‘To lead or not to lead?’ The crucial question for innovating banks

Rajashekara V. Maiya

The above line, a finding from the Innovation in Retail Banking 2014 study jointly presented by EFMA and Infosys is not totally unexpected, we were taken aback by the other half’s clinical acceptance that their destiny was at best, to follow fast.

Perhaps we shouldn’t be. When asked about the biggest barrier to innovation in their business, financial service professionals attending the Australia Information Industry Association (AIIA) Innovation Forum spoke in one voice – “fear of failure”. While every industry shares this fear, in trying to put innovations to market on a grand scale, the financial industry raises the stakes to such heights that failure is no longer an option. Ergo playing it safe is.

Lead or follow

The choice of innovation objective – lead, follow fast, merely follow, and so on – is either a matter of will, or of wherewithal.

Regulatory caution, risk aversion and inimical culture fall into the first category. Banks, which accord primacy to such factors, will choose to remain innovation followers. This is quite apparent. Increasing regulation has made it even more difficult for a historically regulated industry to plunge into something new. But ironically, at the same time, in many emerging areas such as social lending or mobile commerce, nimble non-banking players have rapidly established themselves, while the traditional banks wait for the air to clear. This is just one example of how the average bank’s low appetite for risk is holding it back from taking the lead. Then there’s culture. Respondent banks in the EFMA-Infosys study openly admit to their organizations ’low tolerance for failure, suggesting that there is little support for employees who take calculated risks, which don’t deliver.

On the other hand, the lack of financial or creative wherewithal could force a bank with innovation leadership ambitions to invest their precious resources into tried and tested, incremental – rather than breakthrough – innovation. Indeed, the findings of the EFMA-Infosys study hint at this being the case: while 49 percent of respondents want to be innovation leaders, only 35 percent have invested in advanced R&D, the kind that is necessary to back such an ambition.

So, clearly a number of banks will choose to remain fast followers. For them, the most important thing is to stay abreast of unfolding trends and once these are proven and established, act quickly to adopt. Awareness of the market environment is the key for the success of a fast follower strategy. Setting up competitor innovation information cells with an ear to the ground could really help follower banks in this area.

And what about those who dare to be innovation leaders? They have to tread the fine edge between first mover advantage and market adoption risk. Banking innovation leaders will have to fight not only peer banks, but also non-banking entrants from the tech, telecom, retail, and start-up space. The reward for this hard work is a reputation for innovation, and for those who get it right, even a position of leadership, as the case of Spain’s Caixa Bank demonstrates. Voted “Best Retail Bank for Technology Innovation” for the second year in a row at the Euromoney Awards for Excellence, and also the “Most Innovative Bank of the Year” at the 2013 BAI - Finacle Global Banking Innovation Awards, Caixa Bank, whose share of the Spanish online banking market places it second worldwide by home market penetration, exemplifies the term “innovation leader”. The bank owes its success to being first off the blocks in embracing new technologies, such as contactless and wearable, to cite just two.

Or something in between

Can the possibilities for banking innovation split between leading and following, or is there room for another kind of aspiration? Well, some banks might choose to act as catalysts, creating a conducive, stable and secure environment for innovation, while leaving the actual business of innovating to others. Open innovation gives them a platform for doing this. The EFMA-Infosys survey reveals a rising trend in the adoption of open innovation approaches, such as partnerships with IT companies and other suppliers, staff competitions, and tie-ups with academic institutions. Besides these, an interesting option is to invest in start-ups. Consider Israel’s Bank Leumi, which has stepped up its innovation investment and focus in recent years. It has augmented its internal efforts by partnering with Elevator Fund to specifically identify financial technology start-ups to invest in. The first phase of the program, which started in late 2013, identified five start-ups, each of whom would get $20,000 in funding. Through this initiative, Bank Leumi hopes to gain early access to financial technology innovation and an opportunity to help shape product efforts to support its biggest needs.

Some banks are also starting to organize “hackathons”, or innovation competitions open to non-staff. This list includes the likes of Barclays and Rabobank.

The EFMA-Infosys Innovation in Retail Banking annual surveys show a clear pattern of rising innovation focus and investment among banks. While this is as it should be, banks should also introspect on their motives for innovation. That being said, a bank’s innovation objective need not progress linearly, to take it from follower to catalyst to leader. Nor is it a one-time choice. Banks should expect to transition between these three states, depending on what is most appropriate to the prevailing demands of their internal and external environment, as well as their immediate context. It is fair to say that banks should also be innovative in the way or why they innovate.

The author is Associate Vice President & Head– Finacle Product Strategy & Pre-sales, Infosys