Are banks innovating purely for short-term gain?

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That is the question causing consternation amongst financial institutions, with the managing director, products and marketing, of the Australia and New Zealand Banking Group (ANZ) Matt Boss going as far as to say to The Australian that it is the other industries that should be worried about being put out of business.

Not interested in disruption?

It all started with the statement made by Danny Gilligan, managing director of Reinventure Group, who was speaking at a FINSIA forum.

He said that there were two types of innovation, both having completely different motivations. The first type of innovation was one that ‘sustained’ whilst the other was innovation that ‘disrupted’.

Gilligan argued that traditional financial institutions have no interest in the latter because that sort of innovation would essentially “cannibalise” their business.

This statement was one of key topics in a recent piece of research by Accenture. The research presented two scenarios; the first is considers the banks as passive or impotent.

Caught in the headlights of regulation and cost reduction, the bank loses out to new players that provide more effective financial products and services attuned to the digital age.”

This scenario sees banks relegated to the back of the consumer’s mind to “commodity utilities”.

The second scenario, ‘Digitally Reimagined’, assumes the banks to be aggressive and embracing and adopting innovation in order to “surprise and delight customers”.

However, the report then goes on to say, “Banks in this category see themselves as having short term advantages in infrastructure and customer data, but no long term right to exist without converting this into services that solve emerging digital consumer frustrations.”

On the surface this appears to agree with Gilligan’s assertion – banks will continue to treat start-ups the way consumers treat iPhones – every six months they throw out the old one and replace it with shiny new ones.

However, there is a crucial piece of information that suggests an altogether different conclusion.

“No long term right to exist without converting this into services that solve emerging digital consumer frustrations.”

It’s the consumer, stupid

The Accenture report concludes that if a bank fails to translate those short term advantages into results that please customers, then people will struggle to justify that bank’s existence.

This conclusion is in line with what has been the general response from banks to Gilligan. Westpac chief Brian Hartzer has said that it is important for banks to not get “mesmerised” by innovation and obsessing with inventing “cool new stuff”, but rather remember that the consumer is at the heart of what they do.

“Technology is not the end itself. We are a service business, so it’s important to us to start with the customer,” he said.

Such a response is the clearest indicator of what is the real attitude of financial institutions. Rather than being focussed on short-term or long-term innovation, banks have taken a different route completely.

Foresight and reaction

The financial institutions have adopted a hybrid, hedging-all-bets approach – the approach of simultaneous foresight and reaction. In terms of foresight, they create, or partner with, accelerators and incubators to build-up startups they would have had to otherwise take up arms against. If some slip through the net, they have to quickly react and acquire them before the startup’s value skyrockets.

Last month Barclays opened up applications for the third class of its global accelerator programme. Visa Europe has its own innovation hub that is currently active in three European FinTech hotspots: London, Berlin and Tel Aviv.

Such an approach allows banks to do what Hartzer says in The Australian should be banks’ number one priority- that is focus on the customer.

“If we start thinking actually we’re a technology company or we become obsessed internally with just inventing cool new stuff, then we put at real risk the focus of what’s going to really drive value in the future.”

Ultimately, this sort of approach ultimately neither conclusively proves nor disproves Gilligan’s assertions. To some extent banks really are highly focussed on short-term innovations. However, that is not because they are afraid of being cannibalised by digital disruption, rather they do so because it allows them to plug holes in their services that have been exposed by innovative startups.

At the same time, banks play the long game and invest in and innovate technologies that they predict will be big – for example, Barclays becoming the first bank in the UK to work with Bitcoin technology, or the Dutch bank ING is becoming the first bank in Europe to offer hands-free banking.

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