How banks can innovate in an age of Fintech disruption – CFTE Blog

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The sheer speed of technological innovation has upended the way companies operate from across multiple industries. The eruption of digital technologies and its supporting infrastructure has enabled the spectacular growth of technology giants such as Amazon, Facebook, Apple, and Google et al. Specifically, they have leveraged the power of the platform business model to cast a web so wide that it has fragmented traditional linear value chains and created new value from open ecosystems.
Companies founded on the concept of the platform have a fundamentally different business model from traditional service providers. For example, Airbnb is the largest hospitality provider in the world yet has no physical assets. This platform model not only allows new entrants to scale faster but also allows them to innovate faster by being more agile and responsive to market needs.

Finance disrupted

Enabler technologies like cloud computing, Big Data and APIs are providing entrepreneurs with the tools to create innovative financial products that conveniently address customer needs.
Thus, for incumbent financial institutions to remain competitive, they must seek to make innovation part of their DNA by being as agile as their digital counterparts. Agility can only be attained by transforming traditional business models and adapting organisational processes. This requires the integration of emerging technologies and fostering a culture of innovation to leverage these technologies.

Successful innovators make innovation part of their DNA

Indeed, some are already ahead of the curve. Financial institutions like JPMorgan and Goldman have adapted their business models by digitising multiple areas of their business. They have done so by integrating technologies such AI, robotic process automation (RPA) and Big Data
For example, in July, JPMorgan announced that it would start to utilise its own AI system, LOXM, to execute trades across its global equities algorithm business. And according to them, they are up to 2 years ahead of their competition. They started this innovation journey years ago through senior management buy-in. This has empowered them to pursue a number of innovation strategies, culminating in the deployment of LOXM.
But in many cases, such innovations are more the exception than the norm in finance, and most banks are just starting to adapt their organisations to new ways of innovating.

Different ways to innovate  

Large organisations, including banks and insurers, are waking up to the fact that they need to innovate. A report by PWC indicated innovation is the number one priority for CEOs. In the case of financial incumbents, there are multiple strategies that can be pursued in order to develop innovative products.

Short-term gains versus long term technological breakthroughs

Some innovation strategies produce more immediate results than others, such as the venture capital model. A VC approach enables incumbents to invest in or outright buy a Fintech startup, with a view to integrating the startups product or services with that of its own.
For example, earlier this year French banking giant BNP Paribas bought Fintech startup Compte-Nickel. The startup took the French banking industry by storm by offering customers looking to open a current account a seamless and super quick onboarding process – service characteristics indicative of Fintech startups and one many incumbents find difficult to replicate due to legacy infrastructure and processes.
As society switches to digital, customers will more and more expect user-friendly services and the unavoidable fact is in 5 to 10 years everything an incumbent does will be affected by digital.
In this context, it is not sustainable for incumbents to pursue tactical strategies that only address part of the problem. Instead, incumbents need to develop strategic solutions that aim to transform the organisation’s genetic makeup – the way it thinks and acts.

How do you develop a culture of innovation?

Essentially, the first step is to establish an innovation team. The team serves to seed the idea of innovation throughout the organisation. It connects with multiple business areas to develop relevant Fintech solutions in response to opportunities and challenges. This, in turn, can help to bring organisational wide awareness to innovation initiatives and lay the foundations for the next step.
If implemented with senior management buy-in, the innovation team can produce results, which in turn can drive employee engagement. In effect, innovation teams act as catalysts to drive product development. By concentrating skilled resources and following an agile work methodology, incumbents can take products to market faster by quickly testing and validating new ideas.
There is one major caveat though. The work of innovation teams can only be truly beneficial and sustainable if there is buy-in at all levels of the business. That’s why setting up an innovation team is only the first step.
As with most new strategic initiatives – especially when technology is involved – for effective cross-functional collaboration, communication is key. It is imperative that personnel have an understanding of the underlying reasons for the new initiative. And this is where education can help to deglaze any potential friction.

Beyond the four walls: open innovation

As noted earlier, a new operating paradigm has emerged, one that emphasises ecosystem and collaboration. Therefore, innovation can no longer be restricted to an organisations four walls, but instead, needs to happen in collaboration with third parties who can bring new perspectives and understanding.
In his book, Open Innovation: The New Imperative for Creating and Profiting from Technology, Henry Chesbrough highlights the fact that there are greater intellectual capabilities outside the company than within.
In therefore makes sense to leverage ideas and technology from external sources in conjunction with internal initiatives to develop well-rounded solutions.

A roadmap to open innovation already exists

 A successful road map to innovation already exists, but it is very different from the models of closed innovation that has dominated until now. Fortunately, CFTE is working to develop training and development programs with a number of innovation experts who have a wealth of experience in technological innovation.

The Experts

One of the world’s foremost experts in open innovation is Karim Lakhani. Karim, who sits on CFTE’s academic board, is the professor of Business Administration at Harvard Business School. He is also the founding director of Harvard Crowd Innovation Lab – a project aimed at utilising crowd innovation to help firms drive technological breakthroughs to organisational problems.
Karim’s work is on the leading edge of thinking on innovation. This has given him the opportunity to work in both the academic and industry side to design new models of innovation. These models have been based on integrating crowd-sourced ideas into internal innovation initiatives. It has opened the door for organisations to innovate in ways which wouldn’t have been possible without digital.
Therefore, in order to make innovation part of the organisations DNA, it is not enough to rely on linear methods of R&D to drive break-through innovation. Today’s financial incumbents must invert their innovation models so that they are agile enough to leverage the power of the crowd.

Incumbents embracing open innovation

An excellent example of a company embracing this methodology is Lloyds Banking Group. Lloyds launched the LBG Innovation Lab with the goal of working together with business divisions across the group to help test new product ideas. The Lab also acts as a focal point for driving a culture of innovation and as a means to connect with the global Fintech ecosystem to help nurture collaborative partnerships.
The Director of LBG’s Innovation Lab and Digital Centre of Excellence, Claire Calmejane, sits on CFTE’s advisory board.
CFTE also works with HSBC’s Global Head of Innovation (currently on sabbatical), Christophe Chazot. Christophe sits on CFTE’s academic board and has implemented HSBC’s innovation and strategic investment activities in order to help the banking giant innovate through internal and external development.

Closing remarks

In a world where today’s financial Institutions need to work in collaboration with third parties, CFTE aims to be their first point of call. CFTE mission is to train organisations and people to adopt a growth mindset and benefit from the power of open innovation and ecosystems.
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