Bank Customers Forcing Changes to the Status Quo

"Innovation" is a word that's been bandied about for quite a long time. In the banking industry, the term has been regarded either as an oxymoron (like "freezer burn") or a one-way ticket to loan-loss provision purgatory (stated income loans, anyone?). Indeed, it can be argued (and I have) that the last truly innovative product in retail banking was the general-purpose credit card, created by Bank of America back in 1958. All other so-called innovations in banking were either improvements or extensions of existing functions, processes or products.

Being somewhat of a cockeyed optimist, I'm assuming that the worst of the global financial crisis is behind us, but banks face a period of slow growth and depressed earnings. With regulators and customers alternately taking whacks at the banking pinata, some institutions are fighting back with -- dare I say it? -- innovative approaches to relatively prosaic products such as the good-old demand deposit account. We are also seeing interesting card-based products such as the Citi 2G card, which includes an embedded microchip, and mobile payments and social networking are top-of-mind.

Yes, cost cutting and compliance still occupy huge mind share, but the twin forces mentioned above -- regulators and customers -- are focusing bankers' minds on doing things differently. Combined with ever-accelerating technology advancements, the potential for disruptive innovation is higher than ever before. Witness the multiple announcements this month of new mobile payments initiatives launched by bank consortia, Google and others.

The Road to Innovation

At TowerGroup, we've seen a number of examples in the past nine months of bankers who are really looking to understand where things are going over the next three to five years and who are willing to change priorities and strategies to account for these changes. The nature of disruption is not the same across financial services verticals; barriers to entry and the pace of technology change have significant influences on the relative attractiveness of financial investment segments and therefore the likelihood of a market entrant disrupting business, as the Amazon Kindle did to Borders Books.

Along with strategizing and planning, bankers are organizing themselves to innovate. San Antonio-based USAA, for example, has had a solid record of innovation recently, thanks to a mix of top-level executive focus and grass-roots development of ideas by innovation teams aided by technology platforms that allow for submission and tracking of ideas from conceptual glimmer to implementation.

Corporate venture capital is another source of ideas: Investing in start-ups by VC arms of major financial institutions is big business, not only for the potential return but also in support of technology transfer. Finally, technology and design firms such as Cisco, Microsoft and Palo Alto, Calif.-based Ideo support innovative developments in customer experience and product design.

Nonetheless, most innovation in banking is still just an extension of an existing idea, rather than something truly disruptive. Though we scarcely remember banking without the Internet and can agree that banking has changed significantly because of it, branch channel transaction volumes are ebbing only slowly even 15 years later, and bank business models have not meaningfully changed as a result. As the "digital native" population segment takes its place among banks' most desirable customers, that may yet change. It's noteworthy to see that banks are in fact interested in planning for innovation once again.

About the Author: Jim Eckenrode is a research executive with Needham, Mass.-based TowerGroup, a Corporate Executive Board company.