Banks Can’t Have Innovation Because? False Certainty Kills It

I define the need for false certainty as trying to think through every possible issue before committing a change. It strikes me as being
like trying to predict the weather in 1 years time without any data, just a lot of people who’ve experienced different kinds of weather before.

Large institutions and especially Banks exist in a the 20th century world of false certainty. A bank reacts to things it doesn’t know or understand by setting up committees, and spreading responsibility to various experts who all have to weigh in. As a result nothing gets done without going to 5 different committees and involving hundreds of people. Everyone involved bemoans the bureaucracy, but there is no way around it. This leads to slow decision making and makes innovation look an awful lot like risk.

You Can’t Innovate by Committee

This isn’t unique to banking, regulation or any paper based exercise has the same issue  – Banks just happen to be the worst offenders I’ve seen…

Banks live in a world of complexity: RWAs, cybersecurity, and compliance are all highly specialised subjects that require people who really know their stuff to get right.  Whilst this is very effective for keeping the lights on, it’s killing innovation.

I believe this is because specialists only see a part of the big picture, and the generalists (management) don’t understand the detail enough to know who’s right in a given argument. Innovation as a paper exercise moves forward, usually by compromising the design of the user experience or getting an executive to sign off to some ludicrous sum of money in case a perceived risk becomes reality.

The output of this process is a painfully forged compromise. I imagine it like trying mould clay whilst the left hand is fighting with the right hand. What you finish with is the result of an argument, not what society or your customers want and need.

No Wonder That Delivering Anything is a Victory in a Bank

No matter how terrible it is, this forged compromise is then forced into the world with the might of a great machine. The one click login is gone, and now you’re posting out card readers to every customer. Nobody is using the product, but rather than kill it, the bank plows forward in the belief that once the 100% of functionality is available people will use it. “If we just had marketing”, “It’s rooted Android devices holding back adoption” 3 years and £50 Million later, you have yourself a zombie project and you can thank the need for false certainty. It just won’t die, and it will never deliver. Face it.

(It’s at about this point bank executives will point to impressive mobile app growth figures, but I’ll come to that later…)

VCs Smell Blood

Is it any wonder then, that disruptive innovation is coming to both the finance and legal professions? With finance it’s started to gain real momentum

IMG_78564175290709

The venture capitalists smell blood, and whilst generally I’m not expecting banks to disappear as rapidly as Kodak or Myspace did there is definitely an argument for death by 1000 cuts with two major headwinds hurting banks

  1. The pressure from regulators to increase capital ratios and competition in the market place, meaning that the days of easy profit are over
  2. Alibaba, Amazon, Tencent and Facebook all have banking licences. Alibaba offers lending, credit scoring (link) and insurance products and uses massive scale to do this with an entirely different pricing model.

The parallels are often made with the taxi industry where heavily regulated incumbents were able to keep prices and margins high. I doubt there will be an Amazon of banking, but there may be an Uber (in fact Mark Carney worries banks are facing an Uber moment). I’d define the Uber disruption as a large machine, willing to lobby to win that benefits from the economies of scale offered by technologies such as cloud, crowdfunding and p2p lending.

If large incumbents want to survive and thrive there are good alternatives to innovation by committee.

1. Buy Innovation

IMG_47293624495780

Funds, Incubators and Accelerators are all the rage these days. Every major bank or financial service vendor has something, which tells you at some level they take the threat of innovation seriously.

Buying innovation allows start-ups to innovate outside the organisation then buy them in the product, subjecting the product only to vendor processes or M+A which is far less painful than trying to give birth to something inside a large corporate. By the time a product is being considered for purchase by a corporate, it’s already escaped the death grip of false certainty and design by committee.

I look at IBM as being good at this strategy. Their internal R+D has historically given birth to many concepts we now take for granted only to have someone else commercialise them, yet inversely they have proven their ability to buy innovation makes a material difference to their balance sheet, with 8 acquisitions in 2013 alone

2. Acquire / Build Challenger Brands

There are numerous definitions of a Challenger Brand, but the one I like is that a Challenger Brand wins through mindshare rather than market or marketing spend share. Today the challenger brand is the rule rather than the exception. Airbnb, Uber and even the mighty Apple are all considered challenger brands by CMO.com.

