Banks and innovation are a pair of opposites. Instead of devising the ultimate new idea, new ideas are being buried habitually. If banks aim to become innovative, they have to change their corporate culture, says Peter Hody, editor-in-chief of finews.ch, in an essay for finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Which of the banks in recent years has caught your attention with an innovation that paved the way for an entirely new business avenue? I can’t think of one and of no innovation either.
Instead, we see the steady development in banking in terms of digital services, automation, user-friendly apps, or experiments in artificial intelligence and with the Blockchain technology. But, the truth of the matter is that this all has precious little to do with innovation and much more with transformation.
Banks and the financial market as a whole are so-called late adopters. They adjust only belatedly and often reluctantly to new regulation, technological change and client needs.
«Swiss banks lack an innovation management»
Questions on banks’ innovation management regularly meet quizzical looks. The answer is: banks lack innovation management as such, the strategies are vague at best and they have neither organization nor culture that fosters innovation.
The management and supervisory boards of many financial services providers take innovation to be the prerogative of the bosses. Research papers and books are being consulted and discussed at boardroom level, know-how gleaned from the bosses' network of contacts. Sometimes, the subordinate level is allowed to visit the Singularity University in Silicon Valley. Bank managers receive dozens of advisers every year, advisers who are heaping praise on strategic concepts – but the same concepts are touted in the meetings with several clients.
Which would explain why the so-called client focus is all the rage in private banking, why universal banks have started selling insurance policies again or why the mortgage business is called the residential home ecosystem. Innovation in other words that is straight off the supermarket shelf – touted and sold as innovative but without distinguishing features – in other words interchangeable.
«Managers have to take the lead in all matters of culture and change»
A major misunderstanding seems to be prevalent among decision-makers of banks: it is true that culture change and transformation is a top-down process. Managers have to take the lead in all matters of culture and change.
For innovation however the opposite holds true: this is a bottom-up process. The misunderstanding lies therein that the management believes that it not only has to take the lead in changing the culture but also is responsible for innovation.
«Projects are under huge pressure to succeed»
It doesn’t work that way. A number of factors inhibit innovation at banks. First: banks and their culture are geared towards eliminating risk. Change and development are seen as a danger. Second: the avoidance of risk poses a huge hurdle to the flexibility needed to foster the development of innovative ideas.
Projects thus are under huge pressure to succeed. Third: teams of innovators are often not solvers of problems but creators of ideas they then like to implement. And fourth: the still rigid hierarchies at banks and their focus on the process doesn’t permit the bottom-up.
In «The Lever of the Riches: Technological Creativity and Economic Progress», historian Joel Mokyr pursues the question of why certain societies during some periods of time have been more creative and successful than others. He provides a few clues as to what you need to enable innovation and technological progress both in the wider society but also at organizations.
«That's the theory – the reality requires a stronger sense of urgency»
In short: banks have to maintain an open and permeable personnel policy and provide an infrastructure to allow staff the room and freedom to communicate and be creative. There are no borders to new ideas: therefore, a bank ought to nurture an open and tolerant culture in a bid to detect and pursue new ideas. And the management has to be prepared to replace the old with the new and not to take consideration of vested interests.
That’s the theory – but the reality requires a stronger sense of urgency: fintechs, neobanks and tech-firms are taking market share from the traditional firms in the industry. The value chain is breaking up and a new decentralized structure appears in the financial system.
«The industry needs to rethink and break with tradition»
As innovation cycles become ever faster, banks that are stuck in their structure are confronted by even bigger problems. No drugmaker or tech firm would dream of outsourcing research and development, something that banking has essentially done by relying on consultancies. Banks should have a team of capable people responsible for R&D and personnel policy, experts who can scout for innovation and develop new ideas.
The industry needs to rethink and break with tradition. The corona-crisis has actually triggered a degree of change at some of the banks. Julius Baer for instance introduced a «thinkaton», where staff and spontaneously compiled teams developed ideas they then submitted to the management. Some of those have now reached the project status.
«The conclusion will run counter to the instinct of many bankers and companies»
It is important to have more differentiated risk management within a bank: without any risk, there won’t be anybody around to generate innovation and without a risk tolerance, new ideas will never be tested for their usefulness.
The conclusion drawn by Mokyr, who had a close look at the history of innovation, will run counter to the instinct of many bankers and companies alike: «Technological progress requires above all tolerance toward the unfamiliar and the eccentric.»
Peter Hody is editor-in-chief of finews.ch. He has held several managerial positions at «Cash» and «Stocks», Swiss financial news outlets. Earlier, he was a reporter at Associated Press and RTL/ProSieben. Hody studied history and acquired an MBA in Media Management at the Hamburg Media School.
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