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How Successful Banks Build Their Innovation Strategy
How Successful Banks Build Their Innovation Strategy
How Successful Banks Build Their Innovation Strategy
How Successful Banks Build Their Innovation Strategy
How Successful Banks Build Their Innovation Strategy
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How Successful Banks Build Their Innovation Strategy

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Corporate and retail banks are facing competition …

Corporate and retail banks are facing competition
from new entrants and innovative business
models. If that wasn't enough, shrinking margins
and tighter regulatory requirements are adding to
the pressure. Going forward, innovation is
perceived as the key to growth and competitive
differentiation. Only those banks that can
successfully develop new products, services and
channels in response to the changed market
environment will survive.

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  • 1. How Successful Banks Buildtheir Innovation Strategy
  • 2. Banks need innovation to sustain in future. Zopa, a peer to peer social lending service in the U.K. that allows borrowers and lenders to bypassCorporate and retail banks are facing competition banks completely by connecting directly in anfrom new entrants and innovative business online marketplace, is a case in point. In the U.S.,models. If that wasnt enough, shrinking margins several Credit Unions have tied up with similarand tighter regulatory requirements are adding to online lending platforms. While the jury is still out onthe pressure. Going forward, innovation is whether social lending is a serious threat toperceived as the key to growth and competitive conventional banking, there is no doubt that itsdifferentiation. Only those banks that can simple and cost effective proposition holds muchsuccessfully develop new products, services and appeal.channels in response to the changed marketenvironment will survive. This is echoed by the Technology is driving banking innovation.findings of a recent survey of European retail banksconducted jointly by Infosys and the European Historically, banks have innovated at a slower paceFinancial Management Association (EFMA), which compared to other businesses. Regulation and riskstate that 4 out of 5 respondents said that mitigation has as much to do with this as the factinnovation was extremely important for achieving that the results of innovation take time to show,growth and efficiency. giving competitors a chance to match or even better a pioneering effort and negate anyThe statement that the banking sector lags others advantage of the first mover.in innovation is only partially true. While therehasnt been much disruptive innovation, which is But now, the pace is picking up. Structured financialthe most visible kind, in this space, banks have products like derivatives are the result of productsteadily innovated behind the scenes on internal innovation. Simultaneously, systems and processprocesses and back-office operations. innovation have transformed the back-office, streamlined customer interaction and enabledWhile there has been little disruptive innovation several cost management strategies such asso far, that may change. outsourcing.Most senior managements believe that they are on So far, the Internet has been at the forefront oftop of the challenges presented by the diverse channel innovation, heralding first online and then,forces of structural change, regulation and direct banking. But now, other innovative channelscompetition and claim that their banks routinely are emerging – with advances in convergenceinnovate to adapt to shifting paradigms. While technology, IPTV and VOIP may well be thethey may be well-placed to handle predictable channels to watch out for. Interestingly, channelcircumstances, can the same be said in the face of innovation need not always be technology-driven.unforeseen events? Leading banks in the U.S. have used non-banking channels including pawnbroker networks to reachOnce in a while, the industry may experience the largely unbanked Hispanic population!sudden change extending beyond familiarboundaries. Left unattended, unexpected Processes are driving banking innovation.developments can degenerate in quick time.Several industries have fallen victim to such Generally, innovation is perceived as achange in the form of disruptive innovation, and breakthrough product or technology; in bankingwhile banking has remained largely immune, the however, it takes on an additional dimension – thatemergence of new channels, technologies and of the process. The processes surrounding a newparticipants could potentially bring about product or technology are as important as theirdisintermediation of established players. features and could add significant value by way of cost saving, improved productivity and so on. In fact, most recent banking innovations have focused How Successful Banks Build their Innovation Strategy
  • 3. on improving the processes associated with the Grow revenue and profitsdelivery of products and services, management of Satisfy unmet customer needs by bridging gapscustomer interactions and administration of back- in products, services and processes, on the wayoffice functions. At the same time, product to improving customer relationshipsinnovation has been limited to a small range offundamental offerings. However, because banking Empower staff with tools that help resolveproducts and processes are so intertwined, the customers problemslines between the two are often blurred. Banks measure and monitor innovation in a numberThe following points highlight the contribution of of ways. Tier 1 banks routinely benchmark theirprocess innovation to banking: own initiatives against those of their closest rivals in Innovation of Internet-related processes has order to maintain their competitive edge. This is improved online banking adoption. While the how they do it: first wave of the Internet revolutionized information sharing, innovation in the form of Employ market studies and sampling to Web 2.0 catapulted it into “social exchange”. assess current capabilities: Banks frequently Using a