The Fintech names on the chart earlier in this blog are all challenger brands, characterised by a strong core message that is backed up with product experience. Banks are hiring the same world class marketing consultants, but aren’t backing up the messaging with real culture and product experience change. You can see this in the net promoter scores with funding circle seeing +89% with banks running in the -10% to -30% region

The large incumbent banks know their core customer base will be around for a few years yet, but they’re simply not winning the next generation of customers. In doing so missing a large opportunity as a whole generation becomes aware of and starts to use challenger brands before needing or relying on a bank for all of their financial needs. Perhaps when buying innovation, banks could think about what external brands they keep alive and the value in separating that from their core brand. Typically products born inside the organisation will come out very on brand, because the brand police sit on one of the many committees…

There are however, some good examples of banks buying a challenger brand (e.g. BBVA Acquiring Simple), and keeping it’s brand alive. Would a Moven, or a Final Card gain traction with strong core capabilities underneath them? Can banks embrace this before they sleepwalk off a cliff?

3. Build an Engineering Culture

Even in 2005  “Agile” was a buzzword, and 10 years on inside large organisations there is still an epidemic of paying very detailed lip service to the idea of Lean / Agile without actually understanding it.  Going on a training course for Agile is doing it wrong. Just imagine replacing that with a 1 day Raspberry Pi hackathon for all your staff, and nobody is allowed to say the world Agile until they got something working.  Seem out of place or weird?  How about for Google, or Airbnb? … 

The real issue here is the lack of an engineering culture. Companies don’t do, they talk. The fear of an engineering culture is that tech must be seen as owning the “technology how” but have no input on the “what”.  The business “owns” the what.

Taking a voice from engineers and spreading it throughout a committee limits empowerment, autonomy and collaboration.   This is especially acute in such a hierarchical organisation that will always look upwards for sign off and permission as a way to resolve any conflicts that arise from the committee structure or between business and tech.

The Silicon Valley magic isn’t that they have better MBAs writing the internal business cases, it’s that their engineers are typically the age and demographic of the customer base they’re going after.

The cultural bias of Generation Y is baked into every line of code.

Amazon’s Jeff Bezos has a concept called Pizza Box teams. The idea being a team working on a product or project should be no bigger than you can feed with one pizza box. This is typically harder to do inside a big bank, because the entire committee structure will want to sit on the team of 7, but wouldn’t it be fun if they tried?

4. Face the Facts

When internal reports read like a press release crated from cherry picked KPIs, it makes you wonder why. It probably has something to do with ego,  bonus culture and a lack of bandwidth for management to be critical of every KPI that is waved under their nose.

If your mobile transactions are up 200%, how does this benchmark against the competition both traditional and new entrant?

I’ve never heard a conversation in an incumbent bank about how “the MAU (Monthly Active Users) trended higher when we took 0.5 seconds off the App Intro screen”, or that “DAU (Daily Active Users) spiked 30% when the interface was refreshed”. These are the things challenger brands obsess over. User engagement isn’t a buzzword, it’s how your customer feels about your product reflected in how they’re using it.  Everyone should be talking about it.

5. Empower Autonomy of Decision Making

If you’re in a rapidly changing marketplace like crypto currencies, how do you empower employees with autonomy to execute? There is a need to “power down” and push decision making to those who demonstrate a solid understanding of the changeable nature of the market. Often these employees will be younger and new to the organisations culture. How do you create safe space for this exploration and how do you ensure the organisation can embrace it? The key is finding the right place to give visibility and having the management talent that can harness the creativity. There is a good chance this exists somewhere in the organisation, the challenge is putting the two together.

Perhaps the Pizza Box teams concept holds the key.

6. Fail More

Definite Failure is vital. Nothing ever fails in a large corporations, typically failures fit into two categories, money bonfires and zombies in the wilderness. Money bonfires have so much political support, false certainty and a lack of data to the contrary that the project keeps stumbling forward. Zombies become marginalised until eventually you just stop worrying about them and they go away. This robs the organisation of the ability to learn from failure and collect data. The very keys to success.

