Innovation vs. Product Upgrade: Why the Difference Matters in Banking
Banks have an opportunity to innovate their way out of today’s challenging business landscape, but first they need to actually innovate.
Banks are not innovative organizations, and they lag behind other industries in the move to digital that has already upended consumer tech and media. Most banks would probably counter that by saying they have regulations to deal with – not to mention the duty to protect customers’ money – that prevent them from moving with the same speed as other industries. And they’d be right, particularly when looking at the past few years that have been defined by regulatory upheaval.
The worst of that intense regulatory turmoil is now fading into the rear-view mirror, and banks have learned to work within new limits. However, those banks are finding a completely different business landscape than the one that existed before the financial crisis: the cost of compliance is higher, while fee revenue is down and consumers’ demand for credit is lower than before the crisis. It could be a while before consumer demand for credit recovers as well, as younger consumers put off major purchases like cars and homes.
Innovation offers a path to grow beyond the constraints of this business landscape. That’s what innovation is supposed to do: overturn old market forces, infrastructure, business models and consumer tastes, and replace them with a new playing field.
The iPhone hit the reset button on the entire phone industry, changing consumers’ idea of what phones could do and raising the bar for everyone else in the industry. Facebook reprogrammed how consumers and brands use the Internet for communication and media, changing online media and advertising in the process.
Innovative solutions could similarly disrupt how customers manage their financial lives, and how banks (or other organizations now entering banking and payments) serve them.
Product Upgrades Are Not Innovation
Most of what goes for innovation in the industry isn’t really innovation though. The vast majority of banks are devoting their innovation resources to product upgrades and keeping up with other banks in their market – competitors that also aren’t building groundbreaking innovations.
Think again about what innovations do: they change the rules that everyone’s been playing by. Very few innovation projects in banking aim to do this. Instead, they look to add new features to – or integrate new data and applications with – existing products. Product upgrades are important, but they aren’t changing the game in anyone’s favor. Customers aren’t going to change their behaviors or switch providers en masse for upgraded ATMs or a more intuitive online banking experience.
The most obvious recent banking solution that has had the deep and far-reaching impact of real innovation is mobile check deposit, which has capsized the old idea of the bank branch under its fast-moving wave of adoption. Banks are now faced with completely redesigning their branches and service delivery models thanks to this product. For instance, some banks are now expanding their traditional geographic footprints by offering all-digital accounts without any branch service. With no reason for customer to visit branches for their everyday banking needs, these banks are taking advantage of the opportunity presented by an innovation changing customer behaviors.
Mobile check deposit is unique in how quickly it has been taken up by consumers and shaken up the market. Innovations often take decades to find the form that will catapult them to their full potential. Using computer networks to exchange packets of data was invented in the early 1960s, and the Internet IP protocol was released in 1982, yet mass adoption of the Internet didn’t happen for more than a decade.
Other innovations are lurking in banking that have yet to take that form that will unlock their full value. Will ApplePay take mobile payments mainstream? If not virtual currency, maybe some other tool will take full advantage of Bitcoin’s technology to deliver something consumers need in their everyday lives? It’s hard to imagine right now just how large the impact of mass adoption of such solutions could have on banking. That’s innovation – it’s hard to imagine its full impact because it changes the way we’ve grown used to doing things.
Pursuing A Realistic Innovation Strategy
It’s foolish to expect any banks to come up with huge, far-reaching innovations tomorrow. The culture just isn’t in place. Most large banks are investing in innovation labs, realizing the need to understand how innovations like mobile payments will impact them.
Building the culture for big innovations takes time; and banks have time to build that culture before innovations like mobile payments reach mass adoption and disrupt business models.
Banks also don’t have to be really innovative in every area of their business. That would be next to impossible for all but the biggest banks anyway, given the resources that would require. The future of banking is in understanding the needs of an institution’s core customers. For a community bank, that means knowing what the customers in your demographic group need most, and then being really innovative in those areas. It’s ok to be a fast-follower in areas that aren’t of core importance to the business. For a bank with many clients that send a high volume of cross-border payments, being innovative in that area could mean investigating the action in the startup world on new payment protocols.
That bank doesn’t need to launch its own earth-shattering innovation for cross-border payments tomorrow. But it should have an understanding of what innovations could disrupt cross-border payments, and what the customer needs are that such an innovation would fulfill. If someone else is already working on the innovation that fulfills those needs, then partner with them and contribute to the development of that solution. Be at the forefront of the changes it will unleash. And if over time no one else delivers that innovation, the bank should be putting the culture in place to eventually deliver that solution itself and reap the benefits.
Paul Schaus is the president, chief executive officer and founder of CCG Catalyst, a bank consulting firm. Contact him at consultant@ccg-catalyst.com or 1-800-439-8710.
