Innovation In Retail Banking_EFMA Report 2009

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Finacle from Infosys and the European Financial Management & Marketing
Association (Efma) are pleased to present this major report on innovation in
European retail banking.
In this time of crisis, there is a danger that banks will allow other priorities to slow down
their pace of innovation, but this is precisely the time when innovation can lay the
platform for future growth and efficiency. The market environment will remain challenging
for some time and banks need to consider new business models, as well as make
continuous, incremental improvements to their business.

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Innovation In Retail Banking_EFMA Report 2009

  1. 1. Innovation inRetail Banking S e p t e m b e r 2 0 0 9
  2. 2. Contents04 Executive summary07 Innovation in the context of retail banking13 The impact of the crisis on innovation21 Innovation strategy33 Strategic versus incremental innovation41 Innovation and growth53 Innovation and efficiency59 How banks can become more innovative65 The role of IT in innovation70 Conclusion71 About the research72 List of participants74 About us75 References
  3. 3. I n n o v a t i o n i n r e t a i l b a n k i n g Preface inacle from Infosys and the European Financial Management & MarketingF Association (Efma) are pleased to present this major report on innovation in European retail banking.In this time of crisis, there is a danger that banks will allow other priorities to slow downtheir pace of innovation, but this is precisely the time when innovation can lay theplatform for future growth and efficiency. The market environment will remain challengingfor some time and banks need to consider new business models, as well as makecontinuous, incremental improvements to their business.Innovation is a very widely used term which can apply to any aspect of the business.This report takes a high level and strategic view of the issue and does not focus on onespecific type of innovation, or one area of activity. Innovation in operations is just asimportant as innovation in marketing. We look at the issue of strategic versusincremental innovation, and the importance of innovation for both growth and efficiency.We also assess the barriers to innovation, what actions banks are taking to increasetheir level of innovation, and recommend areas where we feel they could improve.Information technology has a key role to play in helping banks to drive innovation, asis clearly illustrated by the feedback from our research. Nevertheless, it can also beseen as a significant barrier, so we have explored this issue in more detail.A number of case examples are included in the report in order to illustrate variousaspects of innovation. We believe these cases are good examples of interestinginnovations but we have not run a competition to select the best, and there may beother banks in Europe not mentioned who are also innovating in similar areas.As is always the case with Efma reports, one of the key objectives is to share bestpractice across Europe. 89 banks from 26 countries contributed to the research eitherby completing an online survey or participating in an interview. For the purposes of theanalysis we have divided Europe into 3 regions: Western Europe, Central & EasternEurope, and Russia & CIS. There are clear differences between the regions butalso many similarities which show how best practices are diffusing relatively quicklyaround Europe.The respondents included a broad range of senior management in the Retail, Marketing,Operations, Information Technology, Strategy and Innovation areas of banks. We founda huge amount of interest in the subject of innovation when talking to banks acrossEurope, and we hope that the insights we have been able to draw out of the researchprove useful.This report was prepared, on behalf of Efma and Finacle from Infosys, by MichaelPearson of Clarus Investments. Haragopal M Patrick Desmarès Global Head - Finacle Secretary General Infosys Technologies Limited Efma 3
  4. 4. Executive summary• Innovation continues to be important for banks, even in the current financial crisis78% of the banks in the survey believed that the importance of innovation was high or very high for bothgrowth and efficiency. The perceived importance of innovation was high in all 3 regions covered by thesurvey, but slightly higher in Central & Eastern Europe and Russia & CIS compared to Western Europe.• More banks need a clear innovation strategy37% of banks said that they have an innovation strategy, which is low given the perceived importance ofinnovation and the fact that 73% of banks are aiming to be innovation leaders in their domestic market.We believe more banks need to develop a clear innovation strategy (including objectives, processes andmeasures of success), which should be linked to the business strategy.• Approaches to innovation are determined by a range of factorsInnovation strategy should be determined by a bank’s business strategy, but there are several genericfactors which will have an impact. Market specific factors (stage of development, regulation, culture) andcompany specific factors (market share, ownership, resources) provide a framework for understandingsome of the innovation issues which any particular bank will face.• Strategic innovation is a high priority for many banks but concrete examples are rare54% of banks said they are working mainly on strategic innovation, or an equal mix of strategic andincremental innovation. According to some banks, the financial crisis is a catalyst for a new focus onstrategic innovation. However, this view was not supported by evidence yet of radical and innovativechanges to business models.• The strategic risk from disruptive innovators is low but banks need to plan for changeThe banking industry has not been disrupted by new technologies or new entrants. Change tends to takeplace relatively slowly compared to some industries, giving followers a chance to keep up without significantrisk. It is nevertheless important to devote some resources to looking at where strategic innovations mightdisrupt the existing business, and experiment in these areas if possible.• Banks in Central & Eastern Europe, particularly Turkey, are leading in growth innovations54% of banks we surveyed in Central & Eastern Europe believed that their level of innovation in product,channel and customer relationship activities was high or very high, compared to only 28% in Russia &CIS, and 48% in Western Europe. Within Central & Eastern Europe, the banks in Turkey perceivedthemselves to be the most innovative.•Customer relationship development activity exceeds product and channel developmentAcross the 3 regions, 69% of banks said that their customer relationship development activities werehigh or very high, which was slightly more than for product or channel development. Some banks told usthey intend to shift even more effort from product to customer relationship development in the future. 4
  5. 5. I n n o v a t i o n i n r e t a i l b a n k i n g• Innovation in customer relationship development activity could be improvedFor example, 70% of the banks in Western Europe rated their level of customer relationship developmentactivity as high or very high, but only 53% rated the level of innovation in this activity as high or very high.This perception was supported by our interviews and survey which revealed fewer customer relationshipinnovations than either product or channel.• Innovation efforts targeted at efficiency improvements do not match its importance90% of banks in Central & Eastern Europe and Russia & CIS said that the importance of innovation forefficiency improvement was high or very high. However, the level of innovation in the efficiency improvementefforts we surveyed does not match this perceived importance and we believe there is substantially morescope for banks to look at innovative ways to become more efficient.• Information Technology is important for innovation but is also seen as a barrierInflexible IT systems and bottlenecks in IT development were the top 2 barriers to innovation in all 3regions. Banks who have been able to invest in newer systems, either by starting more recently or goingthrough a major change programme, naturally regard this as less of a problem but it remains a significantchallenge for more mature banks who want to both grow revenues and reduce costs.• Other views on barriers to innovation were mixedInvestment was not seen as a particularly high barrier in spite of the financial crisis. The lowest barrierwas a lack of innovative ideas – most banks have idea generation processes, at least for employees, butwould probably benefit from more open innovation. Regulation and compliance was seen to be a highbarrier to innovation for banks in Western Europe and Russia & CIS, but less for banks in Central& Eastern Europe.• Employee training for innovation and creativity is low and should be increasedBest practice research shows it is crucial to focus on employee-related issues to increase innovation andcreativity – including recruitment, training, performance management and rewards. It was surprising thatless than 25% of banks had increased employee training on innovation. There were some cases ofinnovation being included in performance management, but this was not widespread.• The differences between regions are relatively small indicating good best practice diffusionWhile there are some differences between the regions, the similarities in terms of product, channel andcustomer relationship development focus, and in terms of approaches to efficiency improvement, highlightshow industry best practices are being diffused across Europe. 5
  6. 6. Innovation in the context1 of retail banking 7
