By Monica C. Meinert
In the mid-1980s, Blockbuster Video shook up the video rental business. With a consistent brand, better supply management capabilities and a business model that allowed it to quickly scale up, the video store chain dominated throughout the ’90s in a market that had consisted previously of mostly locally run corner shops.Then, in 1997, Silicon Valley veteran Reed Hastings founded Netflix, and everything began to change. Faced with a new competitor that had fundamentally altered the nature of the business, Blockbuster floundered in its efforts to re-engineer a comeback and ultimately filed for bankruptcy in 2010.
It’s perhaps one of the most well-known cautionary tales of “adapt or die,” and a reminder to businesses everywhere that at any time, new players can emerge and quickly change the game.
But where many are still struggling is in the execution: projects are proposed but stall in development, or the implementations may occur only to see paltry adoption rates that underwhelm expectations.
“What we are seeing is when banks are able to partner [with fintech companies], they’re still running into roadblocks,” says American Bankers Association SVP Lisa Gold Schier. She explains that that’s often because “strategically, they didn’t have the right process in place.”
ABA recently entered into a strategic partnership with Alloy Labs Alliance—a shared financial innovation lab and consortium co-founded by midsize and community banks and led by the team of financial technology experts at FinTech Forge. According to Alloy co-founder J.P. Nicols, the alliance focuses on giving organizations “an empirical approach to value creation,” by helping them do three things within their organizations: create capacity, create agility and create leverage.
“It’s about understanding how quickly we can respond to needs of customers and do so in a unique way,” Nicols says. “Community and midsize banks really have an advantage [because of the]relationships they have with their customers. But [they]need to do something with it.”
Working with Alloy Labs—which ABA members can do at a discount—banks can join various workgroups to collaborate with their peers on advancing innovation in various areas, including peer-to-peer payments, small business lending and digital client onboarding. In addition, the consortium model allows members to share the costs and the risks of vetting various fintech providers—and share in the lessons learned along the way.
On an individual level, Alloy also works one-on-one with banks through its two-day, onsite program intended to help institutions determine their innovation priorities, work in cross-functional teams to set strategy and get one or two projects off the ground. At a meeting of ABA’s Community Bankers Council earlier this year, Nicols previewed that process during a special innovation session, guiding CEOs as they thought through their own approaches to innovation.
Drafting a ‘declaration of innovation’
As a starting point, Nicols recommends that each bank develop its own “declaration of innovation”—a statement that defines the “who, what, where, when, why and how” of the organization’s innovation approach. And each bank’s statement will be unique.
“Innovation is implementing new ideas that create value,” Nicols explains. “How they add value is up to you: is it cutting cost, is it adding revenue, is it creating a better customer experience?”
One thing to consider: the bank’s starting point. Is the bank playing catch-up, or trying to set itself out ahead of the competition? While most banks consider themselves to be “fast followers” when it comes to innovation, often they’re not moving fast enough. Nicols uses the example of mobile deposit capture technology: 10 years ago, it was a game changer. Today, it’s something customers simply expect. “If you wait until [these things]become table stakes, you’ve missed the growth part of the curve,” Nicols cautions.
So how do banks truly differentiate themselves?
A good place to start is by looking at the bank’s customers: What are their needs and challenges? Are there products or services that they’re using outside of the bank to meet their financial needs that they might prefer to receive directly through the bank? For example, Citizens Bank of Edmond—an Alloy Labs Alliance member based in Edmond, Okla.—recognized a need among its business clients and turned underused bank-owned real estate into a sleek, modern co-working space—setting itself apart in the market while adding value for its customers.
“It really is about understanding: what are the pain points [customers]are trying to avoid, and what gains they’re trying to achieve,” Nicols says. It’s also worthwhile to think beyond the bank’s existing customer banks, he adds. After all, “if we say we want to grow, but we’re only focusing on selling existing products to existing customers, there’s probably a limited ceiling on that.”
Speed matters
Once there’s an idea down on paper, the heavy lifting begins. It’s here that speed becomes critical, Nicols says. While he acknowledges that “the ‘move fast and break things’ ethos of Silicon Valley doesn’t work inside our highly regulated industry,” and that banks have compliance and risk management concerns to balance, they should still be working quickly to bring new innovations to market.
“The quicker we get to market, the faster we can learn,” he notes. “We want to measure what we’re doing and use that data to create a better process next time around.”
That requires acknowledging that innovation is an iterative process—and making sure that’s reflected in the organization’s strategic approach. And as Nicols reminds CEOs: “You’re going to have better managerial judgment when you have more data.”
Spending wisely
Ultimately, the success of a bank’s innovation strategy depends on its leaders. “One of your most important goals is the deployment of limited resources,” Nicols tells CEOs. “Not only financial resources, but human resources, technical resources, managerial time and attention.”
From a financial perspective, there’s no perfect formula for deciding how much banks should be investing in innovation. But Nicols offers that a good place to start is focusing about 70 percent of the budget on “extending and defending” the core business lines. Beyond that, he recommends spending “20 percent trying to bend that line” and taking bigger steps toward finding that differentiator for the bank.
Finally, 10 percent of the budget can go toward making “small bets” on new products or partnerships. “You want to bet the minimum possible, and as you get more information, decide whether you want more money on the table or less money on the table.”
Like the innovation strategy itself must be iterative and ever-changing, so should the funding strategy; initially, banks may start innovation with the goal of cutting expenses, but over time, that approach should evolve, too, Nicols says.
He challenges bankers always to consider: “How do you spend the dollars that you’re spending today more efficiently and more effectively because you’re being intentional about what’s going to create the difference?”
