Heads of Banking Innovation are Now Bottoms

by Chris Skinner

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

Innovation Perspectives - Desperate for Innovation

This is the fifth of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'What product or sector is in desperate need of innovation?'. Here is the next perspective in the series:

by Paul Hobcraft

When you look at the question posed it is clear to me the key word here is 'desperate'. What or whom is desperate for innovation? After such a seismic shift that has taken place in the recent period causing the global recession there is a really good case for many products, sectors or industries as all in need of fresh innovation but are they desperate? Most of us would immediately think of the automotive industry, the insurance sector, the banking and the home ownership sectors as 'primed' for desperate measures or more radical innovation thinking but after all the considerable bail-outs by public finance this seems not to have happened? So are they 'desperate' or just apathetic to making the changes felt necessary for returning to sustaining futures? Clearly time will tell on how the final consumer judges the 'revised' offerings from these sectors, in new products or services. Also time will tell if we see emerging different models to challenge existing players. It is then they become desperate because they don't seem to feel they are in that situation today, although many, including me, might disagree.

As Clayton Christensen outlines in his book "The Innovator's Dilemma", Harvard Business School Press, it is failure of companies to confront certain types of market and technological change, even what we thought were well run companies that surprise us when they do fail. When do they begin to fail, I think it is when they are not applicable to the future? Are we ready to ditch these sectors or the products, many bailed out, as we know them today? I'm not sure we are...yet.

We have lived through some exciting times for growth in the "Noughties", the first ten years of this century, and as we enter the "Teenies" we do not seem to be that well equipped as we would have liked to be, to tackle the wholesale changes society is expecting. Our past models are not sustaining us to take us forward. We have made this 'rod for our own backs' by producing thousands of competent managers, risk-adverse not risk-taking, with our business leaders continually look over their shoulders or in the rear view mirror who have become short term in most of their actions. Governments still take 'adversarial' positions. The end result of much of the activities of the past decade have led us to building a failure framework, one more sustaining old models and not ones that shift us truly up a gear or two into a new age of prosperity.

So I would argue we are in a desperate situation, but on a broader front than products and sectors alone. What I believe that need tackling through innovation is at a higher level, at the society level and this is where there is a truly 'desperate' need for fresh innovative thinking to sow the seeds of real, lasting change? Products and sector change comes as a result of this shift of focus to the higher level as it forms the 'call to action' framework.

I believe it is through social innovation we see the greatest desperation for change. We are faced with enormous challenges like aging populations, climate change, migration, social divides, chronic diseases, growing behavioral problems, diversity challenges in cities and countries, transitions into adulthood, addition, crime and punishment, learning disabilities, education inequality, conflicts and mutual resentment, rising long-term health related conditions, the effects of affluence and a greater search for happiness and community belonging. These are the truly 'desperate' areas of innovation need that should hold our attention.

It is in these fields that many of our existing models simply do not work well enough. We try to apply business models whereas we need to become more flexible, more imaginative and we need to think more deeply upon the factors that would allow innovation to be successful here.

These challenges have very different patterns of innovation; they are likely to have different motives, different mixes of commitment (voluntary, political and philanthropic) that call for even more complex relationships, different patterns of growth, often more resilient. Judging success will not be based on market share or scale but on a more contained need to overcome with imaginative solutions. We need to plan out different National Social Innovation solutions to tackle these immensely complex problems that only get worse without us turning our creative, innovative thinking upon. These are our pressing, more desperate, frontiers to tackle.

This social innovation space is the new frontier between civil society, government and business to find ways to solve common problems that require real innovation solutions. The positive news is that we are learning fast about the power of networks, different communication mediums and different processes to see some emerging solutions that must now shift from personal experimentation to community engagement ones . It is the power of combining the different players around these social issues and to find a new set of tools, new skills and new kinds of organizations that will occupy us in the years ahead.

Innovation is no more the 'nice to have' experiment it needs deeper understanding, a forward thinking for concept forming and then working them back to the issues on hand and applying novel solutions in many cases. By exploring the power of new combinations, using technology and having better social market understanding will give us a greater appreciation of the different aspects of innovation and how they can contribute so each player understands and does play their part, so we can begin to address these more pressing social innovation challenges that are certainly 'desperate' to resolve in the years ahead.

Perhaps as we enter the "Teenies" it is the right time; the time we start to grow up and understand what innovation can provide to us all so as to tackle those pressing social ills that need new thought and solutions.


You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'What product or sector is in desperate need of innovation?' by clicking the link in this sentence.

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Paul Hobcraft runs Agility Innovation, an advisory business that stimulates sound innovation practice, researches topics that relate to innovation for the future, as well as aligning innovation to organizations core capabilities.

