Dug Campbell

Why Banks Can’t Innovate

It’s a common rule of thumb in business that the bigger the organisation, the harder it is to innovate. Unable to foresee, or respond quickly to the changes that inevitably occur, groupthink and decision by committee become the default modus operandi.

Nowhere is this more prevalent than in large, entrenched and heavily regulated industries and particularly those that, quite literally in many cases, have a licence to print money. Hence the rapid growth in FinTech.

I read an excellent post by Simon Taylor today which gives a valuable explanation of precisely why this happens. In short, these organisations suffer from the curse of over-thinking every possibility when there are simply too many variables for anyone to come up with a definitive forecast of what lies ahead.

With such analysis paralysis, decision making is slowed down to a speed that’s often ineffective competitively. They find themselves in a difficult position. There are so many increasingly complex areas within any financial business that operates at scale (such as cybersecurity or regulatory compliance) that the management is unable make any decisions without the input of a vast array of specialists in each area. As such expert findings are reported back, they are invariably challenged and subsequently diluted by those who invariably know less about the area in question.

The reality is that you can’t blaze a trail when you’re left with nothing but compromises to implement.

And this is exactly why VC’s are currently getting so excited about FinTech. If you’re looking for investments that have the potential to provide above-average returns, why not start by focusing on new businesses that will disrupt huge, slow incumbent businesses that are becoming increasingly ill-equipped to deal with the advance of both technology and societal change with each passing day. As Simon points out, Alibaba, Amazon, Tencent and Facebook all have banking licences. How can the old guard possibly defend themselves?

Perhaps one route is fpr them to simply accept how ill-equipped they are to pursue innovation. Instead they should adopt any of a number of alternative approaches to seeking out that elusive competitive advantage in the coming shakedown. Simon’s suggestions for strategies that could be adopted are as follows:-

  1. Buy innovative businesses – simply buy the result that you need (hence the current prevalence of financial support for incubators, accelerators etc.)
  2. Launch/acquire a Challenger Brand – create a popular standalone entity that is unburdened by the underwhelming public image of its creator.
  3. Adopt the mentality of a technology company – let’s be blunt: older people are less likely to understand how younger people want to access financial services than those of a younger demographic. And structured software development methods will drive innovation.
  4. Really understand how users view your product – rather than paying lip service to the principle, incorporate modern digital and product feedback loops.
  5. Let smaller, autonomous teams make decisions – a phrase likely to strike fear into the heart of any regulator.
  6. Fail more frequently – fail fast and learn from your mistakes.

I can’t imagine that anyone would argue that the sixth suggestion in particular must be the one that scares the pants off the banks. In such a heavily legislated sector such as banking (and – topic for another day – Law), there is a complete lack of understanding about the value of learning from failure. Not great. Risk aversion is poison to innovation.

There’s a clear overall message here. The reality is that just like the proverbial oil tanker, the current financial institutions lack both the culture and the capability to really turn at any useful speed in order to adapt to developments in the wider ecosystem. Given the fact that there will inevitably be another financial crisis (perhaps sooner rather than later), it’s hardly surprising that VC’s and entrepreneurs have identified (whether via Bitcoin or the wider FinTech movement in general) that time’s running out for us to drive innovation in this crucial area.

Unlike with consumer tech where innovation may be successful without being universally adopted (I love Twitter but how many of our parents can honestly say it’s changed their lives?), an improvement in the financial machinery of our economies is essential given the extent to which every single one is so increasingly intertwined across local, national and international locations.

Because, as JP Morgan’s Jamie Dimon was heard to say after the 2008 financial meltdown:

“My daughter called me from school one day and said, ‘Dad, what’s a financial crisis?’ And without trying to be funny, I said, ‘It’s something that happens every five to seven years.’



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