  7. 7. Defining innovationOne of the challenges in carrying out research on innovation is that people can havevery different ideas of what constitutes an innovation. We have defined it in the followingterms: “to innovate” means to introduce changes and new ideas, and “an innovation”is a new idea or method, which creates value for the customer or the company itself.It should be something that is new to the market, not simply copied from another bankin the same market.There is a tendency for all of us to think of innovation in terms of new products andservices, like the iPhone from Apple, particularly ones which are technology related. Itis much harder for us to think about innovation in activities like operations and finance,especially when no new technology is involved.Innovations also range in scale from “incremental” to “strategic”. There are no harddefinitions of what these terms mean and we came across a wide range of views as towhat constitutes a strategic innovation. In Section 4 we look at this issue in the contextof retail banking.Comparing innovations across countries and regionsThe economies and banking sectors in countries around Europe are in different stagesof development and an innovation in one country may not constitute an innovation inanother country. The flow is not just one way, however, from more developed to lessdeveloped markets. We found many cases of innovations in less developed marketswhich have not been introduced yet into more mature markets.One development we will explore further in the report was the larger banks withoperations in several European countries transferring systems and practices acrossborders – usually from the home country to markets where they have made acquisitions.In some cases these banks are taking a very different approach to innovation than themore local banks in a particular market. The fact that there are different innovationstrategies does not mean that one or other is right or wrong, but reflects the specificcircumstances of the banks concerned.It is also the case that what makes sense as an innovation in one country may not, inthe short term, make sense in another country due to the different customer needs,competitive dynamics, regulation etc. so we have to be careful not to generalise.However, in time, innovations do tend to diffuse across all markets and so it is importantfor banks to be fully aware of what is happening in other countries.In Section 3 we explore how country and company specific factors combine to influencethe approach a bank might take to innovation. 8
  8. 8. I n n o v a t i o n i n r e t a i l b a n k i n gThe history of innovation in retail bankingMany people do not think that retail banking is an innovative industry. An annual surveyby Business Week and Boston Consulting Group1 ranked Apple, Google and Toyota asthe most innovative companies in 2009. The only banks featuring in the top 50 wereHSBC and JP Morgan Chase and we don’t think this was particularly for their retailbanking activities.Academic research has typically concluded that retail banking is not very innovative.According to one study in the Journal of Marketing Management, “weak consumerdemand for unique products and services is a major reason why imitative incrementalinnovation is more common than radical innovation in retail banking2”. Of course thisparticular observation relates to product innovation, but you could reach the sameconclusion about channel innovation when you consider the current approach to mobilebanking being taken by a lot of Western European banks.However, we should recognise that there have been many significant innovations overtime which has made the industry unrecognisable from 30 years ago. It takes time forinnovations to become widely adopted, so the impact is perhaps less dramatic than wesee in some industries where a failure to innovate (or innovating in the wrong direction)can lead to extinction quite quickly. 9
  9. 9. One bank we spoke to described its transition several years ago frombeing a product-centric organisation to a customer-centric one –clearly a major change to the business model and believed to beinnovative at the time, but no longer perceived to be an innovation.For some banks in the less developed European countries, thistransformation remains a big challenge.Internet banking is the most significant innovation in the last 15 years.Many banks launched internet banking in the mid 1990’s, but thereremained some wide discrepancies in adoption as of the end of 2008(see Figure 1). In Norway, internet banking use (measured over theprevious 3 months) reached 75%, whereas in the UK it was 40%. InSpain, the usage was just 20%, and in the Czech Republic which isstill catching up, the usage is 14%. The average usage rate for the5 largest European economies was just 28%, and that is after15 years of internet banking services being available. Proportion of individuals over 16 years of age using internet banking in previous 3 months Norway UK Spain Czech Republic 80% 70% 60% 50% 40% 30% 20% 10% Figure 1 0% 2003 2004 2005 2006 2007 2008 Source: Eurostat 10
  10. 10. I n n o v a t i o n i n r e t a i l b a n k i n gOne of the features of the industry is that more or less all banks tendto adopt the same innovations, and there is not generally a lastingcompetitive advantage for the first mover. Of course, we have notexamined all the banks that have failed or been taken over in the last30 years to see if they were less innovative than surviving banks, butwe do not think this would be the case. Banks fail for many reasonsother than not pursuing innovation, and in some cases moreinnovative banks are taken over by less innovative banks with greaterfinancial resources. However, it is clear that banks cannot stand stilland we will discuss the strategic issue of being an innovation leaderor follower later in the report.Entrepreneurship and innovationInnovative start-ups have generally made relatively little impact on theretail banking industry in Western Europe, but there has beenconsiderably more potential for entrepreneurial activity in thedeveloping markets of Central & Eastern Europe and Russia & CIS. Inthese regions there are several examples of start-up banks in the last10 years (e.g. Russian Standard Bank in Russia and Alior Bank inPoland), and also examples of established banks expanding into retailbanking (e.g. Turkish Economy Bank).These banks have been innovative in the context of their local marketsand have created an entrepreneurial culture which tends to encouragecontinuing innovation. Entrepreneurs don’t always need to beinnovative, but typically it helps. Entrepreneurship and Innovation – Russian Standard Bank Russian Standard Bank was founded in 1999 by Roustam Tariko, and is now the leader in the Russian consumer finance market, with more than 25 million loan customers and 25 million credit cards in issue. The bank was started in the middle of a financial crisis in Russia, which illustrates how there are opportunities for entrepreneurship and innovation even in adverse conditions. The bank has over 400 branches and representative offices, 46,000 POS locations and in addition to consumer finance offers deposit products and private banking services. Source: Russian Standard Bank 11
  11. 11. The impact of the crisis2 on innovation 13
  12. 12. The financial crisis first took hold in the middle of 2007 and went throughvarious stages before reaching a critical point in September 2008 withthe bankruptcy of Lehman Brothers. The initial phase was a liquidity crisisfor banks reliant on wholesale funding, and this was followedby a solvency crisis as banks were required to significantly reduce theirleverage by shedding assets or raising capital. The financial crisishas led to the worst recession in the real economy since the depressionof the 1930’s, and mounting credit losses are causing more problemsfor banks.The impact is staggering as you can see from Table 1 which shows theexpected writedowns due to the crisis, and the actual support measuresput in place for European banks. The support measures add up to 27%of European GDP . Projected Writedowns as of April 2009 (Euro bn) Loans 424 Securities 143 Support Measures as of June 2009 (Euro bn) Capital injections 160 Guaranteed bond issuance 544 Other guarantees 237 Table 1 Asset support 612Source: IMF3, ECB4Following significant government efforts to stabilize the banking system,the crisis has moved into a phase which will involve a longer termprofitability challenge. Some research by the Bank of England has shownthat the level of profitability achieved by the banking industry in the last10 years was based on increasing leverage rather than improvementsin the underlying business5. In the short-term, margins have widened insome product areas, and competition may have reduced, but fundingcosts are expected to rise and banks will need to continue to work very 14
  13. 13. I n n o v a t i o n i n r e t a i l b a n k i n ghard for revenue growth while at the same time becomingmore efficient.The impact of the crisis on countries across Europe has been variedand some of the emerging economies have been quite resilient. TheIMF assesses the risks in these countries by looking at current accountdeficits, short-term external financing needs and real credit growthin the last 5 years3. Countries such as the Baltic states and Ukraineare in a relatively weak position, whereas Poland and Turkey have sofar been much more robust.It is also a mixed picture for Western European countries. The UK,Spain and Ireland have been particularly impacted by falling propertyprices. The UK also has a very high level of indebtedness in thehousehold sector, and its economy is relatively more dependent onthe financial sector in general.In the UK, the government has taken significant ownership stakes in2 of the 5 major banks. This was required due to over expansion inproperty lending (HBOS) and poorly timed overseas acquisitions (RBS)among other things. Santander has taken the opportunityto consolidate its position in the UK market by buying some failedsmall banks (see box). Innovative Expansion during the Crisis – Santander Santander is pursuing an ambitious growth strategy which is innovative in the sense that the bank is leading the way in the global integration of retail banking – an example of business model innovation to drive efficiency. In the UK, Santander acquired Abbey in 2004 as a stepping stone and in 2008 this was followed by the acquisitions of Alliance & Leicester and Bradford & Bingley. Formerly Building Societies, none of these banks had been able to build a viable, independent long term business model. Santander is driving down costs by migrating all of the acquired banks onto its existing Spanish core banking system, Partenon. This kind of pan-European integration of IT and back-office operations has been long talked about but is now actively underway at some banks such as Santander. 15
