Innovation In Banking: Mastering Change With An Effective Innovation Strategy


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Banks need innovation to beat present day
challenges. The count for 2010 shows that one bank fails every two days in the United States. It’s not easy being a survivor in the current financial milieu that is constantly throwing up challenges in the form of regulatory enforcement, consumer expectations, competitive threat and
elusive profitability. On the flip side, the same forces hold out new opportunities for those with a clear initiative and innovation agenda.

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Innovation In Banking: Mastering Change With An Effective Innovation Strategy

  1. 1. Mastering Change with an Effective Innovation StrategyUniversal Banking Solution System Integration Consulting Business Process Outsourcing
  2. 2. Banks need innovation to beat present day their debit card is another. Flexible paymentchallenges. options and product bundles are other notable innovations from the past which are now beingThe count for 2010 shows that one bank fails offered regularly.every two days in the United States. Apart from their scale of impact, strategic andIt’s not easy being a survivor in the current incremental innovations differ in the followingfinancial milieu that is constantly throwing up ways. The former consumes more organisationalchallenges in the form of regulatory enforcement, resources, takes longer to hit the market andconsumer expectations, competitive threat and yields a bigger but slower payback. Sinceelusive profitability. On the flip side, the same strategic innovation often heralds a fundamentalforces hold out new opportunities for those with a shift, users take longer to adapt to it. Its ‘big bang’clear initiative and innovation agenda. characteristic makes strategic innovation riskier than the incremental version. These qualitiesMost banking innovations have come about in ensure first mover advantage for strategicresponse to the challenges of their times. The innovators. This is not the case with incrementalinventor of the ATM came up with the idea of a innovation, wherein a creative product variant orchocolate bar dispenser that gave cash instead promotion can be replicated and offered without of frustration of not being able to withdraw different whenever he felt like it. Similarly, theproliferation of electronic channels was driven as An innovation strategy enables banks to respondmuch by changing habits as the need for banks to to change and leverage new ideas.reduce distribution costs. This relative ease of incremental innovationPresent day banking challenges include adopting makes it an imperative component of a bank’ssocial technology meaningfully as well as business strategy as a competitive defenceensuring accessibility of services on emerging mechanism, growth lever and survival tool. Todevices. Once again, some innovation is necessary pass it over means to be left behind. An effectiveto meet these. Banks that ignore these strategy for incremental innovation feeds offdevelopments risk isolation and worse; the environmental change and new ideas ofimplication is that innovation is now a must have. significance to work in a continuous cycle as illustrated below.Banking has undergone continuous incrementalinnovation, punctuated by periodic strategic Incremental Social Innovationinnovation. Networks • Customers Growth / Internet • Shareholders Consolidation / Ideas CompetitiveHistory indicates that the banking industry has • Employees Internet • Management Advantagebeen a laggard in innovation, especially thestrategic kind which creates revolutionary impact. New Change / ExternalThere are many reasons for this including Opportunities Disruption Worldregulatory restrictions, risk mitigation and the factthat in any business of enormous scale, theresults of innovation take years to show. But The major forces of change in the survivor’s worldabove all, since banking is a complex but stable are tighter regulation and compliance, growingbusiness, the possibility of strategic innovation consumerism, measurable productivity driversemerges only once in a while. and growing unexplored potential, each bearing both challenges and opportunities. IncrementalThat being said, banking has been home to a innovation helps its practitioners deal with bothseries of incremental innovations, producing appropriately by imparting agility, enablingsmaller but tangible effects. A global bank’s efficiency and better diversity management, as‘unfixed’ deposit which earns higher interest for well as facilitating expansion:customers without cutting off their liquidity, is oneexample. A leading American bank’s program that • There has been no let up in the tightening ofallows customers to save a bit every time they use financial regulation which was initiated in Mastering Change with an Effective Innovation Strategy
