Author: Andrea Picaso
How to Embrace Innovation in Banking
In this period of economic change, while many banks are cutting spending on “discretionary” projects, it is important to remember that innovation is the linchpin that will help them survive and flourish in less favorable conditions.
The pandemic alerted traditional banks about the need to catch up with fintech platforms. In response, most banks have created powerful apps and websites to improve the user experience. Customers can now achieve most of their banking activities without a physical visit to the branch.
But is that enough to compete with modern fintech companies? And more importantly, are these new additions structurally impactful enough to bear the brunt of the next disruption?
“Smaller FinTech companies have rapid and low-cost access to these newer cloud-based technologies and are developing innovative, best-in-class solutions that address a number of the pain points that are costly for traditional banks to deal with and create friction in the customer’s digital experience.”
Source: PwC
Instead of facing challenges as they come, banks must stay ahead of the curve to stay competitive. In this article, we discuss the need for innovation and how you can ensure your bank stays at the forefront of innovation in banking.
The Need for Innovation in Banking
The need for innovation is driven by two key factors:
Customer Expectations are Becoming Customer Demands
The young generation of customers likes to stay informed about the latest tech. They are early adopters andincreasingly expectall businesses, especially banks, to offer them a convenient, highly integrated experience on whatever channel they engaging with.
Just as customers have grown accustomed to mobile banking, they are quickly becoming accustomed to receiving tailor made offers and incentives based on the payment card they are using or the retailers they frequent.
Over time, these innovations will become table stakes. Traditional banks that fail to catch up will struggle for market share.
In December 2022, the Innovation in Retail Banking Report surveyed large national and regional banks (33%), credit unions (17%), and community & regional banks (24%) to identify trends in banking. As the chart above reveals, offerings including checking accounts, lending and investments, which can be foundational growth areas for banks, have seen little innovation since the pandemic (2020-2021).
Competition
Your competitors will make a run to implement the latest technologies because it’s an opportunity to rope in more customers. If you fail to keep up, your customers will take their business elsewhere.
Your competition might just be some of the largest banks in the world. It’s hard to compete unless you have the right team to support your innovation.
Citigroup hired 8,000 tech workers in 2023, and it already had 30,000 software engineers employed.
So, why is America’s fourth-largest bank going all-in on IT spending?
A GOBankingRates survey found that 85% of people prefer banking online with a mobile app. And Citi wanted to improve customers’ online banking experiences by investing heavily in a top-notch IT team.
Improving online experiences is only the tip of the iceberg. Many large banks and neobanks are already using technologies like AI and machine learning (ML) to develop innovative use cases for their customers.
Overcoming the Fear of Innovation
Employees maintain the status quo when leaders don’t encourage innovation and risk-taking. Leaders should appreciate innovative ideas to develop a culture that fosters innovation.
Here’s how you can help employees overcome the fear of innovation:
Embrace Creative Destruction
Banks are often reluctant to introduce products or services that can destroy an existing, profitable line of business.
This creates an opportunity for a competitor to enter the market with a new idea and disrupt it.
As Schumpeter’s Theory of Creative Destruction explains, capitalism evolves and new, innovative products continue to drive old products obsolete.
For example, companies like Apple and Samsung continue to introduce innovative products like foldable phones and flip phones. These products can impact the sales of existing products that sell well. But if they don’t introduce these products, their competitors will.
Instead of giving in to fear, consider extensive research and testing the product or service to minimize risk.
Take Calculated Risks
Build a culture that encourages calculated risk-taking. If you punish failures, why will anyone share more creative ideas with you?
“Management can state their encouragement for innovation, but it is the demonstration of acceptance for radical innovation that shows whether the support is truly there. People will only want to attempt something risky when there is little threat of significant negative consequences to their work or their career from a failure.”
Source: Journal of Strategic Leadership
Sure, risk-taking isn’t exactly encouraged in banking. But it’s necessary in the context of innovation.
Leaders must improve their response to failure. Instead of punishing failures, consider building a framework that helps creative team members navigate failures when innovating.
For example, encourage your team to identify barriers that led to failure. Help them create an action plan to improve in the next iteration. Provide them with the guidance and resources needed for research.
Encouraging calculated risks and providing a framework to navigate failure helps reduce the overall risk to the organization without stifling creativity or innovation.
Building a Culture of Innovation
Implementing new technologies successfully is a half-won battle. Sustaining the innovative spirit requires a culture that fosters innovation.
“Getting the technology implemented successfully is table stakes. Then you need to energize it with the right culture to drive innovation and transformation.”
Source: Accenture
Research by Jay Rao and Joseph Weintraub published in the MIT Sloan Management Review states that innovative culture requires six building blocks:
- Values: A company’s values are reflected in leaders’ actions. Values that promote entrepreneurship, creativity, and continuous learning breed innovation.
- Behaviors: The behavior of employees and leaders determines the success of innovation. An example of the behavior of leaders is how they act when it’s time to discontinue a product to make room for a new, innovative product. On the other hand, employees must proactively seek resolutions for technical difficulties and make the most of a limited budget.
- Climate: Create a work environment where innovative ideas are rewarded with enthusiasm. Encourage people to take on challenges and risks and promote independent thinking to create an atmosphere conducive to innovation.
- Resources: Innovation requires more than just funding. You need resources like technology and domain experts to experiment with or execute innovative ideas.
- Processes: Banks need a well-defined process to bring an innovative concept to fruition. The process should include idea evaluation, the method for prioritizing ideas in the pipeline, and funding sources.
