By JP NicolsThe rise of fintech and new nonbank competitors has changed customer expectations and highlighted the need for innovation in banks, but why are some handling it better than others?
Three groups of banks have emerged in terms of innovation maturity: leaders, learners and laggards.
Only a handful of banks globally are true leaders in innovation. Leaders deeply understand the need to innovate, and they prioritize ongoing innovation as a business activity just as necessary as compliance and asset-liability management. Senior leaders, from the CEO on down, require and reward innovative thinking, and they set a growth agenda for the company that puts emphasis on generating new sources of revenue. They try to disrupt themselves before someone else does it for them.
But leaders don’t just rely on top-down strategies to improve and expand their business, they also encourage and invest in bottom-up innovation. Likewise, they supplement their internal innovation efforts with external involvement and investments in incubators, accelerators, hackathons, venture capital and lots of other ways to engage in and help develop the broader ecosystem. Innovation is a 360-degree activity for leaders.
A slightly larger, and growing, group of learners have just begun to realize the need to innovate. Learners may even have pockets of innovation within the company currently, but they haven’t really embraced innovation as a business necessity. Early learners may be infected by “FOMO,” the fear of missing out that arises from seeing others’ success, and they may be tempted to make token gestures to drive appearances rather than actual results.
Early learners may also create new job titles that I call “and-I’s,” which are those employees who have had the words “and innovation” tacked on to the end of existing titles. Your “Head of Digital Banking” is now “Head of Digital Banking and Innovation.” Most banks can’t afford a chief innovation officer, let alone a whole innovation team; but this is new territory for most “and-I’s,” and they’ll need training, resources and support to realize a return on their innovation efforts.
Finally, there is unfortunately still a long tail of laggards, those institutions that still don’t even know why they should innovate. Laggards still have tunnel vision on the way things used to be, so they can’t see the changes happening all around them. They are convinced that success is about perfecting their existing products and services, and they narrowly define their competition as just their peer group of similar institutions.
Trailblazers and traditionalists
There are two major camps of employees in most organizations—trailblazers and traditionalists—and the organizations that are innovating successfully are able to capitalize on their differences to get the best of both worlds.
Traditionalists are the old guard, and in laggard banks they are typically the only group– a single-party system of centralized planning and control. If you think about the kind of person who seeks a job in a financial institution, let alone one who stays in the industry a long time and takes on more responsibility over time, you are often thinking about a traditionalist.
Traditionalists seek and strive for stability, security and predictability. They like to quantify the known knowns, reduce risk and variability, and methodically catalog and implement “best practices.”
This is exactly the right way to run the lending and risk functions of a bank, and many traditionalists came up through these departments over the course of their career. But asking people who are wired, hired and fired based on their abilities to identify, manage and avoid risks to take on the job of innovation is ironically a risky proposition in itself.
At best, the result is an over-engineered, top-down approach full of idea capture forms, complex filters and evaluation criteria and committees full of more traditionalists to ensure that nothing too new or unproven sees the light of day. At worst, this approach becomes the “business prevention department” where ideas go to die.
Dying the slow painful death of irrelevance is the risk of not taking risk in a world full of disruptors and innovators. Ask Kodak or Blockbuster about the benefits of this approach.
Enter the trailblazers
Trailblazers are wired differently than traditionalists. They seek to discover new knowledge and explore the unknowns, and they like to spend time outside their company and outside their industry. They enjoy learning new things, and that comes from trying new things. They see “best practices” as myopic at times, sometimes leading to perfect execution of all the wrong things. Right tree, wrong forest.
These are not the people you want running your compliance department or credit administration. They prefer experimenting and testing things to establish “next practices,” and sometimes making mistakes. (Or, to paraphrase Thomas Edison, not failing—just finding 10,000 ways that something will not work as they find the path to something that does.)
The natural inclination is often to isolate these iconoclasts and firebrands in their own labs, if only for their own protection. And that’s not necessarily such a bad idea. Trailblazers need to be around like-minded innovators, and they need some amount of insulation to create and iterate in ways protected from those who would seek to overly neuter and homogenize their unique ideas.
But isolation is not the path to innovation, and a few creative people locked in lab somewhere is not sufficient to bring about real change. Worse, trailblazers who can’t play to their own strengths are often those who jump ship to join fintech competitors.
Leader banks take the time to understand and harness the best of both trailblazers and traditionalists, and they seek to develop a culture where each group can contribute meaningfully. The most innovative organizations in the world build on the strengths and weaknesses of both groups, blending the necessary risk taking with the equally necessary risk management. They balance experimentation with execution.
Innovation is about more than whiteboards and sticky notes, and most banks are ill-equipped to move from ideation to actual implementation, and fewer still are prepared to truly address their internal cultural barriers and the differences between trailblazers and traditionalists. But that is exactly what is required in this era of digital disruption.
JP Nicols is managing director of the FinTech Forge and chairman of Next Money.