Financial Industry and Innovation - What Banks Can Learn from Capital One

30 June 2017

The U.S. financial industry as a whole has been trying to strengthen its business focus on innovation, in response to rapidly changing technologies. U.S. banks are investing in their own in-house innovation labs and building relationships with startups and tech companies in order to keep themselves up to date and stay efficient. These days, however, banks take a step further. They realize it is important to foster internal collaborations among various stakeholders. According to Aite Group’s interviews with 24 capital markets firms in 2015, siloed nature of business lines and their lack of collaboration with innovation teams was the most commonly cited challenge for firms’ innovation. Banks have tried various tactics to encourage collaborations between innovation teams, characterized by persistent research and development, and business units, characterized by day-to-day operations. For instance, banks often empower innovation teams by appointing someone whose title is high enough as a leader of each innovation team, so as to expand the power of entire innovation team and, therefore, induce other stakeholders to collaborate. Banks also employ the pseudo-member system, in which an innovation team recruits necessary person from business units or hires external consultants on a project-by-project basis, to equip their innovation teams with both IT and business persons.

However, despite of such efforts, U.S. banks are far away from being innovative. According to Celent’s report, Innovation in Financial Services 2015, only around 36% of financial services executives indicated that they were satisfied with their companies’ performance in managing innovation. Here, the key issue is that banks have too many organizational and operational layers in between innovators and end-users of innovative products. As the principles of lean management suggest excessive movements of products create wastes, banks’ complicated organizational and operational layers result in too many unnecessary steps for innovative initiatives. For instance, banks usually have a product managing group in between innovation teams and end-users. The product managing group is usually further divided into smaller functional groups, such as product testing, system administration, product release and etc. In addition, handling a newly developed product from one group to another requires multiple steps, of which many are redundant. It is hard to imagine that banks, having such complicated organizational and operational layers, can foster internal collaboration and communication for innovation.

For those banks struggling due to multiple structural and operational layers, Capital One provides an exemplary precedence. Capital One is adopting DevOps practices. Similar to agile management, DevOps puts emphasis on being nimble and efficient through collaboration between the various types of workers. In case of Capital One, the move to DevOps is to shift roles of product management upstream and integrate them into product development teams. Capital One’s product development teams will engage directly with the end-users, and be in charge of whole product delivery process including development, testing and management.

How is Capital One making this possible? Unlike the philosophy of agile, DevOps places more emphasis on methodologies to implement such organizational change, and Capital One’s move to DevOps changes its infrastructures and product delivery processes, creating necessary conditions to consolidate roles of product management and development. Banks have two common challenges in collaborations across entire product delivery process. Firstly, the product development infrastructure can be very different from testing, releasing and/or managing infrastructures. Secondly, much of product delivery process such as testing, configuration and releasing are lengthy and semi-manual. Through utilizing container technology, Capital One is creating consistency among different stages in the software delivery. Also running container technology with microservices and Amazon’s public cloud helps Capital One automate much of its product testing and deployment.

Probably, for most of banks even for Capital One, simplified product delivery process and consistent infrastructures can be considered as a big step forward to foster collaboration between innovators and business persons. However, what makes Capital One more distinguishable from other banks is that Capital One didn’t view such progresses in and of themselves as the end goals. The bank is taking a step further to consolidate various functions of product delivery into product development, reducing layers between innovations and end-users. The case of Capital One may not be easily implemented to other banks due to existence of legacy systems and regulatory issues. However, Capital One’s out-of-the-box-thinking may be what other banks can learn from.