that seem, at face value, to be relatively simple.”

 

The other issue raised by that writer and others involved the size of the bank. Smaller institutions do not have the “extra” employees of larger companies. Therefore, they lack the resources that bigger players can aim at innovation.

 

 

While the comments we received are legitimate and need to be addressed, they also point out the all-too-frequent tendency of bankers to focus on why something cannot be accomplished rather than what can be done. That is my task for the rest of this newsletter, namely, how can banks, with all the cultural, regulatory, and staffing impediments they face, still promote innovation.

 

Practical Innovation

How can banks, no matter the impediments they face, successfully explore and introduce practical approaches to innovation?  The process requires setting a clear focus for the effort, enlisting the bank’s best and brightest, and gaining senior management support. The steps outlined below suggest the necessary path.

 

1.Select an outsider to structure the process. Because it seems so self-serving, initially I had this step further down the list. On reflection, however, a bank needs an independent outsider to guide and push the process to increase the likelihood of success. Getting the right outsiders involved from day one makes sense.

 

2. Agree on the goals of innovation and determine the innovation focus. Innovation opportunities are frequently related to product development or new channel areas. Bank management needs to provide clear direction for the innovation initiative so that a laser-like focus exists for the effort. Succeeding in a limited area plants the seeds for more innovation attempts in other parts of the bank. The innovation effort can reasonably focus on areas such as: adding features to an established product to distinguish it in the marketplace; redesigning an offer to appeal to a priority segment; exploring whether and how to introduce alternative sales and delivery channels.

 

3. Pick a select team. By their nature, most bankers are neither creative nor innovative. Putting them in a position in which they are expected to be so promotes likely failure. Banks wishing to explore product, channel, or other innovations need to rely on a small team of internal people who have developed the reputation within the bank of being creative thinkers while also gaining the respect of other bankers. These people do exist at your bank; you just have to ferret them out.

 

In addition, it may be critical to involve a support team that focuses on the regulatory, risk, operational, and related issues that can limit or slow down innovation. The people selected for this effort must have a bias for finding solutions to issues rather than simply raising the issues.

 

4. Set a timetable. Banks take too long to do just about everything, and, in our view, no linkage exists between the amount of time spent on a task and the quality of the output. Innovation does not pop up overnight. However, new ideas and approaches will emerge within a finite amount of time (no more than a few months and maybe a lot less). An experienced consultant can help to design a tight but effective time frame and keep the effort on track.

 

5. Study the competition. Once the team and the focus are selected, banks should evaluate how other players (both bank and non-bank) have approached the same area. In general, banks are terrible at evaluating and learning from external best practices and often fail to benefit from best practices within their own bank. However, ignorance is not bliss. The reason to evaluate other players is not to emulate them; rather, the value is to use their approaches as a springboard for your own actions. Furthermore, the fact is that for some players, including many smaller banks, practical innovation may rely significantly on being a “fast follower” of others rather than an inventor of new approaches. Again, using industry consultants to accomplish this analysis makes sense. They are both much better situated to do so and operate with the specialized internal resources required to generate high-quality competitive information quickly.

 

6. Meet to evaluate and decide. Bankers attend too many internal meetings. Oftentimes, these meetings occur to address bank-related turf issues, resource allocation struggles, or the failure of senior management to set strategic or tactical direction. Most meetings do not resolve issues but require yet another meeting, seemingly endlessly. In contrast, what we suggest as part of the innovation process is a series of targeted meetings that lead to uncovering and agreeing on specific innovation opportunities. The series of meetings may include:

 

• Evaluation of the current state of the product, channel, segment, etc.

 

• Analysis of bank strengths than can be exploited and weaknesses that must be mitigated.

 

• Assessment of best practices  (again bank and non-bank, whether in the U.S. or not).

 

• Identification and prioritization of options.

 

• Recommendation for priority approach.

 

7. Ensure senior management support. Too often, senior management exhibits classic passive-aggressive tendencies, saying that they encourage innovation and creativity while actually destroying the risk-taking spirit within the bank. Unless management strongly supports the initiatives developed by the innovation team, nothing will come of it, except for increased frustration and cynicism on the part of team members and their colleagues. Senior management is often remarkably unaware of how its comments impact and undercut initiatives that have bubbled up from lower levels of the bank. This is another reason to involve a consultant in the process. The consultant should possess both the independence, authority, and maybe even the courage required to communicate on a peer level with senior management in order to encourage acceptance of the team’s recommendations. That does not mean that senior management cannot comment on or even alter what the working team has suggested. What it does mean, however, is that the basic recommendations need to be supported and implemented.

 

Final Comment

It might be nice if innovation resulted from inspiration. More often, however, it results from analysis, brainstorming, and challenging assumptions and biases. It involves hard work but also entails a process that can be followed, learned, and repeated throughout the bank. Banks can innovate if they are willing to make the investment required and engage the right type and level of people in the process. Certainly, attempting a process such as that described above makes sense given that it can result in a new direction for the bank’s efforts, one that distinguishes it from the competition.