From Tradition to Exomorphosis

By David Peterson

Is innovation in banking impossible, improbable, or inevitable?

I was recently chatting with a banker about innovation and my drive to get financial executives to “think about how they think.” In particular, since financial institutions are doing pretty well financially at the moment, most are not putting innovation at the top of their 3-year strategic plan. Having weathered the 2008-2012 financial downturn, keeping the party going like it was 1999 seemed like a reasonable option.

With millennial customers replacing Baby Boomers, having to think about how bank services will need to adapt in the coming years to remain relevant requires hard work and challenges conventional norms. For the most part, bankers are stuck with an outdated model of what a bank does, and they can’t seem to envision a different, better way to deliver services.

My banker friend mentioned that what I was describing sounded like the Wesleyan Quadrilateral. (You should look it up. I had to.) It got me thinking though.

Is there a similar paradigm that defines the forces of change as it relates to banking services?

I think there is. The pattern follows this way: TraditionExperienceReasonExomorphosis. Let’s examine these individually.

  • Tradition truly drives much of what is done in banking, particular as it relates to the inner workings of an institution. We do things a certain way. We have always done them that way. It’s how it’s done. Period. Many FIs are generationally run, with the current CEO being the 3rd or 4th generation from the same family. Even in situations where the CEO is not generational, the manner in which the FI is run is often a product of the training the CEO received from the previous CEO, with light regard for the monumental changes in technology and customer preference.
  • Experience clearly adds to the leadership style of senior management. Once events occur that introduce new elements into the banking environment, they ultimately change internal processes or services offered. Sometimes even a serendipitous event creates an opportunity, the equivalent of the invention of Velcro or Rogaine. Inventors have to be aware that what they are trying to achieve may yield a different result—but one that could be a bigger opportunity than the original objective. This happens in banking, for example, when an institution discovers it is useful to go and meet customers at their place of business, and then expands that into an effective officer call program. But those in management must be aware enough to recognize when such an experiential event might result in innovative changes.
  • Reason. If you sit and think about a problem—block off time, use all of that allotted time, and really think, you will most likely come up with one or more potential solutions. Certainly reason has been employed by bankers to create new product opportunities. A good example of this might be home equity lending. Some of the people who needed additional funds had equity in their homes. The equity could be used to secure a line of credit, allowing the homeowners to use those funds as they saw fit. This opportunity for thinking of innovative solutions using reason does seem to be limited to incremental innovations on existing services. But it exists.
  • Which brings us to exomorphosis. (Okay, it’s a made-up word, but a cool one.) I created it using exo, meaning external, and morph, meaning change. This yields a definition of change that occurs due to external factors. I truly believe the transformational change that will occur through 2025 will be driven not from within the institution but by external factors:
  • The explosion of products offered by fintechs
  • Potential changes by the Office of the Comptroller of the Currency allowing fintechs access to the U.S. Payments system
  • The changing behaviors of millions of millennials

The generation coming behind the millennials will spur additional change. (I was recently introduced to a term for Gen Z—MineCrafters—so named for the world-building game they love.) We are facing the greatest amount of change in financial services than at any other time in history.

Are bankers ready to tackle this challenge?

Bankers must break out of tradition and become more open to innovation. Rather than eschewing new ideas, we must seek them out. We must hire younger employees, and, when those employees openly question the status quo, we must listen. Not everything seen with a new pair of eyes is an opportunity for a breakthrough, but some are. If we are open to listening to those who are not steeped in our business, who see the trees and the forest, then we can obtain valuable insight.

Answer this question.

How do your supervisors respond to a new employee who asks why step 4 of a multi-step process is needed? Maybe step 4 is a regulatory requirement. If so, then provide an adequate explanation. But if step 4 is “just the way we do this,” and that is the explanation you give, it will be unsatisfying to the asker. You cannot stifle questioning, squelch creativity or genuine inquisitiveness without consequence. Absent a positive innovative workplace, employees fall into the dull routine of how things work today, with no interest in innovation. They’ll stop looking for a better way—a genuine spark of innovation. Or they get bored and leave. Either way, your organization loses an amazing opportunity to learn, to grow.

Check out this excellent article written by a former bank teller who found that the institution she worked for had no interest in developing her skills or recognizing her contributions on the front line of the customer experience. (Okay, full disclosure: the article mentions me and my advocacy for engagement in the branch. But, nonetheless, it is an honest evaluation from someone at the ground level frustrated with a bank’s pace of change, and you should check it out.) In effect, she was looking for an employer that would value her creativity and interest in innovation. Not finding it, she moved on. Maybe that is a part of why millennials jump from job to job. They are creative, asking questions, and looking for an organization open to exploring the future together.

Is that your institution? Could it be your institution?

Millennials will choose where they do their banking services based on their expectations and preferences, but it may not involve a bank. Where will your bank be if your future customers choose to rent condos and ride Uber, negating the need for home and auto loans? What if they just use Venmo and never open a traditional checking account? Exomorphosis is going to occur. It’s like a tank. You can either jump on board, use it to make a dramatic difference in your survivability in the coming years, or you can get run over. It’s your choice.

David Peterson is chief strategic officer at i7strategies, a consulting and strategic planning firm specializing in financial institutions and the companies that serve them.