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Thursday, February 25, 2010

Heads of Banking Innovation are Now Bottoms

by Chris Skinner

Heads of Banking Innovation are Now BottomsOver the past year, most of the banks I deal with have dropped the word 'innovation' from their mantra. It's strange but true that the focus upon being innovative had been such a focal point during the 2000s and now it's all over.

To illustrate the point, the Top 10 American banks used the word innovation' an average 1.2 times per annual report in 2000, rising to over six times per report by 2007.

Heads of Innovation were popping up everywhere and innovation was the key to being different, attracting customers, growing business and increasing revenues.

Now the Heads of Innovation have all gone and Innovation is at the bottom of the banks 'to-do' lists... in other words, the Heads have become Bottoms.

Banks have realised that the last thing they want to be is innovative.

They want to be boring.

So innovation has disappeared over the parapets as fast as Tiger Wood's pants.

But that's not the end of the story.

There will still be some innovation in banks. The question will be: which ones?

Let's roll back to the beginning.

Innovation became a focus for banks because technology was moving at such a pace, and client demands with it, that any bank which was not seen to be innovative felt they would lose business.

Hence, as is the way with banks, they all appointed a head of innovation, used the word 'innovate' in all of their customer marketing materials, and appeared to be innovative by doing funky things like using employees to advertise the bank and giving away pens in branches.

That's all the token gestures of innovation.

Meanwhile, some banks were actually being innovative, but just weren't talking about it that way.

Banks such as Goldman Sachs who were creating incredibly innovative trading systems that ensure best price for their investors, which is why they get so much investment business, whilst creating huge market volatility.

Banks like JPMorgan Chase who invented the whole concept and trading of Credit Default Swaps. By being the first mover to invent and then trade these products, JPMorgan were not only the first into profits from such instruments but the first out of the losses created by them, as were Goldman Sachs.

Very clever.

Banks such as Wells Fargo meanwhile, have made it a clear focus to engage customers using social media, and see this as a differentiation in the customer experience. Rather than having a head of innovation in this area however, they instead invest in creating platforms to engage customers in remote social interactions via blogs, virtual worlds, YouTube, Facebook and Twitter.

That's innovation, but it is not seen as token innovation but core developments in customer engagement.

For the average bank however, innovation is not in their blood.

This is because innovation demands doing things in a different way, and banks don't like to be different. They want to be the same.

They don't want to break away from the crowd, but want to do things in robust, proven, low risk ways.

They don't want to be leaders but lemmings, all running in the same direction doing the same thing in a nice, safe, undifferentiated manner.

They cannot invest in something new and different, because it has to have a clear business model, financial analytics to support the investment, clear returns on investment and absolute management buy-in and commitment.

All of the above would never happen with something that is not proven, not clear, not justified, and unable to be supported by a strong financial business case.

Hence innovation lies in a heap at the bottom of the bank's corporate agenda.

So what are we really talking about today, when it comes to innovation in banking?

We are talking about banks that create cultures of being prudent risk avoiders, entrepreneurial innovators, excellent customer engagers, aggressive market makers or active acquisitors.

These cultures sit at opposites with each other and rarely would you find a bank that could be all in one.

For example, I wouldn't put Wells Fargo in the bracket of prudent risk avoider as they see themselves as an excellent customer engager; Goldman Sachs are an aggressive market maker, as are JPMorgan, but they probably wouldn't use the word prudent; Citi are now a prudent risk avoider having learned their lesson of being an active acquistor; and Lloyds TSB were always a prudent risk avoider until they became an active acquistor.

These cultures are driven from the man or woman at the helm - a fish sets its direction from the head but also begins to rot first from the head - and it is the man or woman in the driving seat that creates the innovation and risk culture of a bank, not the label 'innovation'.

That is why you can find banks that are hybrids of this model - such as Barclays where John Varley has created a retail and commercial banking operation that is prudent whist Bob Diamond runs an aggressive market making operation in BarCap.

There are other banks that demonstrate this mix, and it is purely a reflection of the management team.

For example, HSBC is a prudent risk avoider under Chairman Stephen Green and CEO Mike Geoghagan, but is also an entrepreneurial innovator thanks to Chief Technology and Services Officer Ken Harvey.

All in all, the lesson learnt for most banks is that innovation is not a function or label, but a culture and so it is gratifying to see innovation has been removed from the mantra of the banks as a label.

Now let's see which banks create innovative cultures over the next decade, and watch them grow.

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Chris SkinnerChris Skinner is Chairman of the Financial Services Club and regular commentator on banking at The Finanser.

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Anonymous Annalie Killian said...

I am happy to be one of those lone Directors of Innovation in a large Financial Services organisation in Australia whose priority for the past 7 years has been to build a culture of innovation. Its a slow process that requires enormous persistence and leadership patience as organisations are complex systems and change comes about much more by emergence than pulling levers. Whilst I wish it went faster, I know that this is the only sustainable model for healthy innovation thats not a fad.

1:26 PM  
Blogger Rocco said...

Banks can still innovate, they just need to adopt a broader view of innovation. 20 years ago in Pittsburgh, Citizens Bank put branches inside the popular Giant Eagle grocery stores. I've been a customer since, and that convenience is by far the main reason.

I've noticed recently that the bank tellers always have a suggestion for me while processing my transaction - "I notice you haven't invested in a CD... you could get a better rate on that account... would you like a financial advisor to call you... can I introduce you to our branch manager..." That is another type of innovation. Their innovation doesn't have to be limited to financial instruments.

11:40 AM  

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