Digital is reinventing banking in a myriad of ways. For banks, this means adapting to a whole new way of doing business. But eliminating the old to make way for the new won’t be easy, let alone when the pace of change is accelerating. As banks seek to extend their operational efficiencies and value in an industry seemingly stuck in a business-as-usual mindset and punctuated by profitability pressures, they will need to address innovation with programmatic thinking and rigorous execution.
Part one of this multipart series looked at the various approaches banks have taken to unlock innovation. This installment examines the challenges banks face in this pursuit and our recommendations for overcoming them.
Traditionally, retail banks have been known to be slow to embrace new technology. An analogy commonly drawn is that of changing the course of a big ship. But the journey toward progress is made harder by the need for existing core-banking technology to coexist with new digital systems on a modern IT backbone. These include:
Legacy systems: Legacy core systems continue to be a growing cost burden on banks, with some estimates suggesting that a tier-one bank spends $300 million a year on expensive updates to existing systems. Moreover, IT infrastructure will directly impact a bank’s ability to innovate: financial institutions that have a flexible IT infrastructure report a 70% success rate in innovation.
A move to cloud-based systems is widely seen as essential for opening up possibilities for business innovation, but this transition is happening at a snail’s pace. Banks have so far used the cloud for non-critical processes such as customer relationship management (CRM), but this is changing. The increasing reliability of cloud computing indicates that banks can ill afford to continue ignoring its benefits.
Data silos: Silos are another artifact of banks’ older, slower selves that they need to jettison at the earliest. The growth of advanced analytics, big data and the operational imperative for a “single version of truth” makes clear that banks cannot afford to keep data in nonintegrated towers. Apart from creating unnecessary operational risk that affects a bank’s overall competitiveness, data stuck in silos also hampers banks’ ability to innovate. Information stored in different silos can have inconsistencies and duplication, which can slow down innovation.
These two challenges trap banks in the vicious cycle of updating existing systems while investing in a patchwork of new ones. This makes it more difficult for banks to embrace an innovation-led mind-set and contend with the rise of nontraditional competitors, such as fintechs. Banks seeking to become data-led, customer-centric organizations face additional challenges:
Kindling a culture of innovation: Transforming from a largely compliance-driven organization to one that gives equal weight to product/service innovation is seen as a major disrupter to a bank’s status quo. Finding the right approach is simultaneously crucial yet daunting. Increasingly, banks are looking to emulate the ideas-driven approach of fintech start-ups, where failure is an acceptable outcome. But without a conducive and supportive culture, such initiatives will deliver below-par results.
Attracting talent: When it comes to digital innovation, banks face a talent void, one that appears to be growing larger by the year. This boils down to the fact that banks are now competing with fintechs and other digital start-ups/leaders in attracting digital talent, and they are losing this contest. But becoming an innovation-led organization is not just about IT talent — banks also need a fresh infusion of leadership to drive this transformation. In this regard, they are not helped by the fact that business graduates from top universities also seem to prefer other industries to banking.
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Finally, banks need to address two core organizational challenges that can derail any sound innovation strategy and agenda:
Enterprise agility: Banks need to ensure that not only is their innovation agenda evangelized by executive and senior leadership, but also that different organizational functions and capabilities stand ready to adopt, embrace and support the resulting changes. Banks that are agile in swiftly adopting people, process, governance and/or technology changes in alignment with the innovation agenda will see faster results and subsequent buy-in from stakeholders.
Funding innovation: Banks need to embrace and incubate innovation as a strategic competitive differentiator and as such insulate it to a certain degree from the focus on quarterly ROI. In this, they can learn from their fintech and broader technology sector peers to be patient and remain invested in the pursuit of their objectives. This is crucial in increasingly complex areas such as customer-experience-focused, regtech, or robotics/automation-focused innovation.
Despite these hurdles, big changes in the way banks approach innovation are afoot, and the results are showing. In one survey, while just 7% of respondents said their institution is leading the industry in digital innovation, 40% said they were ahead of their industry peers. This indicates the beginning of the end of banks’ traditional approach to innovation and uncovers the long road ahead for banks as they accelerate into the fast lane of the digital highway.
Keeping the Innovation Engine Running
In the coming years, banks need to strive to create a well-oiled innovation engine that not only smooths the lifecycle of an idea from inception to implementation, but also creates a virtuous cycle that makes innovation an enterprise-wide initiative. This requires radical changes in processes such as human resource planning, which have been the bedrock of banks’ internal operations. Here are six proven approaches we believe banks should consider:
Recalibrate employee talent requirements.
Banks are competing with fintechs, while simultaneously attempting to innovate around their core traditional offerings. This means that banks require skill sets that are highly technical. For example, many investment firms are increasingly hiring graduates with data analytics skills. Some banks are hiring professors from and partnering with institutions such as the Massachusetts Institute of Technology (MIT) to further their innovation agenda.
Additionally, banks and large financial institutions are developing in-house technology capability development programs to enhance the skills of existing employees, as well as engaging interns from leading tech institutes to build a sustainable supply of talent.
Segment innovation and banking.
Banks’ interest in start-ups has surged following the boom in fintech. However, the post-merger/acquisition integration is a very heavy lift for organizations across people, process and technology. To avoid this stress, some banks are taking an alternative route: not integrating, but rather allowing the companies to continue operations as-is, with the end goals and objectives tieing back to the acquiring bank. This allows the smaller subsidiary to continue in its start-up avatar and allows the creative juices to continue to flow unbridled – thus avoiding a cultural clash.
Apply design thinking and deploy information platforms.
In order to get an in-depth assessment of customer lives and behaviors, an increasing number of banks are embracing the design thinking approach to innovation, which turns the traditional approach to innovation inside out. To this end, they are engaging with firms that specialize in customer behavior such as our partner ReD Associates and Stone Mantel. This allows banks to truly embrace customer-centricity and design unique/differentiated solutions.
Another method banks have adopted is using information platforms to conduct two-to-three-week workshops to understand the competitive landscape (trends and investments), identify viable/ up-and-coming fintechs and technology firms, etc. Such efforts, however, cannot be a one-time effort. Going forward, banks need to make this approach sustainable by integrating it into their overall strategy.
Institute an innovation factory.
Banks and financial institutions need to develop centralized innovation management to determine standards and provide structure with business-aligned innovation SWAT teams to contextualize and drive innovation strategy on the front line. One approach involves taking the hub-and-spoke model to innovation wherein the hub (collaboratory, center of excellence, etc.) is aligned with a spoke (line of business).
Partner with major technology purveyors to develop new capabilities.
The proliferation of digital interfaces and leveraging of data across financial institutions requires banks to develop large technology capabilities. This results in a reliance on technology innovators to leverage their critical infrastructure and differentiate business capabilities. Large financial institutions are increasingly emulating their tech counterparts to develop infrastructure footprints, leverage platforms and data, and design digital experience for their customers.
Banks are also looking inward at the suite of capabilities across their core value chains such as mortgage lending, equipment financing, etc. to identify B2B capabilities that will provide more value to their customers. These capabilities are being exposed via application programming interfaces (APIs), allowing banks to unbundle their traditional value chains to create multiple, marketable value chains inside of a traditional end-to-end offering (i.e., externalizing anti-money laundering/know your customer processes to their customers).
Adam Chardukian, Manager, Consulting, and Abhishek Roy, Director, Consulting, in Cognizant’s Banking & Financial Services Practice contributed to this article.