For financial services companies to stay relevant to modern consumers, they need to start thinking outside the vault.Sure, offering new approaches to traditional products and services is important. But to do some disrupting of their own, companies need to transform the innovation process, identifying and exploring foundation-shaking concepts.
When it comes to innovation, business-as-usual is not an option for financial firms.
“Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking,” said Jamie Dimon, chairman and CEO of JP Morgan Chase, in a letter to shareholders.
Citigroup also sent up a flare about the potential threat that fintech companies represent. As we noted in a blog post in June, Citigroup reported that fintechs are expected to push down the number of employees at American banks from 2.6 million last year to 1.8 million by 2025. And in Europe, bank jobs might drop by as much as 37%.
Silicon Valley is Coming to Financial Services
The new wave of fintech innovation will create disruptive and competitive offerings in every line of business across the financial services spectrum. New solutions on the market today include peer-to-peer lending; retailers and SMBs that offer mortgages and auto loans; robo-advisory services; crowd-funding; peer-to-peer insurance; payment optimizations (with new payment rails leveraging technologies like blockchain); and much more.
In many cases, all of this innovation is leading to the disintermediation of banks. The traditional high-friction, highly profitable lines of business that financial service companies have enjoyed may eventually be replaced by low-cost, highly efficient, customer-centric fintech offerings.
But it’s not just the fintech companies that are keeping financial services professionals up at night. Disruption is being driven by several issues ranging from increased regulation to changing customer demographics and preferences.
The result: decreased fee revenue, compressed net interest margins, and even lower levels of return on equity than today. Banks are still seeing single-digit ROEs in the wake of the 2008 crisis, which resulted in regulatory changes demanding increased capital requirements. All of this continues to shrink margins and profits, putting extreme pressure on ROE.
Clearly, it’s time for established financial institutions to step back from the risk-avoidance mindset that stifles innovation. They need to fail weak ideas early, bring winning concepts to market faster, and accept failure in projects as essential to developing market-breakthrough ideas.
Here are six key capabilities that financial services organizations need in order to bring competitive edge-boosting innovations to the marketplace:
1. Encourage network participation
To encourage all employees and partners to help drive innovation, companies need to implement technology that effectively shares appropriate information, communicates how everyone can contribute, and enables easy participation.
Customers and external influencers—potentially numbering in the millions—should be invited to share their ideas, too. For example, with advanced innovation management tools, banks such as BankMobile and Santander are holding idea contests, asking customers to submit ideas and giving them a chance to share in the excitement when those ideas come to life.
These and other crowdsourcing tactics are crucial. With the right technology in place, financial institutions can create an innovation forum that generates thousands of ideas from internal and external contributors.
No longer can companies afford to innovate strictly within the four walls of their organizations. For effective innovation, engaging with customers and external providers is essential to ensure that you are not blinded by your own biases and organizational limitations.
2. Listen better to digital conversations
Organizations need to glean more information from the fast-growing number of resources available today. In addition to traditional information providers, financial institutions must improve their social listening skills to discover the opportunities reflected in millions of digital conversations.
The tools are there. The most modern innovation management systems feature capabilities that capture customer sentiment, identify social reactions to products and services, and monitor peer trends.
Equipped with built-in social analytics that track company-specific product offerings, it’s possible to gain deeper insights into customer feedback for the purpose of creating innovative offerings that align with market preferences.
3. Thoroughly document ideas and understand correlations between them
Great ideas often go unrecorded—even those discussed in scheduled planning sessions. To accelerate innovation, organizations must enable anytime-anywhere idea documentation, efficient storage of notes, and easy discovery for the next team meeting, or by a colleague researching a what-if scenario.
Features of the most powerful tools include an easy-to-use interface that allows users to upload attachments for review and collaboration, link multiple related innovation artifacts, maintain a history of related conversations, or broadcast hashtags to explore topics and virtually connect experts.
For financial services companies, understanding the linkage of ideas to regulatory requirements is also critical, since regulatory compliance efforts generally take up the bulk of financial investments for FS companies. Therefore, understanding regulatory investments—and leveraging those where possible to create revenue-generating ideas—is a concept that must be explored to avoid siloed regulatory spend.
