Technology is playing an increasingly prominent – and essential – role in efforts by banks and financial institutions to improve the products and services they offer their customers. Over the past decade, the realisation has dawned that – as well as presenting opportunities to exceed and reshape consumers’ expectations of digital financial services, lead new ways of working, and address new regulatory challenges – technology and the drive to open APIs poses a very real threat to incumbent organisations, in the shape of disruptive fintech startups that are able to wield that technology with greater speed, agility, and innovation than the banks can manage.
However, retail banks are still only paying lip service to innovation rather than genuinely encouraging constructive risk-taking and making ‘agile’ part of their everyday culture and long-term business strategies. For the most part, innovation labs and the like represent little more than face-saving ‘theatre’, a box-ticking exercise kept well away from the core customer-facing business. There is little prospect of any meaningful output seeing the light of day as long as banks fail to truly adopt the mindset needed to empower innovators.
We recently undertook a study with the independent research firm LM Research, looking into senior banking executives’ priorities, challenges, and plans. We asked senior figures at 15 major UK banks and other financial institutions about the issues that keep them up at night, their perspective on upcoming regulatory changes such as the CMA’s Open Banking regime and competition in the retail banking sector, and their attitudes towards investment in innovation.
Our research found that 80 per cent of respondents are investing more than £25 million in innovation every year, with more than a quarter (27 per cent) spending in excess of £100 million annually. While the majority said they are seeing a return on that investment in terms of PR or planning, barely half (53 per cent) said that their innovation team’s work is actually delivering new services into customers’ hands on a regular basis. But what is happening to the investment made by the other 47 per cent? Why is money being wasted?
One of the biggest challenges for financial institutions today is the need to operate within the limitations of their legacy IT systems. Unable to replace them with a more up-to-date solution due to the risks involved in getting it wrong, traditional banks are forced to combine them with the latest applications and software to compete with their digitally-focused counterparts. However, this solution has been seen to be prone to failure due to the cost of implementation, long development cycles, collaboration challenges, and regulatory barriers.
Adopting new technologies poses significant risks for banks, because if something goes wrong the penalties could be huge. Consumers may want the latest features and services, but they also need to be able to trust their banks to keep their money 100 per cent safe and to be stable, reliable, and secure. As such, this agreement between banks and customers needs to be at the front of mind for developers of new banking services.
Another problem is the industry’s obsession with trying to build a ‘faster horse’, to borrow a concept commonly attributed to Henry Ford. While there’s no hard evidence of the car-maker actually having delivered the line, it does highlight a problem with iterating on existing solutions rather than embracing genuine transformation – major leaps forward just don’t get made.
In the financial services sector, faster horses are being rolled out at enormous costs as many banks try to apply technology to their existing products to stay ahead of the challenges to the market. According to our research, a majority of senior figures consider digital transformation critical to the future of the bank (73 per cent), and 47 per cent are working towards a goal of releasing new services at a faster pace in the coming two years. But a focus on faster horses alone will fail to address the root cause of the challenges banks face, and keeps genuine innovation trapped in labs.
In an age where digital disruption is a big concern and customer experience is a key differentiator, it is vital that traditional players focus on executing on innovation by creating value for customers in the real world and enable labs to deliver to innovation to production, safely and securely. They need to take advantage of existing technologies and trusted partners to accelerate innovation, and to treat change as a normal, safe, behaviour, not an exception.