Banking Fintech

Innovation – why banks are failing

Innovation why banks are failing. Image: Pexels
Written by Chris Skinner

Chris Skinner reviews an article about innovation in banking, and showcases the main highlights from The Disruption House report.

At one of my meetings last week, someone tells me to check out The Disruption House. What’s that, I ask? Go take a look, they say. So I did, and it’s fascinating.

The Disruption House is an advisory firm that includes Swift Innotribe friend Haydn Shaughnessy. The firm has produced a report as to why banks fail to grasp innovation. The report is the conclusion of a study of over 150 financial institutions, focusing on their commercial and wholesale arms, along with a few retail financial services companies and technology firms that now provide financial services. They focused on 65 for detailed study and interviewed 20 in order to uncover information about their innovation capabilities. Here are some of the key findings:

1. Innovation capability. Banks, particularly systemically important banks, have a low innovation capability when compared with companies overall (lagging by 10-15% in comparison with a generic all-companies index), but more importantly the top 10 global systemically important banks (G-SIBs) lag the index of all companies as measured by key capability indicators by 23%, and lag other banks by 10%.

2. Improvements in 2015. Banks have improved their innovation capabilities over the course of 2015, though arguably not significantly so. In particular, BNPP and Barclays have risen in the rankings and now make an appearance in the top 25. CitiGroup move into the top 10 at number eight (up from 11 in our 2014 review), just above BBVA. Those dropping out of the top 25 include Banco Santander and Société Générale, while RBS has made an entrance into the top 50.

3. Strategy. Banks have a strong strategic position. The average score for strategic innovation capability for a bank was 20.6, marginally above that of a combined group (at 20.4) that included banks and new entrants such as Alibaba and Tencent of China. This score implies that the capacity for banks to make strong strategic moves in the market is high, but isn’t being deployed. The main reason for this is leadership.

4. Leadership problems. Banks specifically lag the innovation index of all companies on leadership (based on a 2014 survey of innovative companies. The gap in leadership capability between the most capable and the tenth most capable G-SIB is over 75%, with leadership being particularly weak on the key issues surrounding adaptability, and so­ ware-centric decisions.

5. Too much orientation towards product innovation. While banks appear to be working hard to develop innovation capabilities, these are still targeted at product innovation more than process innovation, and are biased towards blue sky projects in blockchain (which has at least a 10-year development horizon, but which every major bank now has an involvement in) and fintech startups that are going to be difficult to integrate into bank process innovation. These two focal points are not likely to help ROE in the short-term.

6. Process model innovation. Banks in general are not deploying the tools that would help them organize, structure and accelerate change, nor are they drawing on their long experience in platforms. Many are suffering from gaps in intergenerational leadership dialogue, IT-business dialogue and a lack of coherence between strategy and innovation initiatives. These are all process issues calling for process model innovation.

7. The narrative of change and thought leadership. We found that leaders within banks have been extremely slow to develop a vision of what the banking industry might look like in 10 or 20 years hence. There’s little real thought leadership in the sense of the vision of the future, and a narrative to support people on the journey to a new industry.

At the end of the report, the guys also list the Top 10 financial institutions ranked by their innovation capability. You may be surprised by the list …

Top 10 most innovative financial institution by innovation capability (or KCI). Image: The Disruption House

You can download the full report here (PDF).

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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