4. Synthesize concepts and create instant proposals
Many “great ideas” lose a lot of their luster with a little more scrutiny. But even if the original thought doesn’t pan out, it can often lead to an even better idea. Organizations that are successful in generating a steady stream of proposals need a reliable process for selecting those that represent real opportunity and then shaping them into more detailed plans.
Companies that optimize social collaboration among stakeholders have the ability to more quickly identify, refine and advance the innovations that will deliver the highest business value.
For the ideas that have potential, a business case and proposal must be created to make the investment decision, since funding is typically only available for a few investments or evaluations. For an innovative company, there should be hundreds of high-potential ideas that must be evaluated against a variety of criteria, such as ROI, profitability, market share, or alignment with key organization objectives.
But building cases for hundreds of ideas can become very time-consuming, very fast—especially if proposals are managed in Excel or PowerPoint. It is critical that proposal creation be simplified so that anyone can quickly create standard, high-quality proposals using finance-approved and -configured tools. All metrics and analytics associated with the idea should be available on-demand—and configured based on organizational requirements—so that capital investment approval decisions can be made quickly.
In other words, the “Uberization” of the proposal-creation process substantially helps accelerate innovation in the company.
With powerful innovation management technology, companies can evaluate concepts against configurable metrics to determine if an idea—or which version of an idea—can achieve expectations. Predictive analytics capabilities allow innovation teams to run proposals through complicated “what-if” scenarios to reliably forecast how well an idea will work, or to identify undetected impediments to success.
5. Monitor and report on status and results
Fostering ongoing innovation requires organizations to track the results of individual projects, and of the overall innovation program. Managing the innovation pipeline requires monitoring KPIs such as the number of ideas submitted, quality of ideas, conversion rate of ideas in the pipeline, ROI attainment, etc. These metrics should be derived from the underlying innovation process to ensure that quick corrective action can be made if innovation objectives are not being realized.
Sharing appropriate information with early-stage project team members—as well as senior management, key stakeholders, and all other employees and partners—will communicate the value of innovation.
6. Reward the innovators
Recognizing the people who actively participate in an innovation program is vital to its ongoing success. And considering that most ideas will not get past the initial review stage, it’s important that recognition be given to people who continue to participate, even if their suggestions don’t make the cut.
Best-practice innovation managers ensure that each employee’s contribution can be referenced in their overall performance review. This helps them to be recognized and rewarded for their ideas. Plus, it helps companies identify the most reliable and prolific innovators.
As financial services firms look to become more innovative, they should ask themselves the following questions:
- Does your organization have an innovation strategy aligned to the corporate strategy?
- Is your organization focused on incremental innovation, or on breakthrough ideas where new service offerings are created by changes in technology and the business model simultaneously? Do you have the right mix of incremental and breakthrough innovations types in your portfolio?
- Is your organization engaged with your customers, using their feedback to influence the future portfolio?
- How are you partnering with the ecosystem of customers, partners, suppliers and other fintech firms?
- Do you have a “fast fail” approach to rapidly test and reject low-value ideas and push the high-value ones to the next stage?
- Have you decentralized innovation to generate ideas through open suggestions?
- Do you have a set of KPIs and metrics to measure the innovation process in your organization? Can reports on those KPIs be produced automatically?
- Do you have a mechanism to engage with your employees, understand and reward the top innovation contributors, and foster innovation culture in the organization?
- Do you have a mechanism by which high-value ideas can be converted to a standardized proposal by anyone in the organization? Can innovation managers quickly make investment-approval decisions across a large pool of high-potential ideas based on embedded ROI and analytics?
The 2016 World Retail Banking Report found that less than one-quarter of banks feel they have the ability or the agility to innovate faster than fintech firms. If you’re interested in joining those banks that are confident they can innovate with the best of them, I invite you to learn more about how we can help.
White Paper: Conquering Innovation Challenges with Oracle Innovation Management for Financial Services
This article originally appeared in The Modern Finance Leader.