70 Years of ATM Innovation

Still Struggling To Make Them Scam Proof

by Idris Mootee

It is all about the human factors.

I find that people are over-concerned with online security every time there is a piece of news about identity theft on TV. It is really not that bad and we need to accept the fact that it will not go away. Whatever security mechanism being put can fix one hole but usually create another hole. Let me take the example of the ATM, it is a very mature technology (probably about 30 years). Not many people know the first mechanical cash dispenser was developed and built by Luther George Simjian and installed in 1939 in New York City by the City Bank of New York, but removed after 6 months due to the lack of customer acceptance. No customer wanted to get money from a machine. It was a failed innovation.

I remember the one ATM card (Standard Chartered Bank) I used. Every time I used it the machine will eat the card and mail it back to me. I'm not sure what security design reason caused the behavior. So I can only use it once until they send it back in two days. It is designed to prevent fraud.

30 years later, there are still many ATM scams. Japan is still trying to figure out a way to stamp out ATM frauds. Chiba Bank has installed phone signal jammers at four unnamed ATMs at bank branches in the Tokyo region, I am not sure what exactly the criminals were able to convince people to do via mobile. I think there is too many cases criminals instruct victims to withdraw cash from the ATM through the cell phone. The often target the elderly, often telephoned by perpetrators claiming to be relatives and in need of some emergency funds. A new innovation is Aichi Bank is now ATMs will now no longer allow consumers to complete the transaction until they hang up. So you cannot be talking to your friends while getting your money.

How does it work? A metallic film around the ATM will block access if it detects mobile phone waves. Essentially ATMs will become out of range for mobiles. Not only might this prevent the criminals from relating their information, it also helps to provide a break for the consumer to think carefully about the transaction.

While others are jamming cell phones, BT Broadband is converting 2,500 ATM machines to serve as free Wi-Fi hotspots. And for some places like Tibet, people are blessed (literally) with money with their ATM withdrawals. A relatively new addition to Lhasa's old city urban infrastructure an ATM machine - including the red pasted duilian - effectively blessing every transaction that passes through this machine. It is a way to making money clean (legally). Here's another real customer unmet need.

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Idris Mootee is the CEO of idea couture, a strategic innovation and experience design firm. He is the author of four books, tens of published articles, and a frequent speaker at business conferences and executive retreats.

How a Blizzard Saved the ATM

by Stephen Shapiro

"Build it and they will come." We hear that mantra a lot. But with innovation, it is often more like, "Solve a pain and they will come." The ultimate success of the Automated Teller Machine (ATM) is a great example of this.

The other night I was having dinner with someone who in the mid-1970's worked with Citibank, the second largest bank at the time. He shared with me the story of the birth of the ATM, at least from his perspective.

In 1977, after investing hundreds of millions of dollars in ATM technology research and development, Citibank decided to install machines across all of New York City. But at first, they were not very popular. The technology was confusing to first-time users, the machines were not always accurate (they sometimes dispensed the wrong amount of money), and they were impersonal. I was told that customers who used ATM machines were so frustrated that many closed their accounts.

The ATM may never have been an instant hit if it weren't for a natural disaster.

January 1978 will always be remembered for a blizzard that dumped as much as four feet of snow in the Northeast. In New York City, nearly two feet of snow brought the city to a halt. Banks didn't open. Instead, people got their money from supermarkets. But most of those quickly ran out of money.

This created a massive 'pain'.

Where did people turn? The ATMs. It is estimated that during the storms, use of the machines increased by over 20%. Soon after, Citibank started running TV ads showing people trudging through the snow drifts in New York City. That's when the company introduced their wildly popular slogan, "The Citi Never Sleeps." This was the real birth of the automated teller machine.

I found an interesting Fortune article that corroborates his story. The article claims that by 1981, Citibank's market share of New York deposits had doubled. A lot of this growth could be attributed to the ATM.

This story illustrates an innovators dilemma. Brilliant innovations are not necessarily taken up by the masses. Some ideas just need time to incubate and gain acceptance. But can your business survive long enough to see the success? Too many ideas, like Webvan, could not endure the incubation period. Sometimes your innovations need a little boost.

As I have pointed out in previous blog entries, people take massive risks to eliminate their pains, but play is safe when it comes to adding convenience. ATMs were primarily about convenience. What did it take for them to become a success? A pain caused by a natural disaster.

Are your new ideas solving a pain? Or are they just a nice to have? If they are just a convenience, what can you do to create a pain - without having to rely on a natural disaster?

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Stephen Shapiro is the author of three books, a popular innovation speaker, and is the Chief Innovation Evangelist for Innocentive, the leader in Open Innovation.

When Innovation Fails

"Innovation can never be risk-free, but you can certainly make sure you look before you leap."