  14. 14. BNP Paribas has also used the crisis to pursue acquisition opportunities, notably ofFortis in Belgium. Banks in the Euro area have to some extent fared better than UKbanks but the Bank for International Settlements believes that their balance sheetshave not fully reflected expected losses and has urged them to make realistic writedownsand recapitalise6.Some would argue that innovation has played a major role in causing the crisis.The UK mortgage lender Northern Rock was one of the first banks to fail – in September2007 – after aggressively building its business with innovative lending products, like the125% loan-to-value mortgage, and an innovative wholesale funding structure for amainstream lender.The Financial Services Authority in the UK has even questioned the need for some kindsof innovation – “given too much choice consumers often prefer not to act at all for fearof making a wrong choice and too much choice causes confusion. Is there too muchinnovation in some markets – such that it is a barrier to consumers engagingwith them effectively?7”Until now, the banking sector has been remarkably immune to innovative disruptionfrom new entrants which we discuss in more depth in Section 4. However, the crisismay provide the opportunity that others have been looking for to exploit both financialweakness and a loss of consumer confidence in banks.Are banks now more focused on efficiency?Not all banks have been affected in the same way by the crisis, but it was clear fromour research that the majority of banks are focused more on efficiency than growth,and only between 5% and 15% were focused on growth more than efficiency in the3 regions (see Figure 2). Proportion of banks focused on growth or efficiency Growth Growth & Efficiency Efficiency 100% 80% 60% 40% 20% 0% Figure 2 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey Results 16
  15. 15. I n n o v a t i o n i n r e t a i l b a n k i n gHowever, we should also note that between 20% and 40% of banks in each of theregions are equally focused on growth and efficiency. One major bank which hasperformed well during the crisis told us that “the crisis has reinforced our strategyto pursue a balance of growth and efficiency – it is not a viable long term strategyto be focused only on efficiency and banks who have done this in the past have notbeen successful”.Several banks we spoke to from the developing markets who had until recently beenalmost exclusively focused on growth are now adopting more balanced strategies andemphasising the need for profitable growth.Also, not surprisingly, the vast majority of banks in all regions have either decreasedthe level of investment in innovation this year or have made no change (see Figure 3).Very few have increased the level of investment, although the proportion doing this washigher in Central & Eastern Europe at 29%. The international banks operating in thatregion however were much more likely to have reduced innovation investment.One bank pointed out that it was hard to separate what represents investment ininnovation from general ongoing business projects and we would agree with that, sothe survey can only really be an indication of perceptions rather than a precise answer.But it does raise the question about how good banks are at defining and measuringtheir level of investment in innovation. Change in investment in innovation this year Increase No change Decrease 100% 80% 60% 40% 20% 0% Figure 3 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey Results 17
  16. 16. We tend to think of innovation in terms of new products like the Apple iPhone orNintendo Wii, and innovation is certainly very important for growth according to thebanks we surveyed. As you can see in Figure 4, between 71% and 77% of banks ineach region rated its importance as either high or very high on a 5 point scale. Theresults for Central & Eastern Europe were impacted by the response from banks inTurkey – excluding these banks, the level dropped to 61%. Banks rating the importance of innovation for growth as either high or very high 100% 80% 60% 40% 20% 0% Figure 4 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey ResultsWe were surprised to find that banks in Central & Eastern Europe and Russia & CIS ratedthe importance of innovation for efficiency improvements even higher – approximately90% in each region scored it as high or very high (see Figure 5). In contrast, only 66% ofbanks in Western Europe felt that the importance of innovation for efficiency was eitherhigh or very high. Again, Central & Eastern European banks excluding Turkey rated theimportance lower, but still quite a lot higher than Western Europe. Banks rating the importance of innovation for efficiency as either high or very high 100% 80% 60% 40% 20% 0% Figure 5 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey Results18
  17. 17. I n n o v a t i o n i n r e t a i l b a n k i n gSome banks talked about how innovation in products and channels,such as instant loans in Turkey, were also driving significant efficiencyimprovements by eliminating unnecessary processes. Other banks inCentral & Eastern Europe and Russia & CIS saw a lot of potential still inadopting practices like centralisation of operations or processreengineering which in their context were seen to be relatively innovativeactions to take. We explore the issues underlying these views in therelevant sections on growth and efficiency. 19
  18. 18. Innovation3 strategy
  19. 19. How common is it to have an innovation strategy?Several of the questions in our research focused on the issue of innovation strategy. Whenasked if their bank had an innovation strategy we found that slightly more than one thirdof banks in each region said they had an innovation strategy as shown in Figure 6. Theresult was remarkably similar across the regions. Proportion of banks with an innovation strategy 50% 40% 30% 20% 10% 0% Figure 6 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey ResultsActually we think these figures slightly overstate the real picture because our interviewexperience suggests that if we were to apply a rigorous definition of what constitutesan innovation strategy – including for example objectives, processes and measures ofsuccess – the proportion would be lower.The question also needs to be considered in the light of how many banks were aiming tobe innovation leaders in their domestic market. This percentage was very high in all regions,and particularly in Central & Eastern Europe due to the ambitions of the banks in Turkey. Proportion of banks seeking to be innovation leaders 100% 80% 60% 40% 20% 0% Figure 7 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey Results 22
  20. 20. I n n o v a t i o n i n r e t a i l b a n k i n gIn fact, almost 80% of the Turkish banks responding to the survey werealso aiming to be innovation leaders using an international benchmark,not just in their domestic market. These banks are very ambitious andare keeping up-to-date with global developments in retail banking. Morethan one Western European bank we interviewed believed theiroperations in either Turkey or Poland were more innovative than theoperations of the parent company in the home market.There is not necessarily a problem with so many banks aiming to beinnovation leaders so long as it is a focused strategy which supports thevalue proposition. The concept of value propositions was introduced in“The Discipline of Market Leaders” by Treacy & Wiersama: “companiesthat have taken leadership positions in their industries typically havedone so by narrowing their business focus. They have focused ondelivering superior customer value in line with 1 of 3 value disciplines –operational excellence, customer intimacy or product leadership.8”In other words, banks should be clear about which areas they wantto be innovation leaders in, how they are going to achieve that objective,and how they are going to measure success.There may be a rationale for being at the forefront of product and serviceinnovation if this helps to create an “image” for the bank which supportscustomer acquisition activity or other objectives. In this case, innovationinvestment can be seen partly as a marketing investment, and individualinnovations may not all need to be justified on their own business cases.For example, a bank may aim to be the first to market with a new iPhonemobile banking application, or a new contactless payment card, in orderto support its brand image, even if the specific investments are difficultto justify financially. A few banks, like BBVA and BNP Paribas, have setup innovation showcases which have a practical value but can also helpto create a strong innovation image.Factors which explain different approaches to innovationIf business strategy is the main driver of innovation strategy, it is difficultto be prescriptive about what the innovation strategy of any particularbank should be. However, there are some generic factors which willdetermine some of the differences in approach:• Market related factors Stage of market development Regulation Culture (including how this affects consumer attitudes) 23
  21. 21. •Company specific factors Market share Ownership Resources (related to financial strength in view of the crisis)The matrix in Figure 8 depicts these different factors with examples ofbanks from Poland and Spain, which are markets at very different stagesof development. COMPANY SPECIFIC Other factors to overlay: Ownership, Resources Market share of the bank Smaller Larger Other factors to overlay: Regulation, Culture Earlier Stage of market development Alior Bank PKO MARKET RELATED Later Bankinter Caja Madrid Figure 8To illustrate how these factors might combine in determining theapproach to innovation:• A large bank in a market which is at an earlier stage of development, such as PKO in Poland, has opportunity for improvement by adopting best practices to become more efficient, extend its product range and channels, and focus on its existing customer relationships. To be successful, it would not necessarily need to be the most innovative bank in the market, though it could still chose to make that an objective. 24
