What would Amazon look like if it were run by a banker?
First, you’d have to go to an Amazon branch to buy a novel. When you asked for a novel, the teller would tell you that you weren’t signed up for any novels. When you asked to buy one, they’d tell you that you had to go over to the fiction department.
This critique comes from JP Nicols, formerly the chief private banking officer at U.S. Bancorp, now a management consultant. He was up at midnight in Hong Kong recently after a business meeting, Skyping and talking about innovation in banking, a passionate topic for him.
“The world is moving faster and faster, and the banking industry is not moving that fast,’’ says Nicols, the chief operating officer of Menlo Park, California-based Innosect. When bankers tell him that they are “fast followers” when it comes to technology, he tells them, “You’re only half right. There is nothing fast about what you’re doing.”
It’s a biting retort for an industry increasingly attuned to the threats and opportunities afforded by financial technology companies, most of them nonbanks. The giants, such as Apple, Facebook and Google, along with startups such as online lenders and peer-to-peer payment processors, may not make banks irrelevant, but they may certainly put many of them out of business. Some banks are realizing that they have to change to keep up, and are trying to shift their organizational structure and culture to become more innovative, and more focused on what customers want and expect in an increasingly digital age.
Some of the biggest banks have introduced innovation labs in the last few years to experiment and develop software programs and solutions that benefit customers. Some banks are buying tech startups, or investing in them. Banco Bilbao Vizcaya Argentaria Group(BBVA), possibly the most innovative big bank doing business in the United States, is revamping its entire organizational structure to get rid of silos inside the bank that create friction for customers. U.S. Bancorp has 25 people working in an innovation lab in Minneapolis experimenting with new ideas and technologies, and working closely with the bank’s management team to bring new products to fruition. The biggest banks such as BBVA and U.S. Bank obviously have the money to invest, but some smaller banks are trying to get into the game as well. For example, a mutual with less than $10 billion in assets near Boston is spending 1 percent of revenues, or $4 million this year, on research and development with the intent of spinning off technology-related companies for profit. They are all trying to make their banks more innovative, and in the end, keep themselves in business.
But what is innovation, and why does it matter? There is no one definition of innovation. For Nicols, it means putting new ideas into action that move the organization forward. It may mean coming up with a completely new business model, or introducing a product or service that no one has tried before. It may mean solving a problem in a completely new way. Banks are used to identifying, monitoring and mitigating risks, more so than they are adept at innovating. But an argument gaining increasing weight is the notion that banks really are technology companies and need to think more like a technology company. Terms such as “disruptive innovation,” popularized by Harvard Business School Professor Clayton Christensen, have become mainstream, and they portray companies as vulnerable to lower-margin startups with innovative business models that begin taking market share at the bottom of the market and eventually displace established competitors.
Companies such as Amazon don’t worry about “disrupting” themselves, as Amazon did when it introduced its e-book product, the Kindle, even though it would cannibalize its existing print book business. The idea is that companies have to focus on what customers want and expect, not the business’ legacy systems and products.
Investors outside banking are so excited about “disrupters” stealing market share from banks and other financial companies that global investment in financial technology startups jumped 201 percent between 2013 and 2014 to more than $12 billion, across 730 deals, according to New York-based data research firm CB Insights.
Banks have been busy making sure they meet regulatory guidelines and laws, says Somesh Khanna, a senior banking partner at McKinsey & Co. “Meanwhile, their customers’ preferences have changed dramatically, and nonbanks are offering very simple solutions.” There are payment processors who are essentially money transmitters and there are tech companies offering loans, and regulators may eventually catch up to them in the same way they already regulate banks. But according to Kenny Smith, vice chairman and U.S. banking and securities leader at consulting firm Deloitte, the nonbanks will adapt to regulations, and it won’t be as difficult for them because they are more niche-oriented than the banks are. Banks are trying to react by investing in startups and creating innovation labs. They are collaborating in many cases with the “disrupters,” such as online lender The Lending Club and Apple, in an effort not to get left behind. Banks are trying to adjust to the new environment by becoming more innovative, giving people the title “chief innovation officer,” and hiring from tech companies such as Yahoo, Amazon or Google.
Spanish-based BBVA purchased a design firm and a variety of startups, including online banking services provider Simple, whose founders promised it was nothing like a bank. BBVA Ventures makes small investments in startups and introduces them to BBVA management across the globe. The company’s commitment to innovation really comes from the top. Earlier this year, the BBVA board announced it had reorganized to focus on technology in the company, and appointed D. Carlos Torres Vila as president and chief operating officer, a man who had been global head of digital banking and has an electrical engineering degree from the Massachusetts Institute of Technology.
“You’ve got enough bankers in banking. We don’t need more bankers,’’ says Brett King, the author of the books Bank 2.0 and Bank 3.0, and the founder of Moven, a mobile phone application that allows you to track your savings and offers you credit for purchases. “BBVA will be more tech than banking,’’ King says. “[Chairman and CEO Francisco Gonzales] realizes that. They are trying different models. They aren’t married to one way.” Just like a tech company, “they are trying different things and seeing what works.”
Already, the company had tinkered with its organizational structure to get rid of banking silos between departments, silos that didn’t really benefit customers. Jeff Dennes, the chief digital banking officer for BBVA Compass Bancshares Inc., the U.S.-based bank, is charged with digital integration of the bank’s products and services, including online banking, mobile banking, payments, a good portion of information technology and data analytics. He says the bank is “totally committed to investing in digital capabilities” that allow clients to have easier access to money, along with real time advice that helps them make sound decisions with their money.
The $85.5 billion asset BBVA Compass has a development center that employs 500 people in Birmingham, Alabama, according to Dennes. The company renovated an existing operations center into an 80,000-square-feet, open-floor office space that employs teams of five to nine people. They work in two week sprints to develop working software, compared to a more typical timeframe of six to nine months for software development. The compressed time frame creates a different environment. “The energy is off the charts compared to any other area of the bank,’’ Dennes says. “Every day, developers have to stand up and say what they were going to do yesterday, whether they got it done, and what they intend to do that day. It has a way of focusing you,’’ he says. But innovation is also transforming the rest of the bank as well. Even risk management needs to get creative, Dennes says. The vision of creating a digital bank “requires everyone to think differently,’’ he says. “If that was just one guy saying it, it would be tough. But you have senior leadership talking about it, and people tend to get on board.”
U.S. Bancorp’s approach is slightly different, but it has spent a long time making its bank forward-thinking. It has had an innovation group for more than eight years, with the original intent to look at long-term trends in the payments business. The bank realized early on that innovation was happening, and competition was coming from nonbank competitors, says Dominic Venturo, executive vice president and chief innovation officer for the Minneapolis-based bank with $403 billion in assets.
“It’s difficult to run a business as well as our business leaders do today, and at the same time focus on [the] long term and try to decide what’s important,’’ he says.
Nicols, who worked at U.S. Bancorp, says CEO Richard Davis decided shortly after becoming CEO in 2006 that he needed to make the bank more innovative. “Richard drew a line in the sand and said, ‘We’re going to be an innovative bank.’’’ Davis decided to invest heavily in the payments business. As a result, U.S. Bancorp was one of the first to introduce mobile photo bill pay, in early 2013. It signed up early for Apple Pay and Android Pay, Google’s rival to Apple’s phone-based payments service. U.S. Bancorp is consistently recognized as a leader in mobile banking for the variety of services it provides. The innovation lab has experimented with Google Glass and augmented reality, the concept that reality can be enhanced by computer inputs, such as images or information displayed in your glasses. Two years ago, Venturo published a paper on the privacy implications of the Internet of Things, which involves connecting everything mechanical, including such things as cars, TVs and refrigerators, to the Internet. The bank created a mobile shopping app called Peri that partners, such as retailers, could use to help people shop and compare prices using their smartphones.
But the innovation team isn’t cut off from the bank’s goals. Twenty-five people work on the team in the bank’s headquarters offices. Staff meets regularly with the heads of the four major business groups: wholesale and commercial banking, commercial real estate, trust and wealth management, and payments and consumer banking, which tell the innovation team what their problems are and their customers’ problems. The innovation team then works on solving them collaboratively with the bank’s management team. The team also brings in customers to the lab to collaboratively develop software that meets their needs.
Unlike BBVA, the bank doesn’t have a venture capital arm, and although it does partner with other companies or hire vendors to jointly create solutions, it doesn’t tend to invest in them or buy a lot of startups. Venturo himself has a banking background, having worked 15 years for U.S. Bancorp. Before that, he was with Bank of America Corp., and has worked stints in payments and as a commercial banker. He tends to promote from within U.S. Bancorp.
