Retail banking in many ways has been at the forefront of innovation with hole in the wall cash machines, telephone, then internet, then mobile banking, secure payments, we could go on. However they are also running the new appearance on some very old and not fit for purpose IT systems. How have they survived FTSE / S&P churn and will they survive going into the future?
If we look at the FTSE 100 companies we are left to ponder an interesting fact: only 24% of them survive since the FTSE was founded in 1984. This general deterioration in length of survival as a FTSE firm is also consistent with the findings for the S&P indexfrom the same year.
The cycles of a company’s lifespan fit very well with Joseph Schumpeter's works on the theories of entrepreneurship and innovation. The reason for this is that innovation is becoming more disruptive and faster. Disruptive technology leads to quicker and more seismic change where market presence and size are not enough to attract the modern consumer.
When disruptive approaches are combined with innovative thinking and practice, based on customer real time behaviour, then potentially devastating consequences will ensue for incumbents who are not innovating. This is factually accurate as we can see that the time that companies remain in the major trading indexes e.g. S&P, FTSE, reduces every 10 years as these companies fail to innovative, ignoring disruptive companies.
The definition of disruption is important for retail banks because their competition has been regulated and restricted - this is now changing. As of January this year in the UK alone there were 6 new entrants to this market, driven by innovationand new disruptive IT.
Retail banks have to face the truth that while their significant size and presence was an enormous barrier to entry, it no longer is. Good examples are Tesco Bank and Sainsbury’s Bank. Where in 1997 they were joint ventures with RBS, by 2008 and 2014 respectively they had become independent banks as wholly owned parts of their respective Group Companies.
Are banks facing up to this challenge is an important consideration. The pharmaceutical business did face a similar challenge where the global market was dominated by quite a number of larger players in the 1990’s and 2000’s. Since then the industry has undergone significant consolidation and now looks like many of the other major global business with a few key players dominating the major markets.
This industry throws out hundreds of innovative companies every year that are looking for new treatments for smaller niche medical conditions. These innovative treatments are then put through final development, licensing and marketing by the bigger commercial players. This is a very different scenario to the retail banking business where the approach tends to be disruptive e.g. supermarket banking, Google Wallet, PayPal. The dynamics of the market are not the same although some of the thinking that spurred the big pharmaceutical companies in their responses are relevant.
The retail banks are missing a trick by ignoring disruption and only concerning themselves with innovation. The World Retail Banking Report points out the clear lack of investment in middle and back office operations, where the majority of complaints come from. The lack of urgency to replace old legacy systems, the inability to think outside of the problem and create iterative and gradual solutions rather and hugely expensive, long to deliver “big bang” solutions, is what is allowing the disruptive companies to steal the retail banks traditional ground. There is a mass of “value” sat in these parts of the banking system that can be used to create the “one view of the customer” that are just being squandered.
The challenge is that the so called “new entrants” have none of this legacy. When confronted with new technology and approaches that enable a better customer experience they “do something” using lean and incubation approaches. Rather than using a heavy waterfall process with “everything and the kitchen sink” needing its time and place in the process of change with significant upfront planning and heavy duty financial budgeting and preparation.
Innovation has always been a balance between pull and push. Change is an evolving process even when it is disruptive. Often the disruptor will put several pieces of proven approaches together to create the disruption e.g. Apple, Amazon but it is rare that they invent something from nothing that is disruptive.
The retail banks need to adopt a radical approach to innovating out of their problems by producing disruption themselves, using their data. The current system does not work for them. They are not using the Big Data and Data Analytics to give real time customer insight and are woefully short on data management systems to give the “single customer view”.
Part of the solution to this is to be disruptive, radical and innovative. Very much like the pharmaceutical business they need to set up Innovation and Technology Hubs. While the pharamceutical industry did have some larger firms that seeded these, the retail banking industry is in the unique position to set these up themselves.
The reason why this is so important is illustrated by the graphic below.
Picture 2: Efficiency and Effectiveness: Why it is so hard to innovate (Image courtesy of Radtac)
Most companies are very good at making themselves more efficient at what they do and the vast majority of people focus on this. This is discussed in the full paper which can be found here What the retail banks need to do is to develop these Innovation and Technology Hubs so that they can achieve greater effectiveness.
Radtac’s experience in incubator approaches and development has been applied multiple times to clients in recent years including the credit card payments and leisure industries.
The fundamental commitments to achieve this are:
- remove the interference of the parent company
- appoint a person reporting directly to the CEO that covers this area of the business
- set up a separate business unit / location (physical separation encourages different thinking and physically removes interference)
- give free unfettered access to the current systems (this needs careful consideration when establishing but needs to be done)
- accept that this is going to challenge the traditional business model and provide stability and protection from the core group in the Bank that will see them as purely disrupting – which is why they are there of course have a simple way of generating ideas from within the company that can be incubated into this environment e.g. Innovate to Learn, Not Learn to Innovate, Idea Driven Organisation
- a mechanism that allows ideas to be fast tracked into the incubator and then tested and driven forward or stopped in rapid iterations of normally 12 weeks
- appropriate independent funding.
In conclusion retail banking across Europe is in an unique position to exploit what it knows and can access through Big Data and Analytics. It needs to invest to remove legacy and staid approaches to middle and back office development (these have been massively underinvested in and remain the source of most customer complaints – see report on World Retail Banking Report). It needs to have an iterative approach to development rather than a Big Bang.
The prioritisation of innovation needs to be taken seriously by every CEO and to understand what this means in terms of recruitment, mould breaking behaviour and market perception. Each bank needs to pursue a process of mergers and acquisitions that looks not just at market share but at the new routes to customer service and providing exceptional value. Remember that these disruptive developments will be disruptive, so having them as standalone is important.
What are your thoughts on this topic? I would like to hear if you’ve experienced any of these challenges, especially if you are working within the banking or finance sector. Just use the comments box below to share your thoughts with us.
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