  22. 22. I n n o v a t i o n i n r e t a i l b a n k i n g• A smaller bank in the same market, such as Alior Bank (a recent start-up), will typically need to be more innovative to attract customers – either customers new to banking, or customers from more established rivals. As a start-up, this bank has some advantages in being able to begin operations with a clean sheet of paper and adopt the latest operating processes and technology innovations, but on the other hand it does not have economies of scale.• For a large bank in a more mature market, such as Caja Madrid in Spain, customer loyalty and cross-sell rates are already quite high, and the bank is already relatively efficient. The challenge is to embed a culture of continuous and mainly incremental innovation, while at the same time looking out for opportunities for strategic innovation or risks of market disruption.• In the same market, a smaller bank such as Bankinter is at a scale disadvantage and there are fewer new to banking customers to target. Arguably, such a bank needs to be innovative to prosper and may therefore have to consider more radical innovations than one of the larger banks.The other market related factors come into playbecause, for example, regulation and culture is notthe same even for countries within the same region.Hence when we compare say Poland and Turkey,they have very different characteristics and a bank’sinnovation strategy needs to reflect that.The other company specific factors come into playbecause banks that are part of larger pan-Europeangroups (“ownership”) will have different options toconsider on how to focus their innovation efforts,and banks with stronger financial resources will alsohave more innovation strategy options.Taking these and other factors into account youwould not expect all banks to have the sameinnovation strategy even if, superficially, there aresome similarities. 25
  23. 23. Do you need an innovation department?Not surprisingly, banks that had created a department responsible forco-ordinating and driving innovation were more likely to have aninnovation strategy. As you can see from Figure 9, the creation of aninnovation department was most common in Central & Eastern Europeand least common in Russia & CIS. Proportion of banks with a department responsible for co-ordinating innovation 30% 25% 20% 15% 10% 5% 0% Figure 9 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey ResultsExamples of banks we spoke to in Western Europe with innovationdepartments were BBVA and Caja Madrid. In the case of Caja Madrid,the desire to focus on making the bank more innovative led to thecreation of the department and the development of an innovationstrategy in 2007.Examples of banks we spoke to in Central & Eastern Europe withinnovation departments were Garanti Bank and Turkish Economy Bank(partially owned by BNP Paribas). One of the roles of thesedepartments is to provide a focal point to monitor innovationdevelopments from around the world, in banking and in otherindustries that might impact banking.The need for an innovation department is not seen to be universal.One quite innovative bank in Poland felt that this would distract fromeach department and employee being innovative, and this was quitea common view. However, for some of the Western European bankswho had struggled with becoming more innovative, it was seen as acatalyst for change. 26
  24. 24. I n n o v a t i o n i n r e t a i l b a n k i n g Innovation Strategy – Turkish Economy Bank In 2005, Turkish Economy Bank was a small bank focused on corporate and private banking. It has since then developed a retail banking business with more than 1m customers and over 300 branches across Turkey. Key to the bank’s successful development has been a clear innovation strategy, co-ordinated by the innovation department but involving all areas of the bank. This includes the following components: • Innovation leadership from senior management • Innovation strategy, aligned to the business strategy • Idea generation and screening – including the Spark innovation portal • Change management processes and innovation competency development • Evaluation, measurement and rewards, creating innovation champions • Internal and external communication to generate interest and ideas Source: Turkish Economy Bank, Presentation at the Efma CRM Conference in June 2009A disciplined innovation processEven without an innovation department, it is clear from our interviewsand from best practice research more generally, that there are realbenefits from having a disciplined approach to innovation basedaround a number of key stages. These stages could apply to any typeof innovation, but particularly where a significant investmentis required:• Idea generation• Idea screening• Business case preparation and review• Concept development• Prototyping• Implementation 27
  25. 25. As we will see later in the report, banks do not see idea generation asa barrier to innovation although we think they would benefit from more“open innovation” (see below). However, we believe the idea screeningprocess is also critical and needs the proper attention. Even bankswithout an innovation department might have some sort of InnovationCommittee to review ideas but these can become politicised anddysfunctional if not carefully managed.The speed of implementation is a key factor for some types of innovationproject. Both Turkish Economy Bank and LCL described how they hadbeen able to develop and introduce significant product and channelinnovations in just 6 months. Such an approach means being pragmaticand accepting that not everything will be perfect on launch, but canprovide a number of competitive advantages.Measuring success is another key management issue which mostcompanies struggle with. In a report on this subject, Boston ConsultingGroup recommended the use of multiple measures such as revenuerealized from launches in the past 3 years, projected versus actualperformance, and the total investment in growth projects9. Of course,this depends on being able to identify what is an innovation investment,and how to allocate costs to it.The potential for open innovationThere has been growing interest in the concept of “open innovation” aspursued by companies like Procter & Gamble (see box). This recognisesthat a company’s own employees are not able to generate or pursue allof the most innovative ideas, so it makes sense to work with externalpartners to maximise the opportunities. For an R&D focused companylike Procter & Gamble, this might involve drawing on external scientificresources, but it can also involve working with smaller, innovativecompanies who are able to explore more radical innovations. Anotherdevelopment along these lines is “co-creating” where companies engagetheir customers in the product development process.28
  26. 26. I n n o v a t i o n i n r e t a i l b a n k i n g Open Innovation – Procter & Gamble Procter & Gamble has for a long time been one of the world’s leading consumer products companies with a strong reputation for product development and management. However, according to the CEO, AG Lafley, “by 2000, it was clear to us that our invent-it-ourselves model was not capable of sustaining high levels of top-line growth.” The company realized there were many scientists, engineers and small and mid-size entrepreneurial companies globally working on the innovations that P&G was interested in, so they developed an approach called “Connect and Develop” to exploit these external sources of innovation. Open innovation now plays a part in 35% of P&G’s innovations, accounting for billions of dollars in revenues10.In our research, we asked how banks saw the potentialfor partnerships and collaborations with othercompanies to drive more innovation. Not surprisingly,partnering with competitors was seen as the least likelyapproach for banks in all regions. In most casesthis was either due to regulation against anti-competitive behaviour, or for the larger banks, beinghappy to work alone. 29
  27. 27. In fact, it was the smaller banks who rated this approach to innovation most highly, forexample Bankinter which has worked in partnership with other banks to develop theHalCash remittance product. Of course, there are some payments related innovationactivities which require collaboration between competitors and so this is still importantfor all banks. Importance of partnerships for future innovation (scale 1-5, where 5 is very high) Western Europe Central & Eastern Europe Russia & CIS 5 4 3 2 1 With competitors With companies With companies With major With small, Figure 10 from other industries from other industries suppliers innovative companies for distribution for combining partnerships capabilities and technologies Source: Infosys - Efma Innovation Survey ResultsBanks in Central & Eastern Europe saw a much higher potential for distributionpartnerships to drive innovation compared to Western European banks. In general,Western European banks have found these relationships to be disappointing and newopportunities are in any case relatively limited. For the Central & Eastern Europeanbanks there are still many distribution partnerships to go for and there is some potentialfor innovation. Examples include Garanti Bank’s “Money Card” in partnership with Migrosin Turkey which combines the benefits of a retailer’s co-branded card with a multi-loyaltycard, and includes a number of innovative product features.Working with other companies to combine capabilities and technologies was seen tohave good potential by banks in all 3 regions. However, we were provided with fewexamples of how this was working in practice and most of the comments related topartnerships with mobile telcos.Perceived as slightly less important were partnerships with major suppliers. There arechallenges for suppliers getting too close to individual customers but there are examplesincluding the recent technology partnership agreement between Caixanova, IBM andINSA to create a technology innovation centre in Spain. 30