Ever since innovation became the buzzword du Jour, a lot of people seem to have lost their ability to tell smart ideas from stupid ones. Case in point: the financial "innovations" (read: stunningly stupid loan products) that kicked off the trillion-dollar economic meltdown mess we're currently in. The simplistic notion that "new equals good" has often been a recipe for grand-scale disaster, just as it was in the dotcom debacle at the turn of the millennium. And when the doo-doo inevitably hits the fan, it's all too easy to level the blame at innovation per se rather than admit to being a bonehead. Here's why many ideas that are labeled "innovations" are just plain stupidity.

Simply put, innovation goes wrong (sometimes big time) when an organization over-commits to an idea before validating the key assumptions on which it is based. Let's take the infamous sub-prime mortgage. The assumption here was that a jobless, homeless person who is just out of jail and doesn't even have a bank account can afford to make mortgage repayments of any description, let alone horrendously overpriced ones.

The idea of selling mortgages to poor people with bad credit was clearly "new" given that banks have traditionally offered 30-year, fixed-rate amortizing home loans to people who looked like they could actually pay the money back. But going after this risky, low-end market segment with a ripoff financial product wasn't exactly what C.K. Prahalad had in mind when he talked about "the fortune at the bottom of the pyramid." And it turns out - duh! - that this particular "financial innovation" wasn't a very smart one (to put it mildly), and even less smart when used as the cornerstone for a multitrillion dollar house-of-cards based on endless derivatives of derivatives.

It's precisely big boondoggles like this one that give innovation a bad name. In fact, columnist Paul Krugman wrote in the New York Times that "financial innovation" is a phase that "should, from now on, strike fear into investors' hearts." Yet should the financial services industry - or any industry for that matter - now decide to "throw the baby out with the bathwater" when it comes to innovation?

Absolutely not. It's worth remembering that over the last couple of decades, innovation has given us a string of success stories in financial services:

• Charles Schwab's online equity trading


• Commerce Bank's open-all-day, seven-days-a-week business model


• First Direct's branchless banking


• Grameen Bank's micro-credit lending concept


• PayPal's user-friendly, online-payment service


• Umpqua Bank's people-centered retail environments

The difference with these opportunities is that they were all based on very solid assumptions about the viability and sustainability of the business model; they were not built on proverbial sand. That's why these innovations have created significant new value and wealth, instead of destroying it.

Unfortunately, there are all too many cases where companies have overcommitted to an idea that wouldn't even pass the sanity test. These tend to be ideas where the customer benefit is unclear or unimportant to people, or where the technology is not yet up to the task, or where the market is just not there, or where the business model is so stupid that it's dead on arrival. Instead of first checking the validity of critical assumptions on which the idea is based, sometimes a company (or even a whole industry) decides to jump from 10,000 feet without a spare parachute, hoping against hope that the thing will somehow work.

Take Iridium, Motorola's failed satellite telephone venture, which was built on a fundamentally flawed assumption about the size of the target market. Basically, Motorola totally underestimated the speed at which cellular coverage would spread. Their premise was that there would be huge regional gaps in the global network - parts of the world that would have no mobile phone coverage for a long time to come. That would have made Iridium the perfect answer. It turned out quite quickly that those regions would be very few and far between (you would practically have to be an Arctic explorer to need an Iridium phone!), so the target market soon shrank to insignificance. This is something Motorola should have known better.

Or take Webvan, the "oh-so-dotcom" online grocery business that burned through a billion dollars and went belly-up. There was nothing fundamentally flawed about the idea of online grocery shopping, as a host of other retailers have since proven. Rather, Webvan's massive failure was based on a whole series of flawed and untested assumptions around the customer value proposition, the economic engine, the value of partnerships, and the product and service offering.

Business history is full of such examples: from Coca-cola's infamous "New Coke", to GM's all-electric EV-1 project (which cost a billion dollars and sold only 700 vehicles), to all those other empty dot-com business models in the late 1990s - like Pets.com - that quickly disappeared. The lesson from all these disasters is to look before you leap. A company should first reduce the uncertainty surrounding critical project assumptions before committing irreversible and non-recoverable resources to an idea. The greater the uncertainty surrounding these assumptions, the greater the risk associated with any new opportunity. Therefore, the focus of an innovation project should initially be on learning rather than earning. It should be on launching experiments to test whether a business model makes sense or not, or whether a new technology will work or not, or whether customers would value the new service, or what they would be willing to pay for it, or which product configuration would work best, or which distribution channels would be most effective, and so on.

Clearly, innovation can never be risk-free. But the process of validating or invalidating these critical project assumptions should stop you from ever completely misreading the basic economics of an opportunity. It will make sure that hubris never gets the better of humility.

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Rowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation.