3 Principles to Promote a Bank Culture of Innovation

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Many bank leaders I talk to are very aware of the importance of innovation in the face of a fast-paced, changing environment. Yet, they have trouble promoting change and adopting more modern and efficient processes and technology — contributing to the struggle of making their bank more innovative. While every institution is slightly different, I wanted to share a few practical approaches to achieve internally led innovation that were very effective during my 12 years at Alphabet’s Google and another six working with the most innovative community and regional banks.

A recent survey from McKinsey & Co. found that 84% of CEOs understand innovation is imperative to achieve growth, yet a mere 6% are satisfied with the level of innovation within their organizations. These numbers reinforce that executives have the desire to promote innovation, but continue to struggle with execution and strategy.

One of the main problems I see institutions having in their typical approaches to innovation is the reliance on external paid consultants instead of activating an existing resource within their bank: their own employees. Employees already have a deep understanding of issues that both they and customers experience with the existing services and technology stack and are in a unique position to generate ideas for improvements. Not to mention they are also highly motivated to drive these innovations to a successful completion.

Embracing this approach of where the innovation most likely comes will enable bank leadership to focus on creating an environment that is conducive for innovation. Here are three practical suggestions executives and boards should consider:

1. Make it “Safe” to Fail
The foundation of a successful bank business model includes managing risk, such as balancing the downside of defaulting loans with the benefit of interest income on performing loans. And just like it is impossible to benefit from interest income without risking the principle, it is not possible to innovate without trying some things that, in retrospect, do not work out as originally planned.

The key here is to make sure everyone in the organization knows it’s OK to try things and sometimes fail. Without trial and error, there is no reward. Organizations that minimize the negativity around failure and view it as an opportunity to become better are often the ones that are able to move forward and innovate.

2. Encourage “Bottom-Up” Ideation
Most are familiar with “top-down” change that stems from leadership teams and management. However, this approach makes it harder to innovate; in many cases, it ignores the unique context that front line employees have gleaned. These employees use the bank software and speak with customers, giving them a unique and very valuable perspective. They know what is causing pain and what modifications and improvements would make customers happier. The key to promoting innovation is to extend the opportunity for ideation to all employees in a “bottom-up” approach, allowing their voices to be heard while embracing and appreciating their creativity and insight.

Giving employees a safe space to voice their ideas and an opportunity to provide feedback is at the core of innovation. Executives can achieve this by shifting the organizational process from a one-pass, top-down approach to a two or more-pass approach. This is front line employees can propose ideas that management reviews and vice versa: management proposals are reviewed by the same front line employees for feedback. Management proposals’ are then refined to reflect the employee feedback. This allows management to incorporate all relevant context and makes everyone feels part of the process.

3. Enable an Agile Approach
While planning everything down to the smallest detail may seem like the safer option, it is important that boards and management teams accept that the unexpected is inevitable. Rather than trying to foresee every aspect, it is important to incorporate an agile mindset. An agile approach starts small and observes, adjusts course based on those observations and continues to course correct through repeated observation/adjustment steps. This allows the organization to absorb the unforeseen while still continually making progress. Over time, the pressure to be correct all the time will dissipate; the bank will feel more in control and enabled to make appropriate adjustments to increase the chances of the best possible outcome.

The rate of change around us and within financial services is steadily increasing; it is impossible to predict and plan for what will happen in the next few years. Instead, it is crucial that bank boards and management teams embrace adaptability as a critical element of corporate survival.

Focusing on 4 Key Trends for 2023

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The current market presents unique challenges for financial institutions.

As we navigate a complex environment during a time of significant industry change, recessionary pressure and geopolitical uncertainty, it’s crucial that banks focus on a realistic number of strategic priorities. Entering the first quarter of 2023, I see four key trends impacting the financial services industry that boards and executives need to focus on to survive and thrive amid economic uncertainty.

Talent
Having the best bankers, treasury management officers, middle office talent and banking center managers is always critical. But it’s also vitally important to have those unique individuals who can take an innovative idea and turn it into reality.

Your bank needs people who can work well with your partners and vendors to make sure you’re delivering the right kinds of capabilities to customers, and leaders who can see around the corner and anticipate the capabilities you’ll need in the future. That talent can be hard to come by; the turbulent labor market presents some challenges, but also opportunities.

There have already been some significant layoffs at large tech companies, but they aren’t the only ones. Smaller tech companies have also had to cut back — and that could be a chance to hire talent that has historically been out of reach or acquire a superstar that left for an early-stage company and is ready to come back. Lastly, banks should look for high-performing people at lower-performing companies and see if they might be ready for a change. Successful talent strategies will have an outsized impact on future performance.

Strategic Clarity
Reaching strategic clarity with all of your stakeholders will be crucial. Scarce resources and changing investment environments means financial institutions must make clear and deliberate decisions when it comes to their strategies.

Not only is it important to know your customers, your market and how you will differentiate and win, but it’s imperative to guard against strategic drift or succumbing to the temptation to be all things to all customers.

Pressure to Innovate, Simplify
The marketplace has been noisy. The substantial amount of funds invested in new financial technology firms over the past five years has made it feel like there are endless opportunities to innovate. Stakeholders in all directions may be making suggestions and recommendations. This has helped move the banking industry forward in important ways and helped power some of the digital leaps we experienced during the pandemic.

However, bankers seem to gravitate toward complexity. Now is the right time to take a step back, take stock of your organization’s investments and determine whether they have helped you simplify your business and operations.

Could you rethink entire lines of business based on the digital capabilities that you now have? Where can your institution make incremental, but important, moves toward simplification? What are the bank’s most important innovation priorities that need to move forward regardless, or because of, the turbulent macroeconomic environment? These are critical questions that every management team should be addressing.

Deposit Strategy
Not too long ago, it seemed every bank was flush with deposits. Today, even financial institutions with favorable loan-to-deposit ratios are figuring out how their deposit base is changing, what effect higher and rising rates are having, where they’re experiencing attrition and churn within their customer base, and what parts of their funding strategy need to be reworked.

It will be critical to develop a long-term sustainable deposit strategy and identify advantages specific to your institution. For example, in which industries does your bank have lending expertise? Use that experience to develop working capital solutions for those same customers. If your bank has developed your digital banking capabilities, explore where you have untapped potential in the existing customer base with targeted campaigns and marketing messages. Haven’t revisited your compensation strategy? Now is the right time to be addressing incentives for developing a commercial deposits business. Actions that a bank takes today will have a lasting positive impact.

It’s easy for directors and executives to become overwhelmed in such a fluctuating environment but the financial institutions focused on strengthening talent, clarifying critical priorities, accelerating innovation and maximizing their deposit strategies will be ready to take advantage of growth opportunities in this new year.

What Venture Capitalists Predict in the World of Fintech

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Fintech is no longer the enemy of banking. While much of the talk among fintech companies just a year or two ago was that they wanted to disrupt the dinosaurs of banking, now the tone has changed, said several speakers at the FinXTech Annual Summit Wednesday in New York City.

“I’ve seen a slight change in the business model, where it’s now about —How can we partner with the banks?’’’ said Jim Hale, the founding partner of FTV Capital, a venture capital firm. “The tone has changed.”

The event gathered more than 200 entrepreneurs and bankers together to discuss partnerships, financial technology and trends. Hale was one of several venture capitalists at the conference giving his perspective on future trends in financial technology and the challenges of partnering with banks.

In fact, many of the biggest banks, some of them in attendance, such as Wells Fargo & Co. and Citigroup, have started venture capital arms to invest in fintech startups, so they can learn and influence the direction of future technology.

The most active banks investing in fintech startups are Banco Santander, Goldman Sachs, Citigroup, Mizuho Financial Group and JPMorgan Chase & Co., according to a new report from CBInsights, which tracks financial technology investments globally.

The report said global venture capital funding and deal activity fell slightly in the first quarter compared to a year ago, but rose compared to the fourth quarter of 2016, a trend that venture capitalist Ryan Gilbert, a partner at Propel Venture Partners, said was likely the result of uncertainty brought on by Brexit and the U.S. presidential election.

There were 226 venture-backed investments in financial technology companies globally in the first quarter of 2017, receiving $2.7 billion in funding, compared to 256 investments and $4.9 billion in the first quarter of 2016, according to CBInsights. In the U.S., there were 90 deals financed in the first quarter with $1.1 billion in cash, compared to 137 in the first quarter of last year at $1.8 billion.

Hale estimated that 90 percent of fintech companies focus directly on consumers, but he is more interested in funding solutions that solve the back-office problems and infrastructure needs of banks. He is also interested in solutions that manage data quicker, faster and cheaper than current solutions do.

Gregg Schoenberg, the founder of Westcott Capital, said he sees opportunity to make asset management more efficient, since the cost structure in these organizations is high. Banks also have a tremendous amount of data on their customers and could use that more effectively. Few other industries are required by law to collect as much data on their customers as banks are, which have to meet know-your-customer and anti-money laundering mandates, he said.

For examples of how technology can create more efficient processes, banks might look to successful companies such as Domino’s Pizza, which has a high stock price not based on the quality of its pizza, but by its distribution system, Schoenberg said. The company has a robotics division and 17 different ways to order a pizza, he added.

Gilbert is looking to invest in emerging technologies such as voice recognition and artificial intelligence, enabling capabilities like having conversations anytime with your “banker” in the form of a chat bot, for example.

“That’s really rethink and rebuild,” he said. Gilbert is often more excited about innovation happening outside the U.S., such as Singapore, a country with a lot of wealth and a stable, central regulator, and where banks are using chat bots and voice recognition software.

In the U.S., there are more hurdles, and multiple regulatory bodies for the banking industry, including federal and state agencies. Just yesterday, the Conference of State Bank Supervisors sued the Office of the Comptroller of the Currency over the latter’s proposal to regulate fintech firms.

Still, Gilbert is not pessimistic. “Now is not the time to give up,’’ he said in an interview yesterday. “We have 5,800 banks and there are a lot of opportunities to turn these institutions into great things. Technology is developing at such a rapid pace. The best is yet to come.”

Recognizing How Fintech Companies Are Making Banks Better

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While the financial technology sector is still viewed as a source of competition, most fintech companies focus on providing solutions that will ultimately make banks more efficient and profitable. True, some fintech firms do compete head-to-head with banks, but the great majority of them are more interested in partnering with banks in ways that will benefit both sides. In recognition of this growing trend towards cooperation, FinXTech.com recently held its 2nd annual Best of FinXTech Awards, which highlights collaborative efforts between banks and fintech companies working together in a successful partnership. From a pool of 10 finalists, three winners were chosen by this year’s FinXTech Advisory Group. The judging criteria were strength of integration, innovation and growth in revenue, reputation and the customer base that resulted form the project. The three teams, whose stories are detailed below, were honored today at the FinXTech Summit in New York.

USAA and Nuance

Headquartered in San Antonio, Texas, USAA wanted to develop a stronger relationship with current customers while also attracting new customers through the use of technology that would meet their needs and preferences. Since 2013, USAA has utilized Burlington, Massachusetts-based Nuance’s virtual assistant technology—called Nina—on its mobile banking app. Nina leverages natural language understanding and artificial intelligence to provide a proactive and personalized customer experience. In 2016, following Nina’s widespread adoption by USAA members on the mobile channel, the bank deployed Nina on its usaa.com website.