variety of vertical tools such as wikis, ally with consultants and technology partners to mashups, blogs and surveys, users fulfill their evaluate new markets and formulate an need for information, entertainment and appropriate competitive strategy. Business communication. Several banks around the intelligence solutions help to answer key world have caught on to this phenomenon and questions related to the size of market carved Web 2.0 spaces where they interact with opportunities, competitor strength, level of customers, provide information, resolve technology deployed, and so on. problems, brainstorm and generally improve In markets where they already have an the banking experience. established presence, banking institutions can Automated and integrated back-office systems evaluate their performance by analyzing have enabled banks to outsource or offshore customer satisfaction, retention and advocacy routine administrative and customer service and benchmark these parameters against those functions. Centralized transaction processing in of their biggest competitors to arrive at their true core operations such as credit risk assessment performance and relative strengths. and loan approval has reduced the role of the Define the role of innovation in the long term local branch. and a roadmap for achieving its goals: To start Payment processes have been revolutionized with, banks must have a clear vision of the role by the introduction of chip-and-pin and innovation must play within the organization. contactless payment systems. Take for Next, they must formulate the right strategies, instance, Hong Kongs “Octopus” smart card, ensuring that they are in sync with larger which can not only be used on the citys public business goals. Taking a holistic approach, the transport system as originally intended, but also bank must set up an organization-wide in restaurants and retail outlets. We can cite innovation framework comprising strategies, several other instances of smart payment guidelines and measures to ensure that the mechanisms that have rendered cash innovation agenda is both understood and redundant – for example, global money transfer implemented on the ground. via SMS. Evaluate the cost of innovation versus expected economic benefit: Most banks planBanks must establish a sound innovation ahead and allocate financial resources for theirframework. innovation projects. On the cost side, they needAlthough banks may take different approaches to to budget for marketing and related expensesinnovation, most are driven by the following needs: including insight gathering and product How Successful Banks Build their Innovation Strategy
  • 4. development and for process improvement, access to a full range of insight techniques andwhich entails IT investment. It is equally the ability to configure products and servicesimportant for them to assess the efficacy of their around their clients needs.efforts. Using the balanced scorecard and Last but not least, banks can take the openvarious operational metrics, they can measure innovation route, whereby they can collaboratehow much innovation has contributed to with third parties to generate innovative ideas.business growth, customer retention, advocacyand other parameters.Build a strategic team to implement their Innovation needs organizational support to succeed.innovation portfolio: Organizational focus is aprerequisite for innovation success. Thus, The banking industry is facing multiple pressures.banks must dedicate a multidisciplinary team to On the one hand, banks have to adapt to greaterdrive the agenda. While senior executives take regulation, competition and consolidation, whichthe decisions, they must have the support of are largely out of their control; on the other, theyvarious business units as well as middle and have to meet increasingly diverse and demandingjunior-level staff that are responsible for customer expectations. Most realize thatexecution. Many successful banks have set up innovation is indispensable to their future growth“incubators” to encourage and reward and sustainability. Those with serious innovationinnovative thinking among employees. intent must give it the best chance of success byMitigate risk by being prepared with an laying the groundwork in the following manner:alternate plan or a roll-back mechanism in theworst case: While innovation promises much, it Prioritize innovative actions that raise enterprisealso carries significant uncertainty and risk. effectiveness by improving business processesMoreover, banking innovation faces several Move with agility, before the value of innovationhurdles in the form of compliance mandates, and the banks competitive advantage diminishoperational silos, excessive caution and red Ensure adequate moder n technicaltape. At times, these constraints might infrastructure, which would not only use feweroutweigh the compulsions to innovate; worse, financial and energy resources, deliver betterthis may happen during execution. It is therefore performance and provide greater capacity butimprudent for banks to green-light any also help to incubate innovationinnovation without having a viable exit option.Interestingly, incremental innovation mayprovide the right risk-reward balance, and manybanks have successfully altered products, Authorprocesses and channels by innovating in small Bhaskar Banerjeesteps. Consultant - Product Strategy: Finacle UBSBring clarity to “innovation thinking” with the Infosys Technologies Limitedhelp of external consultants, benchmarkingstudies and formal exchange of learning withpartners and peers: While innovation expertsbring wide experience and knowledge ofdifferent markets to the table, their ideas canonly be implemented on the back of robusttechnical infrastructure. In the retail bank surveymentioned earlier, inflexible IT systems andbottlenecks in development were cited as thetop 2 barriers to innovation. Thus, it is importantto partner with technology vendors having How Successful Banks Build their Innovation Strategy
  • 5. www.infosys.com/finacle/networking.aspJoin us on Twitter, LinkedIn and Finacle Whiteboard at www.infosys.com/finacle/networking.asp

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