The Future Is Now

SAN FRANCISCO–What is the future of banking?

This question seems to be asked with greater frequency by those inside and outside financial services in the wake of the credit crisis. Perhaps that is so because the stakes, in seems, are higher. For traditional banks, many of the competitive threats that have blossomed in the last couple of years take aim at the very essence of what it means to be a bank: to engage with customers and facilitate commerce.

I have been following banking since 1993 and never has the drive to innovate been so acute. The fact that today kicks off the very first Bank Innovation conference — note the “Bank” and “Innovation” side by side — should be nothing short of remarkable to anyone with a more than cursory knowledge of the history of the US banking industry. “Innovation” in banking past was often the result of consumer threats of bloody murder, and little more. Today, innovation is an imperative coursing throughout the nation’s financial system. Heck, even the Federal Reserve is holding press conferences these days. In the weeks leading up to today’s start of Bank Innovation 2012, we conducted a survey of financial services professionals to better understand the role of innovation in banking today. Consider that better than 52% of respondents said that their company maintained a dedicated innovation team. In 1993, I’ll bet FI executives who were asked this question would have responded, “What’s a dedicated innovation team?”

That is not to say banking is staffing by hundreds of thousands of Steve Jobses. We asked financial services executive which area of innovation they think is the most “valuable” to consumers today. About a third of them said channel integration, meaning the ability for consumers to do whatever banking they want across whichever banking channel they want at almost any time. No other aspect of innovation scored higher — not online banking, mobile banking, payments, etc. You would think, then, that banks would allocate most of their innovation resources to channel integration. If you thought that, you would be wrong. Banks are spending more on online banking and mobile banking than on channel integration, according to our survey. I am certain there are reasons for this, most likely that the ROI on online and mobile banking investments is higher than on channel integration innovation. But there is something amiss when bankers know what their consumers want — and don’t provide it to them.

What is at the root of this disconnect? While I want to reiterate what I wrote above, that banks are far more inclined toward innovation today than in years past, the goal is obviously to serve consumers to their maximum satisfaction. So what is preventing that? Respondents to our survey said that the greatest impediment to innovation at their company was, not surprisingly, budget. But I would suggest another factor under the surface. We asked FI professionals to share with us the areas of banking that need the most innovation today. One answer struck me:

We need to address the next phase in payment preferences and technology. We lost the Interchange Bill. We need to get over that and start looking at what is coming before PayPal and similar competitors take over this market.

When I read that, I got stuck on one word: “start.” “Start”? PayPal was founded in the late 1990s, and banks are going to “start” trying to figure out how to address the “next phase.” Look, it is easy for me to criticize, and I should apologize for doing so. But as a relative outsider, I would include wrongheaded priorities or just plain inertia, along with budget, as the major impediments to innovation. Or as another respondent put it, “Banks really need to work on the ‘cool’ factor and help the industry move forward.”

This leads us to the start of Bank Innovation 2012 today. The people who have signed up for this conference are not those who are just starting. They have taken time out of their busy lives to move banking forward, and I — as a simple consumer — am grateful to each of them for doing so. The truth of it all is that the innovation age in banking has only begun. Of the approximately 234 million mobile phone users in the US, about 36.7 million of them have used a mobile banking service at least once, according to recent data. That means there are 197 million to go. If that is not an opportunity, I don’t know what is.

Where to begin? What is the launching point to begin this process of action, not reaction, of invention and reinvention? It all starts — in best sense of the word — with one simple question: What is the future of banking? And off we go …