On usaa.com, Nina provides immediate, human-like support and assists USAA members with tasks such as activating cards, changing a PIN, adding travel notifications and reporting lost or stolen cards. Nina goes far beyond a static question-and-answer capability to deliver a more human experience that speaks, listens, understands and helps USAA members get things done efficiently. Nina responds to 1.4 million requests per month and eliminates the need for USAA members to sift through menus, ensuring that every interaction begins and ends with an effortless, natural experience. Through its partnership with Nuance, USAA is able to provide its customers with a compelling, multi-channel, automated customer service experience that keeps it ahead of the pack.

Scotiabank and Sensibill

In October 2016, Scotiabank—Canada’s third largest bank—and Sensibill, both of Toronto, launched eReceipts, a service that allows customers to store, organize and retrieve any receipt (paper or electronic) directly from Scotiabank’s mobile banking app and wallet. Scotiabank is the first of the Canadian Tier 1 banks to rollout the solution, and Scotiabank CEO Brian Porter has referred to it as a “game-changing application.”

Sensibill’s receipt processing engines uses deep learning and machine-learning to extract and structure information about each item, including product names and SKU codes. This adds clarity to otherwise vague transactions and reduces the friction associated with searching for a specific purchase. The service is also the first to offer consumers automatic matching of receipts to card transaction histories, which supports customers’ need for convenience and accessibility and enables Scotiabank to provide a seamless end-to-end payment experience.

Scotiabank customers use the service to track both personal and business expenses, with approximately 38 interactions with the service per month per customer. In the same way that online and mobile bill pay serves as a “sticky” product that retains customers who do not want to move their information to another bank, eReceipts has the propensity to reduce attrition. Forty-eight percent of eReceipts users use the app’s folders and notes to keep themselves organized, with captured receipts often being revisited. Not only does the app improve the customer experience, it also has the potential to lower the bank’s costs. For example, Scotiabank believes that 20 percent of credit and debit card queries could have been resolved through the Sensibill app, which ultimately should lead to a reduction in call center activity.

Green Dot Corp. and Uber Technologies Inc.

One of the biggest challenges workers in the gig economy face is gaining speedy access to their earnings. In March 2016, Uber, the transportation network company headquartered in San Francisco, and Green Dot, a prepaid card issuer located in Pasadena, California, launched a customized business version of Green Dot’s GoBank mobile checking account. Initially piloted in San Francisco and a few other cities, the solution provides Uber drivers with immediate access to their funds through a feature called Instant Pay. All drivers do is open a free Uber debit card from a mobile GoBank checking account and use this account to access their earnings instantly, for free, up to five times per day. Drivers are also able to use their Uber debit card for free at any of GoBank’s 42,000 ATMs spread across the country, and can also use it for transactions wherever Visa cards are accepted.

The pilot was so successful that in June 2016, Uber offered the solution to all of its drivers nationally, resulting in over 100,000 drivers signing up since August. That same month, in response to driver feedback and increasing demand, Uber and Green Dot announced it was expanding Instant Pay to work with not only a GoBank account, but almost any U.S. MasterCard, Visa or Discover debit card that is attached to a traditional checking and savings account. The expanded debit card program has scaled quickly, with millions of transactions having occurred between the August launch date and September 30, 2016.

The other seven finalists in this year’s Best of FinXTech Awards were IDFC Bank and TATA Consultancy Services, Franklin Synergy Bank and Built Technologies, National Bank of Kansas City and Roostify, Somerset Trust Co. and BOLTS Technologies, Toronto-Dominion Bank and Moven, Woodforest National Bank and PrecisionLender, and WSFS Bank and LendKey.

Innovation: The Time Is Now

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Technological transformation can be a key solution as banks seek efficiency and address changing consumer expectations. In this video, Manoj Daga of Sutherland Global Services outlines how banks should focus their efforts to innovate.

  • Technology Trends Impacting the Industry
  • Potential for Automation
  • Where Banks Should Invest