  28. 28. I n n o v a t i o n i n r e t a i l b a n k i n gThere is also a difference in attitude to working with smaller, innovative companies, with Central & EasternEuropean banks the most likely to think of this as an important driver of innovation. Such a partnership cango beyond a normal supplier relationship if the bank takes an equity stake in the company, or develops adeeper and closer relationship, perhaps with exclusivity for a period of time over some key technology.Examples include Credit Mutuel Arkea’s small investment in UpandNet the online giftcard company. A Review of Innovation Management Best Practices We have reviewed a wide range of sources on best practice covering all elements of the innovation process, some of which are described below. The four common themes to highlight from all of this expert opinion are: • Start with a clarity of objectives, and link these to strategic objectives • Give support to innovation from the highest level and integrate it into the management process • Focus on the people and cultural issues at least as much as the process • Ensure rigorous measurement of innovation and accountability for results In a Strategy & Business article, “P&G’s Innovation Culture”11 , Chairman & CEO AG Lafley describes how P&G built a world-class organic growth engine by investing in people. In 2000, P&G’s success rate with new products was 15-20%. It is now 50-60%. According to Lafley: the consumer must be central to the process, innovation should be integrated in everyone’s job and must be scalable, employees should be recruited and developed emphasizing flexibility and agility, and there needs to be integrated thinking across the company. The Harvard Business Review article, “Reverse Engineering Google’s Innovation Machine”12 , describes the 6 major components of Google’s approach to innovation. Google allocates time in employee job descriptions for innovation, actively cultivates an environment of experimentation and rapid failure, and uses rigorous analysis and objective decision making to assess ideas. Google is also particularly good at leveraging innovation partnerships while keeping control of the core architecture. AT Kearney research with 250 companies worldwide, “Innovation Management – Strategies For Success and Leadership”13 , identified the traits of successful innovators and found that leaders clearly focus more time on the early stages of the process: innovation strategy, idea generation and idea screening. Best practice for innovation strategy requires creating an explicit and well articulated strategy. Best practice for idea generation means involving a wide array of partners and embracing open innovation. Leading companies review more ideas and use well-defined screening criteria; they also take bigger bets initially but are more rigorous at pruning ideas. McKinsey & Co, in the article “Leadership and Innovation”14 proposed that companies should focus on 3 areas: integrate innovation into the strategic management agenda; make better use of existing talent for innovation and allow innovation networks to flourish; foster an innovation culture based on trust among employees where ideas are valued. The main motivators of behavior to promote innovation are strong leaders who encourage and protect it, and senior executives who actively manage and drive it. Companies need to define the type of innovation that drives growth and meets the strategic objectives, add innovation to the formal management agenda, and set performance metrics and targets. 31
  29. 29. Strategic versus incremental4 innovation 33
  30. 30. We have defined strategic innovation as innovation which is moresignificant for the business model of the bank, or part of the bank, andwhich creates real competitive advantage.Strategic innovation is not exactly the same as “disruptive” innovation,a term that was adopted by Clayton Christensen and Joseph Bower todescribe situations when new competitors enter a market at the “lowend” and then from this position disrupt the market for the establishedcompetitors, or expand the size of the market by drawing in previouslyun-served customers. Examples of disruptive innovators are low-costairlines such as Ryanair15 .More recently, in the Harvard Business Review article “Reinvent YourBusiness Model”, Christensen and his colleagues have written aboutbusiness model innovation, using several examples including the iPodand iTunes which 3 years after launch was a $10bn business accountingfor 50% of Apple’s revenues . Business model innovations of this typecan reshape or even destroy whole industries but are rare.Examples of strategic innovation in banking are also relatively rare. Wehave already mentioned some previous innovations which in our vieware strategic – like the diversification of banks into the selling ofinsurance products – but they tend to be adopted by most banks andtake time to become established. Unlike the Apple iPod/iTunes casethere is not usually a significant first mover advantage and no “winner-takes-all” outcome.One banker in Western Europe we spoke to said that he would onlyexpect to see one or two strategic innovations in his lifetime. Anotherbanker in Central & Eastern Europe said that the crisis has provided theimpetus for his bank to take a fresh look at all aspects of its businessmodel, but they were still at an early stage of reviewing this.A particularly useful insight from one of our interviewees was that theysee a cycle of strategic innovation followed by implementation, and thena continuous refinement of the business model. Where you are in thecycle will determine where your innovation focus and resources aretargeted.Between 5% and 20% of the banks in our survey said they were workingmainly on strategic innovation. 57% of respondents in Western Europeand 79% in Central & Eastern Europe said they were working eithermainly on strategic innovation or on an equal mix of strategicand incremental. 34
  31. 31. I n n o v a t i o n i n r e t a i l b a n k i n g What kind of innovation are banks mainly working on? Mainly Strategic Strategic & Incremental Mainly Incremental 100% 80% 60% 40% 20% 0% Figure 11 Western Central & Eastern Russia & CIS Europe Europe Source: Infosys - Efma Innovation Survey ResultsA few of the banks who said they were working mainly on strategicinnovation were relatively small, start-up banks, or banks with a recententrepreneurial history. Other examples included banks operating incountries still at a very early stage of market development, for examplein Romania.Two of the best examples of potential strategic or business modelinnovation we identified from the interviews and the survey were:• Setting up a Mobile Virtual Network Operator (see box)• Expanding in a new market through franchising (see box)We think that banks setting up as Mobile Virtual Network Operators is agood example of what may prove to be a strategic innovation as it takesthem into a new business and allows them to control more of the valuechain in mobile banking. It may also be a good defensive move if mobiletelcos start to set up their own banking operations. There are severalexamples of this strategy such as Rabobank (Netherlands), PosteMobile(Italy) and Bankinter (Spain) (see box).Franchising is also a business model innovation, though it has been usedin some markets for many years, such as Belgium, and may not beapplicable to all markets. ING Romania and Volksbank International havesuccessfully introduced a version of the concept into Romania in the lastfew years. At the end of 2007, ING had 170 agent offices,and Volksbank had 95 agent offices supporting 135 traditional branches(see box). 35
  32. 32. Other suggestions from our interviews included Web 2.0 strategies and Mobile Banking strategies. Theseare relatively speaking leading edge for some of the banks involved, but it remains to be seen how thebusiness model of the bank will fundamentally change as a result.Also mentioned were back-office optimisation and increased co-sourcing/outsourcing, but in both thesecases it was recognised that the changes being pursued would not necessarily be viewed as innovativein an international context. It might be more appropriate to describe these as major change initiatives. Strategic Innovation – Rabo Mobiel and PosteMobile With Rabo Mobiel, Rabobank offers its customers a multichannel bank that is open 24/7 making it possible to consult and manage bank accounts via internet or mobile phone. As a MVNO on the Orange network, Rabobank also offers its customers a “low cost” telephone offer to encourage them to use mobile internet. The logical continuation from this positioning is the use of the mobile as a virtual purse and a secure medium for payment cards. PosteMobile, the Italian postal company MVNO, was launched in November 2007 and more than 200,000 BancoPosta customers used these services in the first six months. PosteMobile decided to give a further boost to its innovation strategy by launching mobile payment and shopping services. The Gemalto MVNO portal management solution allows PosteMobile subscribers to pay their bills with their mobile phone, send a telegram or a fax, manage their account and transfer funds from their BancoPosta account and their BancoPosta PostePay prepaid credit card. Source: Banks and Mobile Telephones (Efma, Capgemini, Microsoft, Crédit Agricole, Novamétrie, May 2009) Strategic Innovation – ING Romania In 2004, ING started a new greenfield operation in Romania by combining its “Self’Bank” business with a franchise formula imported from ING Belgium. Exclusively tied entrepreneurs work as “ING Partners” in “ING Offices”, promoting financial, banking and insurance products and services, including loans, savings products, credit cards, etc., as well as post-acquisition services. In a separate “Self’Bank” section owned and maintained by ING, clients can perform payments and cash transactions as well as exchange money, etc., without any involvement of the agent or his/her staff. The agents have a mandate from ING to represent them, while ING is responsible for everything they do. ING has 170 offices operating under this scheme in Romania. With an annual network growth of 40%-50%, the bank has attracted over 540,000 clients since the launch of the concept. Due to its automated operations, ING Offices reach a high productivity, employing half the staff of a traditional branch, between 3 and 10 people on average. Source: Entrepreneurial Banking in Europe (Efma, ZEB, Centea, November 2008) 36