- Success: Success is critical to funding future innovations. You can capture the success of innovation at three levels (external, enterprise, and personal). External success is especially important because it shows how well your innovation paid off and earns the company recognition as being innovative.
If you want to build a culture of innovation, make sure you have at least two to three of these building blocks solidly in place.
Enhancing the Customer Experience Through Innovation
Customer experience is one of the most critical areas that innovation in banking can improve. Here are a few examples of how:
Omnichannel Banking
Omnichannel banking isn’t new. Your bank probably already allows customers to switch seamlessly between self-service, assisted, and full-service banking.
But there’s a major gap in terms of personalization between self-service and assisted banking.
Using AI to improve personal engagement can help digital and in-person banking channels work together.
It allows the banker to step in only when necessary, allowing the customer to self-serve otherwise.
For example, you can suggest debt investments to a customer who has been consistently investing in equities to rebalance their portfolio.
If your customer thinks rebalancing is a good idea, they’ll consider it or reach out for more advice.
Banking in the Metaverse
Currently, the best you can do is use AI to understand the customer’s behavior and push personalized suggestions.
However, according to Deloitte, bank branches remain the preferred method of banking for complex transactions like mortgages and wealth management across economies.
That’s a gap the metaverse can bridge.
Banking in the metaverse feels like a distant dream. But banks like J.P. Morgan are already investing in the metaverse.
The reason? The metaverse opens plenty of doors to provide personalized and immersive customer experiences.
Picture this: A customer wants to invest a substantial amount and needs advice.
Do you think he’ll want to make a decision over the phone or in just a single visit? Probably not.
The metaverse solves two problems here.
First, the customer can meet a virtual assistant or a bank representative’s avatar in the metaverse, just like in real life. Second, the customer can arrange multiple meetings without having to waste time physically traveling to the branch.
Open Banking
Open banking is a system that allows banks to access data from third-party financial services via open banking APIs (application programming interfaces).
Accessing third-party financial data offers plenty of opportunities for innovation. For example, you can partner with a fintech company to offer an innovative solution that you’ve created.
You can continue focusing on innovation while the fintech manages your innovative banking solutions.
Open banking allows you to provide BaaS (banking-as-a-service) to third-party financial services. You can allow them to connect to your database and charge a fee. The third party can use the data to offer more value to customers.
Also Read: How Blanc Labs and Flinks and overhauled mortgage application for EQ Bank
Regulatory and Security Considerations
Regulatory and security considerations are critical to ensuring you don’t end up in legal hot water or end up losing thousands of dollars (and your reputation) to scams.
Regulatory Considerations
Regulators want to encourage innovation while mitigating risks.
For example, central banks around the world have started to accept the idea of digital currencies. But so far, most cryptocurrencies have shown themselves to be poor stores of value that are often used for illicit purposes.
The key here is to work with the regulators to find common ground where digital currencies have a more stable value.
“Regulators also play a critical role in shaping the context in which banks—both digital and traditional—execute their business plans. For example, with a regulatory framework that enables fully digital onboarding and operations, banks may be better able to reduce the costs of onboarding new customers. Or, in a market where the central bank puts in place mechanisms to support data flow, simplify credit scoring, and encourage open banking through common API standards, banks may find it easier to focus on data access to support their risk-management activities.”
Involve people within your institution who know what the regulations say. When working on innovative solutions, use these insights.
Speak to regulators and compliance officers to understand the potential regulatory roadblocks you might face as you bring your innovative solution to market.
Instead of viewing regulators as a barrier, make them assets. Seek their guidance through the process of innovating products that comply with applicable regulations.
Security Considerations
Hasty digital transformation can leave you vulnerable to security risks.
For example, as open banking becomes more popular, the number of third-party providers accessing a bank’s system will increase. There’s an obvious risk of unauthorized access to customer data and fraud.
Banks must standardize their security architecture and create a gateway for API call pre-validation.
PSD2 security requirements can adversely impact the customer experience, but RTS (Regulatory Technical Standards) provide the alternative of using behavioral biometrics.
Behavioral biometrics enable banks to identify potentially fraudulent transactions before they’re executed. According to a BioCatch case study, banks were able to flag 312 fraud attempts within a month, preventing over $300,000 in losses.
Collaboration with Fintechs
Collaborating with fintechs allows banks to play to their strengths and tap into the capabilities of fintech startups.
The Open Banking and Embedded Finance report states that companies are partnering with third-party providers to deploy advanced technologies.
Here are some critical areas where banks rely on third-party relationships:
According to the Innovation in Retail Banking 2021 report, banks specifically need innovative solutions for digital account opening, cloud deployment, open banking, and the speed of deployment of these solutions.
Here’s a quick overview of the level of partnership banks had with third-party providers in key areas as of December 2021:
Bigger banks might consider acquiring a fintech company instead of collaborating with them. Acquisitions allow banks to leapfrog into the future with innovative solutions. However, if an acquisition doesn’t seem viable, collaboration is a smart move.
Innovate with Blanc Labs
Blanc Labs helps banks, credit unions, and Fintech companies automate processes and implement cutting-edge solutions powered by technologies like RPA, AI, and ML.
Banks are looking to partner with third parties to implement advanced technologies — the types of technologies we have extensive experience with.
If you’re looking to fast-track your journey of innovation in banking, we can help.
Book a discovery call to learn more about how we can help you implement the latest technologies for innovative banking solutions.