  3. 3. response to the economic crisis. No doubt, enabling them to serve rural and fringe markets compliance is harder for banks with a high without setting up physical infrastructure. degree of global exposure, that have to adjust to Innovative first movers entering unbanked regulatory change in multiple geographies; at territory are strengthening their competitive the same time they must do so quickly in order position by erecting entry barriers. to minimise risk, penalty or both. Only a few banks view adhering to greater regulation as an • Today’s youth belong to a truly mobile opportunity to tighten their operations and generation which expects their banks to be with reduce the costs associated with them regardless of which part of the world they non-compliance. Some believe that their travel to on work or leisure. Being used to an superior ability to comply with ever-changing, online social world which is accessible from increasing regulation gives them competitive anywhere, anytime, on any available device, advantage over others who struggle to do so they expect the same from their banks. The race while incurring great cost. Thanks to their among banks for a presence on all devices is on! positive mindset, these forward thinking banks are able to win the trust of existing and Leveraging ideas has never been easier or more prospective customers who are more important than in the present age of easy access. concerned about compliance than ever before. Thanks to social networking technology, banks can reach out to millions of customers and all their• Technology-led innovation enables banks to employees over the Internet and Intranet respond quickly to new mandates; it also gives respectively in next to no time. This affords an them the agility to take advantage of market opportunity to involve all stakeholders in the opportunities, launch products and services and innovation process right from the idea generation counter any threats faster than the competition. stage and sustain their participation all the way until co-creation.• Innovation improves efficiency by streamlining processes so that they can achieve more In contrast to incremental innovation which may using less effort and time; creating a be pursued by all, strategic innovation is a likely supportive environment in which partners can preserve of the big banks. The reasons are simple be more effective making the best use of – heavy resource requirement, long timelines and existing resources. higher risk. However, these are balanced by the potential of a much larger upside than that of any• In the area of customer management, incremental innovation. innovation in the form of a unified customer information repository enhances a bank’s Through their strategic innovation strategy, knowledge of its users. Since this information is leading banks must raise the bar and usher in recorded permanently within the bank’s trends for others to follow. Since this is easier said collective memory, it can be recalled by any than done, it is advisable to approach it - like Bank customer facing executive to improve of America has in its ‘Bank of Tomorrow’ initiative subsequent interactions. Over time, the bank with MIT - in partnership with other entities that acquires intimate knowledge of each customer can bring complementary strengths to the table. beyond the basic details of location, profession, income etc. to include preferences, habits, risk When the chance for strategic innovation comes appetite and tacit insights, which it could along once in several years, big banks don’t have leverage to refine its approach to segmentation much option but to take it. That is because by and right selling in order to better manage the letting the initiative slip, they will be reduced to diversity of its customers and satisfy their following - a sure disadvantage given that they unique needs. lack the fleet-footedness of their smaller rivals in adopting anything new. On the other hand, by• Banks have long since relied on innovation to leading the change, they can dictate the pace from extend their footprint in new geographies. But a position of strength. the saturation of prime markets is now driving them towards unexplored pockets. Channel Ironically, while smaller institutions face several innovation, particularly in the mobile domain, is barriers in pioneering strategic innovation, they Mastering Change with an Effective Innovation Strategy
  4. 4. can follow it with relative ease. One reason for thisis agility; the other is that those that have investeda small amount in existing technology andinfrastructure can write it off and deploy their fundsfor greater strategic impact. Hence, such banksmust wait and watch for an opportunity to adaptquickly to any new strategic innovation. Therationale of working in partnership holds in thiscase as well and smaller banks could operate inconsortium to reduce individual investment and risk.That being said, strategic innovation is notexclusively driven by the leaders and sometimeseven a small institution with a big idea might setthe ball rolling.Innovation is the key to future success.While banks that are still standing may havefinancial prudence and regulatory compliance tothank for their existence, they need continuousinnovation to survive and thrive in the future. Aneffective innovation strategy will help them satisfycustomers better, manage the expectations ofinternal stakeholders and respond to the otherchallenges thrown up by the survivor’s world.While all banks must have a clear agenda forincremental innovation, the current environment isalso opportune for strategic innovation,particularly for big banks having resources at theirdisposal. By seizing the initiative, banks can meetfuture opportunities and challenges from aposition of strength. Authors Balwant C Surti Head - Solutions Architecture and Design Group, Finacle Infosys Technologies Limited Amit Kumar Agarwal Lead Consultant, Finacle Infosys Technologies Limited Mastering Change with an Effective Innovation Strategy
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