Over the past several months I’ve been spending a lot of time looking at the industry in which I work (Financial Services) and wondering what it is that keeps this industry from being a leader in Innovation. Like many other industries the leaders in banking regularly talk about their Innovation agenda and some even claim to be be leaders in Innovation, but as I look across the industry I see very little real change – even the best innovators in Financial Services seem to be making incremental changes with very little disruptive change coming from the large incumbent companies.
It reminded me a bit of Clayton Christensen’s Innovator’s Dilemma where we are now seeing some small non-bank competitors entering into pieces of the core Financial Services market offering “good enough” offerings that provide significantly new value propositions for our customers. But if the incumbent Financial Services companies aren’t innovation leaders, where can they look for inspiration on what it means to be really innovative? BCG publishes an annual list of the most Innovative companies, so I figured that would be a good place to start.
Before any of my Financial Services friends get themselves wound up, the BCG study also serves as a proof point to my position that banks are simply not innovative. If you look at the list you will quickly notice that there isn’t one financial sector company that falls in the Top 50 most innovative companies this year. In fact there hasn’t been a bank in the list since 2012 when HSBC found themselves in 28th place (before dropping from the list completely in 2013). Even if you go back to before the financial crisis of 2008 there have only been a handful of banks who have made the list, and none of them have been able to sustain their rankings.
So where are the innovators? In 2014, 7 of the top 10 Innovators all come from the tech and telecom sectors, 2 are from the automotive sector, and 1 is from the consumer and retail segment (and that one is Amazon who I would actually contend is really a tech company).
Perhaps this shouldn’t be a real surprise as Innovation is typically a measure of the number of patents filed in a year and tech and telecom companies have historically been significant contributors to the patent pool. That measurement also excludes a view into the more innovative small companies that are entering the Financial Services space, but who are playing at a much smaller scale (specifically those competitors that Christensen’s Innovator’s Dilemma indicates that we should be looking at to avoid being disrupted).
So where is the innovation in Financial Services and what is the risk of not knowing?
HBR calls out the risks highlighting how Apple became the dominant player in the music industry in just 5 years, Google wiped out the vast majority of GPS companies market cap with the release of their mobile maps app, and Alibaba grew to 16 billion lender in less than 3 years. Industries can change quickly and from my perspective inside the industry the Financial Services industry is ripe for massive change over the next 5-10 years.
Payments have been one of the key profit areas for banks over the past 15-20 years with the high interest rates collected on credit cards, the interchange fees collected from merchants, and the annual fees collected on many premium and rewards cards. While banks have been enjoying the success and widespread acceptance of the major credit card providers and networks some smaller companies are starting to challenge the revenue model and customer value proposition that has been accepted as the foundation of the business.
PayPal was one of the first to start to disrupt the industry offering a simple on-line payment mechanism that was easily integrated for small merchants and easy to sign up for consumers. PayPal is now the number one online payments company in several companies, and has a huge footprint in even the most profitable areas of the world. While PayPal relies on a similar business model of fee for purchase, their easily integrated and simple interface has made them more approachable than traditional banks and credit card companies for merchants and consumers alike, driving continued growth into the market.
New competitors are now attacking the physical payments world as well with companies like Square offering a significant change to the customer value proposition to customers. Rather than simply moving payments from cash to card or card to phone which offers limited incremental value to a consumer, Square has eliminated the need to reach for a payment tool and instead relies on previously approved spending patterns and geo-location to enable simple and quick transactions for both merchant and consumer.
Many retailers are also now offering their own payments tools allowing customers to link their spending to proprietary apps which leverage the existing payments networks, but which disintermediate the card companies and banks from the customer themselves. Payments and patterns are now available to the retailer themselves and they can offer rewards directly to their customers based on their actual patterns and usage of their app.
Deposits and Day-To-Day Banking
Deposit accounts have been perceived as a protected land for many banks profits given the regulatory environment around them and the need for deposit insurance etc in many major geographies. But even these areas are not safe from disruption as non-banks take a non-traditional look at how their customers use those types of products.
Recently Walmart teamed up with American Express to launch a prepaid credit card which works over the existing payment “rails” but which is targeted at the lower income primary market that Walmart markets to. Rather than offering a full “deposit” product bank account to their customers, Walmart instead elected to offer a pre-paid card which for all intents and purposes works as a deposit account for customers who generally operate week-to-week on their balances. Customers can have their pay direct-deposited to their new pre-paid card just like a bank account, but their bank for all intents and purposes becomes “Walmart” – which drives more of their spending through the doors of the giant retailer.
So What’s The Answer?
Banks have lived in a regulated world for years which has provided significant walls around their businesses that protected them from outside competition. It was incredibly expensive to start a bank and the ongoing regulatory controls maintain a significant overhead on their business. In exchange for those high barriers to entry and ongoing participation banks have enjoyed one of the most protected profit positions of any industry anywhere (which shareholders now expect to see every quarter).
Those banks that survive the oncoming Innovation onslaught will be those that recognize the shift in the competitive landscape and who start to behave more like those companies that top the BCG Innovation index. They will be cordoning off investment focused on Innovation through R&D, they will be focused on value creation for their customers in the same way that tech companies focus on customer experiences, they will be creating new technologies and experiences and they will be protecting them through patents rather than relying on the regulatory protection that has served them so well in the past.
The Financial Services industry is overdue for disruption, and the signs of the start of that disruption are all around us today. I challenge all of my peers in the Financial Services industry to take a good look around and think carefully about how they are shifting to compete in a completely new way. That will mean making hard decisions to rebuild technology foundations built for agility rather than based on legacy over making short term revenue targets. It will mean tearing down the boundaries between business lines, technology, and operations teams so everyone is operating on the same team and aligned to the same priorities. It will be rethinking our relationship with our customers in a completely new way, not incrementally improving how they can interact with us but rather completely reexamining our value proposition to them.
The old days of operating in a protected environment are nearly gone. Those that survive will be those that recognize those signs and take real action TODAY rather than waiting until it is too late to change course. Those that don’t will be reminiscent of Kodak – hiding their heads in the sand and ignoring the changes around them until it is too late.
Tim Empringham, MBA
Tim Empringham is a passionate advocate for Innovation in organizations of all sizes as a mechanism to drive growth, create uncontested market space, create new customer value, and drive efficiency into the internal organization. His focus is on disruption of thinking and markets through integrative thinking, structured Innovation frameworks, and leadership development of Innovation and Change leaders within the organization.