The really odd thing is that at a personal level most executives will admit their biggest failures made them who they are. Yet media training and culture prevents organisations from allowing this level of honesty and frankness internally. It’s very difficult to tell the truth without hurting someone’s feelings, but I’d argue it’s more dangerous to avoid the truth to save someone’s feelings when the regulator and innovators are breathing down your neck.

The Moment of Truth

Is there a bank account there with the bravery to really embrace these ideas? Becoming genuine internally is the key to being authentic externally and winning a whole new generation of customers, and it will show in the products and services. Are bank employees empowered to make this change? Time will tell…

  • http://mx.thirdvisit.co.uk/ Mark Cross

    As UK banks cannot even allow a bitcoin business to open an account despite having the required gambling licence and KYC compliance in place, government encouragement to look after crypto businesses, HMRC taxation guidelines. Yada yada yada. For crypto Fintech businesses what might actually force internal change is a Banking regulator who as a entity of last resort can force any UK bank to accept a customer unless a Director has a past criminal conviction etc.

    Now that might springboard very quickly into massive loyalty management systems on the High Street. Shop by shop user defined currency but with exchange facilities.

    Hey only wild thoughts…

  • http://www.cmogle.com/blog cmogle

    Very interesting points raised throughout.
    I see a mismatch between metrics used by incumbent boards to assess performance now and those needed to secure sustainable futures.
    Existing KPIs typically serve to provide observable metrics for shareholders (and regulators).
    They are not particularly useful to indicate the ability of an incumbent bank to thrive in an uncertain future.
    Until boards are ready to mostly focus on, measure, and manage issues which affect their future, rather than the past models, we will see far too little improvement.
    In this environment, challengers will make (relatively) easy progress by obsessing on the things that customers experience.

  • pt8685

    Banks make decisions by committee because regulators (reacting to a fearful public) demand extreme levels of governance and risk control. Regulators kill innovation, not commitees.
    A similar, albeit mostly local, regulatory threat is now looming over Uber. It’s not just driven by competitors lobbying for help from the local governments. Safety advocates, labor unions, and other interests will put pressure on city leaders accross the country to begin regulating the Uber economy. We’re just a few Uber car wrecks away from requiring commercial licensing of Uber drivers.
    False certainty is not the fault of banks or other risk-averse industries. Its the fault of a fearful public and over-protective regulatory environment.

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  • http://www.sytaylor.net sytaylor

    Regulation is simply public opinion on a 24 month delay. How regulation is implemented is a separate issue though.

    Why does proving to the regulator that a bank is meeting its requirements require so many spreadsheets? Is it not within the gift of those subject to regulation to simply provide open transparent databases using modern technology? The issue is one of culture. Implementing the letter of the law rather than to it’s intention through dialogue with regulators.

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  • Robin De Villiers

    False certainty… I think you have a point, but I’m more cynical in my outlook.

    How come Apple could almost overnight put companies like Nokia out of business? Large corporations don’t innovate by choice. If they change the character of their industry to be more technology centric, then they will face competition from all the tech companies.

    Nokia etc created an industry that supposedly offered us a better phone every few years. It was getting very tired even by the stage Apple came along. The idea of the iPhone isn’t even really a revolution rather than an innovation. And a company like Nokia couldn’t put two and two together and adapt? They chose not to since it would require significant investment and risk by doing so. Instead, much like bridge players, I feel they looked over the table and implicitly agreed with the likes of samsung and blackberry, that the current system was good and decided not to rock the boat too much.

    Here’s an idea for a retail bank: Instead of merely being a bucket of money that everyone pays a bank charge for, instead a person’s bank can be an entire personal finance solution. At any point, they can ask for the standard array of accounting statements, but they can also commission third parties in a online market place to offer financial services. For example, someone might ask whether they are paying too much for gas and electricity. They could pay someone else to tell them who their best energy provider would be and even transfer their account over.

    Now that’s an idea I just had. It isn’t an act of genius. So I’m fairly confident that the CEOs of retail banks have had similar ideas and choose not to develop these ideas.

    Its the same with the TV and car manufacturing industries.