  33. 33. I n n o v a t i o n i n r e t a i l b a n k i n g Iceland Sweden Finland Norway Russia Estonia Latvia Denmark Lithuania Netherlands Ireland Belarus UK Poland Germany Belgium Czech Rep. Slovakia Ukraine Switzerland Austria Moldova Hungary France Slovenia Romania Croatia Italy Bosnia & Herz. Serbia Bulgaria Montenegro Albania Portugal Spain Entrepreneurial banking models... Greece already exist seem feasible are possibly feasible are not possible n/kSource: Entrepreneurial Banking in Europe (Efma, ZEB, Centea, November 2008) One of the characteristics of the banking industry is that the timescales are quite long for strategic innovation to make a difference. It would probably not make sense for banks to devote significant resources working on strategic innovation at the expense of incremental innovation, but there is a case for investing in exploring strategic innovation possibilities in order to be ready to move on these when necessary. The example of ABN Amro Netherlands “Dialogues Incubator” shows how this can be done using a corporate venturing approach which is common in other industries (see box). 37
  34. 34. Incubator Strategy – ABN Amro ABN Amro’s Dialogues Incubator was set up to develop ventures which made use of ABN Amro’s intellectual capital and contributed more widely to society. The incubator has strong support from senior management and has set up several ventures including: • Mkbnext: a service to help small businesses with mergers and acquisitions • Brightbox: to provide ABN Amro’s HR expertise to other businesses • Associates: an employment service for independent knowledge workers The incubator is a catalyst for innovation in the bank more widely, and is able to explore new business models without some of the constraints of the core banking business. As an example it has experimented with “agile” IT development approaches which are of interest to the bank. Source: ABN AmroStart-up companies have had very limited success so far in disruptingthe retail banking industry, even though many observers see it as ripefor change. Comparison services, such as moneysupermarket.com inthe UK, have become well established and are a useful channel fordistribution of bank products. Online payment services like Paypalhave also had some success but have posed a limited threat to thebanking industry.More recently, peer-to-peer lending services have been launched inseveral countries, for example Prosper in the United States and Zopain the UK and Italy (although Zopa has recently had its licensesuspended in Italy). At present these are very small businesses whichhave had minimal impact on established banks, but they havepotential to grow. In the box we have highlighted some other recentfinancial services start-ups from the United States that are worthkeeping an eye on. 38
  35. 35. I n n o v a t i o n i n r e t a i l b a n k i n g Examples of Recent Innovative Start-Ups in Financial ServicesThere is a steady stream of financial services start-ups, particularly in the UnitedStates, many of whom are focused on the payments space. These companies canbe disruptive to the banking industry, but in some cases they also partner withbanks. We have selected 4 examples here which illustrate the type of innovationbeing developed by start-ups.Obopay is a service that lets consumers and businesses purchase, pay, and trans-fer money through any mobile phone using Obopay’s mobile application, text mes-sage, mobile Web, or Obopay.com. As the first mobile payment service createdexclusively for the mobile phone, only Obopay works on any phone and any carrierto empower consumers and businesses with the convenience of mobile payments.Obopay partnered with MasterCard in June 2008 to provide mobile P2P paymentservices in the U.S., and received an investment of $35m from Nokia in March2009.Bill Me Later enables online retailers to offer transactional credit to consumers atthe point of sale using sophisticated underwriting techniques and credit decisionmodels. In the small business sector, Bill Me Later is pioneering payments with theBill Me Later® Business service tailored specifically for the small business buyer.The Bill Me Later network includes hundreds of top-tier retailers including Apple,Borders, and Walmart. The company was acquired by eBay in October 2008for $945m.SmartyPig allows customers to open goal-based savings accounts and invite friendsand family to contribute to their goals. Goals range from saving for a child’s collegeeducation, to planning for a new baby or wedding. It is based on proprietary,patent-pending technology and the latest security standards. According to aninvestor in the company “SmartyPig is a safe, proven platform providing uniqueopportunities for consumers to maximize their savings. It has been successfulinside and outside the U.S. and I believe that within 5 years it will be recognizedas a global leader in the consumer banking space.”SimpliFi is a free online financial planning and advice service that lets anyone planfor their financial future. It was created to give middle and lower income consumersaccess to the kind of professional financial planning and advice usually availableonly to those in higher income brackets who work with financial planners. SimpliFi’sVirtual Financial Advisor is Sophie, and she guides the user through the onlineplanning process covering long-term savings, debt management, insurance andinvestments. The company won the Best of Show award at FinnovateStartup 2009.Source: Company websites 39
  36. 36. Innovation5 and growth 41
  37. 37. Innovation for growth is typically the type of innovation most people can relate to becauseit covers new products and services, often using new technology such as mobile banking.In exploring the issue of innovation and growth, we started by asking banks about theirlevel of development activity in the areas of product, channel and customer relationship.We recognise this is a simplification because in some ways these activitiesare interconnected, but in general the respondents did not have a problem makinga clear distinction.The differences overall were quite small. On average across all the regions, there was aslightly greater focus on Customer Relationship developments than on Product or Channel.Banks in Russia & CIS rated their Channel development activities lowest of the 3 types,whereas banks in Western Europe rated Product development as their area of least focus.There were some very mixed views underlying these results. For example, we spoke to onebank in Central & Eastern Europe which was mainly focused on Product development, andanother bank in the same country which was mainly focused on Customer Relationshipdevelopment. The two banks were of a same size and had other similarities such as foreignparents, but they were pursuing opposite development priorities.It was also the case that a number of the banks we interviewed scored Productdevelopment activity as the highest to reflect their current focus, but at the same timethey were planning to shift more towards Customer Relationship developments. We wouldtherefore expect to see Customer Relationship development activity becoming more clearlythe most important area of focus.We also asked banks to score their current level of innovation in the areas of Product,Channel and Customer Relationship. First of all, looking at the average scores across thebanks in each region, you can see from Figure 12 that the perceived level of innovationwas highest in Central & Eastern Europe, but this was driven by the responses of the banksin Turkey. Otherwise, the highest level of innovation was in Western Europe, and the levelof innovation in Russia & CIS was quite low. 42
  38. 38. I n n o v a t i o n i n r e t a i l b a n k i n g Banks rating their level of innovation in Products, Channels and Customer Relationship as either high or very high 60% 40% 20% 0% Western Central & Eastern Central & Eastern Russia & CIS Europe Europe Europe Figure 12 (excl. Turkey) Source: Infosys - Efma Innovation Survey Results The typical reasons put forward by some of the banks we spoke to in Turkey for their focus on innovation were: • The relatively young population with an interest in trying new technologies like mobile • The focus on customer acquisition in markets where banking penetration is still increasing • The desire to increase geographic coverage rapidly but at the lowest possible cost The first of these points about having a young population may well be unique to Turkey as you can see from Table 2 which illustrates the differences between some of the markets we studied on a range of dimensions. Turkey clearly does have a much younger population but Poland, Russia and Ukraine are more or less the same as Western Europe on this dimension. However, mobile phone penetration is actually higher in Poland, Russia and Ukraine than it is in France or Turkey. In terms of other technology use, Internet penetration is more consistent in declining from West to East. The second and third of these points about the focus on customer acquisition and increasing geographic coverage could apply equally to many of the other developing markets in Central & Eastern Europe and Russia & CIS, and so are not unique to Turkey. France Spain Turkey Poland Russia Ukraine GDP per capita (PPP US$) 34,045 31,955 13,920 17,625 16,139 7,271 Population < 25 yrs old 31% 26% 44% 31% 29% 28% Internet penetration 51% 59% 33% 44% 21% 23%Table 2 Mobile phone penetration 93% 112% 89% 109% 133% 121% Source: World Bank, Eurostat, International Telecommunications Union (all data for 2008) 43
