Financial & Economic Blog

By Matt

For me, the word innovation brings to mind things like the iPhone, velcro, biofuels and defibrillators. Banking and trading stocks does not rank too high on this list.

Financial services, as an industry, is traditional and competitive around a couple key metrics like transactional costs, assets under management and rates of retention. While the insurance channel may be an extreme example, aversion to risk is the general rule and taking chances on new products or new approaches to services is generally not part of the culture. There are some large companies initiating innovative new programs, like ING, Citizen's Bank of Canada and BofA, but they are largely the exception.

A recent Boston Consulting Group/BusinessWeek survey on innovation in the financial services industry underscored the disconnect:

• Only 53% of respondents in the financial services industry said innovation is a priority, compared with 67% from all other industries.

• Also, 48% of banking executives said failing to innovate is an industry weakness, compared with 40% for all other industries. The bankers cited not moving quickly enough to change as one specific weakness.
• However, about 25% said lack of management support is a "major obstacle" to developing products and services, compared with just 18% of respondents from all other industries.
• Only 41% of financial executives said they believe their organizations are as innovative as competitors, versus 51% from other industries.
• Among bankers, 45% of respondents said their industry's "risk-averse culture" cramps creativity, compared with 37% from other industries.

Some banks, though, are innovating by drawing inspiration from other industries. Umpqua Bank, based in the Northwest, looked to leading edge companies in the hospitality and retail industries including Nordstoms, Victoria's Secret and Ritz-Carlton and then revamped their branches to focus on customer lifestyle and experience. By breaking the rules in their industry (and getting branded as revolutionaries), Umpqua Bank grew from 6 to 120 branches in just 11 years.

So what role is technology playing in innovation in the financial services industry. Is technology relegated to security and cost cutting solutions, or is it being used to enhance customer expereince and deliver more personalized services to a greater number of people? Are banks looking at adopting social networking features or tapping into network effects that happen on the web or are they building walls to keep this sort of behavior outside of their business model? What do consumer's really want (convenience and personalized service probably aren't too far down on the list) and how can technology deliver this?

Let's looks at what's happening in the banking industry:

Banks are facing a highly competitive environment with the following key challenges:

1. Inverted yield curve leading to reduced profitability
2. Intense competition for loans and deposits
3. Specialized business focus, which limits additional sources of revenue
4. Increased competition from non-banks

Banks can increase revenue and market share by capitalizing on the following trends:

1. Leveraging websites to create non-interest income
   Banks are making websites more of a delivery channel for products, services and solutions, since it is the first touch point for potential customers and the most utilized place for present customers
2. Improving their Online Customer Experience
   The convenience and personalization of online interactions are accelerating the movement away from personal contacts, making customers' online experience not only a key aspect of any retention strategy, but also a fundamental factor for long-term survival
3. Enhance on-boarding programs to retain current customers and expand product mix
   Engage customers around financial literacy by consistently delivering valuable content and help them identify their financial priorities and aspirations. Communicate customer goals to bank staff who can then better serve them.

* Trends are drawn from recent articles of the American Bankers Association publication Bank Marketing.

So what out-of-the-box kind of thinking are banks doing to address their unique challenges? The answer appears to be not much, unless you count follow-ons like blogging or MySpace pages and even then it's very few who have actually implemented these. It may be that innovation in the financial services industry has to come from outside, since companies probably don't have the stomach to throw out an established and profitable revenue generator for an untested and risky concept, even though that idea could propel them ahead of their competition. This gets back to the issue of a culture of innovation that rewards risk takers, which I would argue that startups and visionary companies like Apple and Toyota are inherently better suited to address.

A recent article in the NY Times talked about how Marriot has partnered with boutique hotelier Ian Schrager. When asked about the partnership, Bill Marriot said “We’ve partnered with Ian because he is unique, and we don’t have anyone who can do what he does.” The financial services indsutry may find itself in the same predicament as Mr. Marriott. Innovation is happening in the industry, it's just not being driven by any of the established leaders. Instead companies like Prosper (peer to peer lending), Wesabe (community and personal finance) and Zecco (free stock trades + a community of active traders) are leading the pack. If these companies are any indication of the future, the value is in the network of members/customers. The big question for financial services companies is: will they allow themselves to let their customers interact and cede some level of control.

With a company's online presence increasingly becoming their real presence as a majority of Gen X and Gen Y bank online, can financial services companies afford to defer technological innovations that improve customer experience or reach a key market? According to reserach by Javelin Strategy, 20% of US consumers read blogs, rising to 34% for affluent, tech-savvy ones. However, less than 1% of all financial institutions have their own blogs ( however, the objectives of a company blog should be taken into account as this post points out).

Just one more reason why financial services companies won't be sharing top billing space with the Toyota Prius anytime soon.