“One of the misconceptions about innovation is you have to go bring in a bunch of disrupters who don’t know anything about your business to think differently, but I think it’s more helpful to bring in deep domain expertise and give them permission to think differently,’’ Venturo says. “They are more likely to come up with an idea you can actually do.”
Community and regional banks may have a tough time affording an innovation lab, whether they come from in-house or the technology industry. Many of them already struggle with attracting and retaining talented people, and will largely have to rely on vendors to provide many of their technological platforms and services. Just because small banks often are focused on commercial clients, that doesn’t mean they don’t need to stay relevant to those commercial customers. “Those who want to be innovative have to have a plan in place that is executable, to make sure their technology presence is relevant and stays relevant, even if the business line focus is commercial,’’ says Ryan Rackley, a director at Cornerstone Advisors in Scottsdale, Arizona. Moven’s King advises banks to be very careful about picking a core platform vendor, and any technology vendors that they use on top of that. Since they are so dependent on vendors, they must choose wisely.
But a few banks are going beyond picking vendors and are experimenting with in-house innovation as well. After a merger in 2007, Eastern Bank Corp. president Bob Rivers noticed a huge drop-off in branch traffic, which has continued to this day. (The mutual’s busiest branch did 60,000 transactions per month back then, and it’s now half of that.) Rivers began to think, ”The world is changing radically, and if we don’t do something quickly, we are going to be left behind.”
With the support of management and the board, Rivers began networking around Cambridge, near the bank’s headquarters, where there was plenty of technology talent surrounding the Massachusetts Institute of Technology. “We knew we needed to make investments in new technology,’’ Rivers says. Rivers ended up recruiting the former executives of PerkStreet Financial, an online financial services provider with a rewards checking account tailored to each individual’s spending habits. The business ceased to operate after it failed to raise new capital. One of Eastern Bank’s recruits was Dan O’Malley, the enthusiastic, nobody-is-doing-what-we’re-doing co-founder of PerkStreet and now, chief digital officer at Eastern Bank with a team of about 20 to 25 innovators.
About a year ago, the bank put O’Malley and his team in charge of the customer call center, gave them access to a mass of data on the bank’s customers, and let them “build cool stuff, buy cool stuff and change our culture,” according to Rivers. The team’s goal is to spin off technology companies that make the bank a profit. Rivers said Eastern Bank’s directors didn’t need to be sold on the idea. “I would have to say, the board was more enthusiastic about it than management was here, by and large,’’ he says. Last year, when two members reached the retirement age of 70, the board brought in new expertise, including Joe Chung, a venture capitalist, and Bari Harlam, an executive vice president at BJ’s Wholesale Club in charge of membership, marketing and analytics. With such support from the top, the bank already has rolled out voice recognition software for the call center, so customers don’t have to answer a series of maddening questions to verify their identities. “The amount of friction we took out was huge,’’ O’Malley says.
Not all banks would have shareholders supporting long-term investments in research and development. But as a mutual, Eastern Bank doesn’t have the same pressure to meet quarterly earnings estimates that public banks have, and has more ability to invest, O’Malley says. Recruiting talent is always an issue, but O’Malley thinks the bank does have a leg up compared to a startup. The bank has a trove of data that can be harnessed to improve services and build new products. It already has a huge number of customers. It’s not trying to build capital and customers. It already has them. O’Malley is bringing in developers who have never worked for a bank. The head of the data center is an MIT-trained scientist who has been published in Science and Nature magazines. “You need people who know how to build stuff,’’ O’Malley says.
He feels strongly that banks need to adapt or they will lose business. “If we don’t do this right, we are going to lose chunks of our business. There are online lenders who will lend to small businesses within a day. Our traditional process takes a month, and they’re doing it in a day.” He thinks for many banks in the country, the situation is dire.
Judd Caplain, a banking advisory industry leader for the consulting firm KPMG, agrees that banks that don’t make changes will lose business. “As long as banks reinvent themselves, they will continue to exist,’’ he says. “Those that do not risk becoming dinosaurs.” Of course, banks have heard that before. The Internet was supposed to mean the death of branches, and yet they are still a powerful new customer acquisition tool, and a place to solidify a presence in the community. But Brett King has noticed a change. Bankers two years ago downplayed his predictions about a revolution in mobile banking, and countered that the Internet didn’t kill branches. Now, he doesn’t hear that anymore. “Banks are saying, ‘You’re right, it is changing, and we’ve got to do something now,’’’ he says. “It’s real this time.”