  39. 39. We should recognise there are also big variances within countries – the main cities inTurkey or Russia are not comparable with their less developed regions. A number of banksstated that there are customer segments in these countries which need to be targetedwith different types of product and channel propositions than the more affluent or younger,urban consumers.Several Western European banks we spoke to said that customer inertia was a rationalefor not having to invest in the latest channel technologies, and so their focus was muchmore on finding innovative ways to deepen customer relationships.Product innovationWe asked an additional question on product innovation, which was about the importanceof 4 different factors – technology, bundling or packaging, personalisation and pricing (seeFigure 13).For the Central & Eastern European banks and for the Western European banks, productpersonalisation was seen to be the most important factor, followed by bundling orpackaging. However, many of the Western European banks we spoke to were concernedthat regulation would make it more and more difficult to bundle products, and hence theywere less inclined to focus on this. Product technology was the least important factor forthe Western European and Central & Eastern European banks, but the most important forbanks from Russia & CIS. Importance of different factors in Product innovation (scale 1-5, where 5 is very high) Western Europe Central & Eastern Europe Russia & CIS 5 4 3 Figure 13 2 1 Technology Bundling or Personalisation Pricing packaging Source: Infosys - Efma Innovation Survey Results 44
  40. 40. I n n o v a t i o n i n r e t a i l b a n k i n gIn-spite of the fact that Product innovation was the area of least focusfor the banks in our survey (although there is increasing interest in thedevelopment of new deposit products), there are a wide range of productinnovations apparent in the market. We have selected a few of the moreinteresting ones here to illustrate some of the main developments.Deposits. Caja Madrid has won awards for the Barrilete Cosmico savingsproduct which enables customers to earn more interest if they have moreproducts with the bank. This is a good example of pricing innovationlinked to the goal of increasing customer loyalty. LCL has developed aunique current account product for the French market called “a la Carte”,which improves on traditional package accounts by offering moreflexibility for personalisation, and a simulation capability when makingchoices (see box). In the Russian market, AlfaBank was the first todevelop a single contract to enable customers to more easily opendifferent accounts with the bank without having to go through the sameprocess each time.Payments. Bankinter developed the HalCash remittance product whichenables users to send money by SMS, and the receiver to pick up themoney from an ATM without having a card. Bankinter has also partneredwith banks in other countries to increase the scale of this business. Thereare other examples of this type of product, for example from GarantiBank in Turkey. Other P2P payments by SMS services have recently beenlaunched, such as the Pay2you service from Credit Mutuel Arkea.Cards. Garanti Bank’s FlexiCard is a good example of personalisation,where the user can select 10 different parameters when taking out thecard (see box). Other banks we spoke to also offer the opportunity forcustomers to select a photo to put onto their card, including AlfaBankin Russia with the MyAlfa card. Contactless cards are a major area ofdevelopment with many examples now across Europe, one of the latestbeing People’s Bank of Georgia which is launching a Visa payWavecontactless card. Banco Sabadell offers its customers the option at thepoint-of-sale of selecting an installment payment plan when making apurchase with a credit card – this is done by sending an SMS as thepayment is being approved. Prepaid cards on an open platform such asVisa are also a big growth area with potential for banks to be innovativein developing customer propositions. Banks in Italy are currently leadingthese developments in Europe with Poste Italiane being the largest issuer.The Visa CodeSure card is an example of a card innovation from Visa.This card has a battery, keypad and LED screen built in whichenables the user to generate one-time use codes for securee-commerce transactions. 45
  41. 41. Personal Loans. Several banks in Turkey offer “instant” loans by SMS or from anATM/Kiosk, where a customer can get immediate approval and receive the money from abranch after providing supporting documentation, or in the case of the kiosk from Akbankwithout having to go into a branch at all. This is both extremely convenient for the customer,but also drives down costs for the bank by simplifying the process and removing paper. Ofcourse, there are regulatory barriers to this type of product in many countries and in thecurrent environment, personal lending is not the area in which banks want to take anyadditional risk.Mortgages. In the current crisis, we can observe that mortgages are not the focus ofbanks for innovation. Some banks have even suspended new mortgage lending for thetime being and several product innovations from the last few years will probably bediscontinued. One notable innovation was identified by Millennium bcp in Portugal whichis offering price discounts based on the cross-sales of other products – this is similar tothe loyalty-based deposit products mentioned above. Product Innovation – LCL à la Carte and Garanti Bank Flexicard "LCL à la Carte" is a new concept based on interactivity and simplicity. A new customer composes a day-to-day banking cart, by the user-friendly simulation on the Internet or with his bank adviser in a branch, and benefits from permanent discounts on the standard rate of each product. These discounts increase according to the number of products and paying services subscribed and can represent up to a 20% saving on their total cost. If the customer domiciles his income at LCL, he will benefit from a further 10% discount. As his cart progressively grows, the customer discovers in real time, thanks to the simulator, the cumulated cost of the services he selected. This new approach is aligned with the LCL development strategy based on customer knowledge, the quality of customer advice and the price transparency that is now expected by all customers. *** Garanti Bank FlexiCard allows customers to choose the interest rate, reward rate, card fee, campaigns, redemption type, and card design. During the application process, applicants can manipulate over 10 parameters to create their preferred combination. Customers who want a simple approach can choose to select one of the 4 ready made packages. They can determine not only their reward ratio and type, but also choose from where they prefer to get additional Bonus points (whether it be a merchant category such as restaurants, or a retail store). From a redemption point of view, cardholders can use their Bonus points as cash, or they use their points to buy air tickets. The customised design also allows the option of having a vertical card, where the text and card number appears on the card in portrait rather than landscape layout. 46
  42. 42. I n n o v a t i o n i n r e t a i l b a n k i n gChannel innovationThe level of development activity and level of innovation in Channels wasthe highest in Turkey, and significantly higher than the rest of Central &Eastern Europe as you can see from Figure 14. Most of this activity inTurkey was focused on alternative distribution channels, but there are alsosome branch innovations taking place. Banks rating their level of development activity and innovation as either high or very high Channel Channel Development Activity Innovation 100% 80% 60% 40% 20% Figure 14 0% Turkey Other CEE Turkey Other CEE Source: Infosys - Efma Innovation Survey ResultsAs was the case for Product innovation, there are many examples of Channel innovationaround Europe as banks experiment with new channels and also the re-alignment ofbranches to meet current needs. Banks in different parts of Europe face differentchallenges and opportunities as we have already mentioned. The rate of deployment ofnew ATMs is much lower in Western Europe than elsewhere for example, which meansthat there is less opportunity for innovation. Western European banks are also openingfewer branches. Having said that, there is no reason why Western European banks shouldnot be at the forefront of innovation in Internet or mobile banking services.Branches. Deutsche Bank’s Q110 is an example of a showcase branch being used toexperiment with new concepts and technologies, as is one of Barclays’ branches in London.Several banks are developing low-cost branches, for example ING Belgium’s brancheswithout cashiers, or Turkish Economy Bank’s “lite branches”. One of the most dramaticnew branch designs is from CheBanca! which launched in Italy in 2008. However, it’sworth noting that in the United States, Washington Mutual’s radical branch design hasbeen dropped following the bank’s acquisition by JP Morgan Chase in favour of a moretraditional design. 47
  43. 43. ATMs and Self-Service Kiosks. Banks are significantly expanding therange of services that can be delivered from ATMs in many markets, andalso experimenting with more targeted marketing to ATM users. Billpayment, cash deposits, contactless card operations, and multipleoperations without having an ATM card are all examples. Several of theTurkish banks are leading in this respect, with for example Akbank’s loankiosks which won a technology innovation award from The Banker in2008.Internet. Internet banking functionality is improving all the time butmainly in an incremental fashion. The focus and interest now seems tobe on how to use the Internet as a sales channel, not just a servicechannel, improving user interfaces, and exploiting Web 2.0 opportunities.Examples of innovators in this channel are Yapi Kredi of Turkey whorecently won the 2009 award from Global Finance for Best Consumer& Corporate Internet Bank in Europe.Call centre. The main innovation here is the growing use of voice overinternet protocol and collaboration software to enable customers tospeak to an adviser interactively, either from their own PC, or from abranch terminal. This innovation has the potential to significantly changethe way that service and advice are provided to customers. It is not justa “call centre” innovation but more broadly a customer serviceinnovation. Bankinter was one of the first banks to implement this service(see box).Mobile. There are a large number of mobile banking projects underwayacross Europe so picking one or two is difficult. DnB NOR’s SMS basedbanking service is a notable success – it was launched in November2007, and within 12 months around 25% of the bank’s retail bankingcustomers were using the service which has some unique features. Thereare several examples from Turkey, but Garanti Bank was one of the firstwith a browser based service called Cep Subesi. It is linked directly tointernet banking using the same PIN and password, and 12 months afterlaunch in September 2007, the service had over 100,000 users. Theuse of the mobile handset itself as a payment device, using contactlesstechnology, is set to take off in the not too distant future with severalexperiments underway across Europe, such as the joint pilot by 6 Frenchbanks and Visa in Caen and Strasbourg. 48
