In my previous article, Banks Can Build On Strengths Within – Know Yourself, I wrote about the need for the established retail banks to focus on customers, technology and data, building on their strengths, to maintain competitive advantage. In this article I discuss how, in the face of a rapidly changing environment, banks must acquire deep intelligence and insight of disruptive technologies, and new business models, to adapt before it’s too late.
Change is the new normal with a growing list of technology companies disrupting. Others are, at least, building their potential to disrupt industries by changing or introducing new business models. Gartner added 16 new technologies to the Hype Cycle last year. In recent research by Accenture, 86 percent of surveyed executives anticipate the pace of technology change will increase rapidly, or at an unprecedented rate in their industry over the next three years.
The FCA is clear that innovation should be a normal and core discipline of banks.
The government’s vision is for UK financial services to be the most competitive and innovative in the world. The FCA is encouraging innovation with its own initiatives including Project Innovate and the regulatory Sandbox.
Expedient change is the catalyst for businesses to look beyond their own world. It helps them to move out of their comfort zones to observe, rethink and transform their business models, systems and culture. But innovation is difficult for well-established companies; they are good at knowing their market, staying close to their customers, and developing existing technology. Disruptive technology does not fit naturally into this model, often being raw and unproven and with limited appeal. (Ch.8, Afuah, A.)
According to past research from Capgemini the opportunity is clear that those companies investing in digital and transformation management are more profitable. Not only have the large tech companies established thriving digital cultures, but they are also early adopters in other industries showing the way ahead.
No one knows exactly where valuable innovations will emerge; systems and parameters are required to capture the opportunities and threats. The good news is that established banks have already responded to this critical challenge by investing in their own innovation systems. These are strategic initiatives to develop a sustainable innovation capability rather than short term or one off investments.
Three must-have examples of new best practice are:
1. Investment in start-ups;
2. Innovation labs; and
3. Innovation networks.
1. Investment in startups
$9.4bn was invested globally in fintech companies in Q2 in 2016. Startups are unencumbered by legacy systems and structures which can otherwise limit digital developments. The bank’s aim in this type of investment is simple; to have a board seat but not too much control that might otherwise “choke” the business.
Santander’s investment arm InnoVentures launched in 2014 with a mandate to invest $100 million in up to three years in the fintech sector and identify technology that could be used for its own customers. Investments have covered payments, alternative lending and digital delivery of financial service.
HSBC set aside $200 million for investment in fintech in 2014 and has backed startups like Danish trade finance company Tradeshift. Meanwhile Spanish bank BBVA invested £45m in Atom Bank in 2015, taking a 29.5% stake.
2. Innovation labs
Many banks have been opening their own labs in recent years. These are buildings or departments working on prototypes and ideas to create new revenue streams or support existing ones. In many cases, banks have gone on to open labs in multiple locations reflecting different markets and technology hubs.
The focus is on creativity and sharing ideas; tapping into, testing and applying new technology, often surrounded by other startups to foster the innovation culture.
RBS launched Open Experience in 2016 to “innovative new technologies for the bank and its customers”. They have more recently teamed up with US firm RocketSpace to offer a London campus for high-growth tech start-ups. Rise is Barclays’ open innovation programme. Hubs provide a working environment, event spaces, and meeting rooms for start-ups in the fintech sector. Deutsche Bank has opened innovation labs in London, Berlin and Silicon Valley. HSBC has opened a fintech innovation lab in Singapore that will focus on developing digital and mobile banking services.HSBC has also been mentoring startups in London, Hong Kong and Sydney.
3. Innovation networks
Whilst creating new ideas, products, services or business models help from others will sometimes be needed. Some partner with tech giants Google, IBM, Facebook,and Microsoft. Others build relationships with academic institutions and commercial organisations like Gartner and Continuum. These affiliations bring together diverse skills, expertise and personalities to provide further inputs for innovation.
In 2016 Santander was the first British bank to partner with a crowd funding site to fund social enterprises. This provides Santander access to new technology, getting them closer to the crowd funding sector.
LBG has recently worked in partnership with the Advanced Skills Institute (ASI) and Google on data analytics; which they suggest puts them ahead of their peers. Atom bank is working with Durham University and the UK government on a research project to develop a new model for retail banking.
RBS has technology scouting networks in Silicon Valley, Israel, London and Edinburgh. This scouting network around the world acts “just like a football club looking for a hot new prospect that can take it to the next level”.
You will see that being a stargazer and adopter is critical in this new era of change where disruptive innovation is all around us. It requires the development of ecosystems to keep pace with change. The established banks are doing just this. It’s still early days and the long term success remains to be seen but with the stakes so high no one can afford to be left behind.
In my next article I will discuss how in the new era of change, banks must collaborate in a whole new way with customers, competitors, and suppliers to create more value. Shared goals, bound in trust and being customer focussed can be advantageous for all!
Afuah, A. (2009). Strategic Innovation: New Game Strategies for Competitive Advantage