  44. 44. I n n o v a t i o n i n r e t a i l b a n k i n g Channel Innovation – Bankinter Bankinter customers using the Internet can click on a button and connect directly to the call-centre If they have a query or need help completing a transaction online. Since introducing the video call service, Bankinter’s customer satisfaction ratings increased and its online product sales improved by 25 percent according to Dialcom Spontania. Using the video call and collaboration technology, Bankinter’s sales force now has the ability to see when a customer is on- line allowing them to interact and close a deal with customers immediately rather than over the phone or in-person. “Our customers tell us that data, voice and video collaboration perfectly balances the convenience of online banking with the personal service of an in-bank teller,” said Jorge Andreo, proj- ect manager of video and VoIP for Bankinter. Source: Bankinter, Dialcom SpontaniaCustomer relationship innovationThis was the activity that was receiving the most development focus by banks in Western Europe, andalso had a high degree of focus for banks in the other regions.However, in Central & Eastern Europe, the level of innovation in Customer Relationship was not particularlyhigh, and was very low in Russia & CIS. One bank pointed out that you don’t need to be particularlyinnovative when you are trying to drive the customer’s product holding from an average of around2 to around 4. In many cases, banks with foreign parents are bringing their home country customerrelationship management strategies to these new markets – this can be innovative locally, but not in aEuropean context.In Western Europe on the other hand, the level of innovation in Customer Relationship was perceived tobe slightly higher than for Products and Channels. Customers of banks in this region often hold an averageof 5 products and driving this average higher in a mature market will require more significant innovation.From the interviews and surveys, it was clear that there are fewer examples of Customer Relationshipinnovation than Product or Channel innovation, even though many banks are implementing a variety ofCRM systems, improving their data mining and analytical capabilities, and developing better systems forlead management.Banco Sabadell is using multi-channel, real time marketing campaigns at the level of one, and othersare working on similar approaches such as DnB NOR with event based marketing. A few banks talkedabout the need for innovation to improve the efficiency of sales staff, or provide better support torelationship managers. 49
  45. 45. In terms of more radical innovations however, probably the most significant is BBVA’s“tú cuentas” personal financial management service (see box) which is similar to anumber of the services now taking off in the United States. ING is testing a similarservice. These are based on the “aggregation” concept which has been in developmentsince the Internet bubble 10 years ago but is finally getting some traction. Customer Relationship Innovation – BBVA BBVA launched the “tú cuentas” service in 2008 and has achieved a strong take- up since then. Based on the Strands tool which was developed in the United States, it aggregates all types of information that are relevant to the customer which includes financial information, not just from BBVA, and also non-financial information such as electricity and phone bills. The program catalogs the information into predefined categories and allows cus- tomers to re-categorise if necessary. “tú cuentas” then presents customers’ in- formation more visually, providing them with an instant snapshot of all their finances to better understand what they are spending their money on. The serv- ice permits users to compare anonymously their finances with a group of their choice, allowing them to make a comparison of different expense categories with the chosen group. “tú cuentas” then offers the user personalised advice based on knowledge of their tastes and preferences. This can include more sophisticated options which use artificial intelligence to help find opportunities tailored to the customer’s preferences and needs. The user can also evaluate the utility of these sugges- tions, in such a way that the platform learns their tastes and preferences in order to make recommendations that are more adapted to their profile. Source: BBVAIt is important to mention social media even though the impact of this is still relativelysmall in banking. At a recent Efma conference on social media, banks such as ABNAmro and Banco Sabadell described their activities, which include experimenting withvirtual worlds, and setting up on Facebook and YouTube. Rabobank has also beenactively working on social media ideas and some banks in the United States are now“tweeting” on Twitter. A small start-up bank in Germany, Fidor Community Banking, isexperimenting with social media concepts, creating a community of customers whoshare ideas, help to design new products and vote on various issues. We expect largebanks to gradually embrace these approaches but as we have noted for otherinnovations, customer inertia will most likely prevent mass desertion.We also surveyed the importance of technology, staff capability and process designwhen innovating customer relationship management and found that technology wasthe least important factor. In all 3 regions, staff capabilities were seen to be the most 50
  46. 46. I n n o v a t i o n i n r e t a i l b a n k i n gimportant factor, emphasising the need to focus on staff related issues, and not justtechnology or process. One bank told us that they had implemented advanced CRMsystems a while ago, but the biggest challenge had been to get staff to use them in themost effective way, which required better training and different incentives. Importance of different factors in Customer Relationship innovation (scale 1-5, where 5 is very high) Western Europe Central & Eastern Europe Russia & CIS 5 4 3 2 Figure 15 1 Technology Staff capabilities Process design Source: Infosys - Efma Innovation Survey ResultsSME BankingOur research also covered SME banking and this business line deserves a separatemention.Many of the channel innovations already described, such as in Internet and mobilebanking, also apply to SMEs. Other innovations more specific to SMEs that wereidentified during our research were:• Tailored packages for very specific SME segments, such as those from Turkish Economy Bank, Raiffeisen International and OTP Bank.• Stream-lining of loan application processes down to 1-2 days in Russia by Société Générale (an innovation for the Russian market).• Better local servicing and decision making through “integrated financial solutions centres” at National Australia Bank’s Clydesdale and Yorkshire banks in the UK.• Additional, non-financial services such as eConta (accountancy and tax) and Virtualdoc (document management) from BBVA. 51
  47. 47. Innovation6 and efficiency 53
  48. 48. Cost management has been a top priority for banks in the more developed Europeanmarkets for many years, as revenue growth rates have barely exceeded the rate ofinflation (see Figure 16). It was until recently less of a focus for banks in Central &Eastern Europe and Russia & CIS who were experiencing very rapid market growth, andtheir priorities were acquiring new customers and managing the growth.As we explained earlier in the report, banks from Central & Eastern European and Russia& CIS now regard innovation to be more important for improving efficiency than it is forgrowth. This may well reflect the sudden need to focus on efficiency in these markets. Annual revenue growth by region for retail banks, 2002-2006 70% 60% 50% 40% 30% 20% 10% Figure 16 0% Western Europe Central & Eastern Europe Russia & CIS Source: Retail banking in Europe, Efma/Roland Berger/Nordea, April 2008In a 2008 report, Arthur D Little ranked European banks by their cost/income ratios inthe period 2004 to 200616 . What is striking from this research is that of the 10 mostefficient banks in Europe, 5 have failed or been bailed out by their governments. Ofcourse there are many reasons for this, but clearly efficiency alone will not guaranteelong term success.However, Banco Popular and Svenska Handelsbanken were both in the top 3 of thissurvey, and illustrate how a differentiated business model and focus can lead to higherlevels of efficiency. Not all banks can or should copy the strategies and business modelsof these banks, but they can learn something from them.One banker in Western Europe said that efficiency improvement needs discipline morethan innovation. However, another bank said that efficiency innovation was very difficultto copy, unlike for example a mobile banking application, so it could be used to createreal competitive advantage. There are many different possible approaches to efficiencyimprovement. Some banks are able to pursue acquisitions and benefit from economiesof scale within countries or increasingly across borders. Generally, this would not bedescribed as “innovation” but to some extent it is an innovative strategy for banks in 54

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