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Can Banks Resharpen Their Innovative Edge?

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Editor's Note: This article originally ran in the January 2013 Edition of American Banker Magazine.

Innovation is the key to your company's survival, no matter what industry you are in. It must be an integral part of your organization. But what exactly is innovation in this industry?

For the vast majority of financial services companies, innovation is not just limited to disruptive technology changes, which seem to be the domain of nonbanks. Innovation in financial services includes shifts that improve all products, services and support mechanisms such as infrastructure, marketing and sales channels.

Heading into 2008, the banking sector was at the forefront of innovation. BusinessWeek even highlighted groundbreaking efforts such as Bank of America's Center for Future Banking, where I was an executive, as "the way to innovate." And then the financial crisis hit and entirely changed how we view innovation in banking.

These days, a typical reaction to any mention of financial innovation is: "Didn't financial innovation cause the crisis by creating hard-to-understand financial instruments?" or "Does the world really need more financial innovation? Shouldn't we be focusing elsewhere?"

There is no doubt that some innovations in the industry did deviate from their original purpose and did, in fact, contribute to the crisis. But many academic studies have confirmed the benefits of financial innovation and its importance to the development of financial systems. Financial innovation can address many of society's challenges. New, service-minded offerings that continually assess and aid customers' financial health, for example, would be great for the industry and its customers.

But while innovation typically adds value, it also can have a negative or destructive effect as new developments clear away or change old organizational structures and practices. Innovation often stems from completely new thinking, which many leaders cannot embrace. Organizations that do not innovate effectively may be destroyed by those that do.

That risk is heightened for the banking industry, where the tremendous value in consumer banking and in the payment space makes for an attractive target for nonbank competitors attempting to enter the industry. This is why I believe a call for innovative, fresh thinking is so critical today. For four years since the financial crisis, banks have been heads-down focused on efficiency, cost cutting and in the worst cases, simple survival. But the rest of the world isn't waiting for banks to bounce back. The perfect example of this: Apple. Since unveiling the iPhone in January 2007, Apple has obtained the No. 1 market position in its industry, disrupting many other industries in the process. It is quite possible that banking will be next. A recent study found that 43 percent of U.S. and U.K. Apple product owners would dump their current bank for Apple.

Banks historically were insulated from competitive threats due to the need for a local presence (e.g. branches). This, of course, has changed. With technology and nonbank businesses providing new options for safeguarding and managing people's finances, customers will continue to depend on banks only so long as banks can provide service and value that cannot be found anywhere else.

There are so many pressures now on banks' operating models: consolidation trends, regulation, industry specialization, changing workforce needs, "shadow" banks, retailers and new technology. Yet the innovation imperative remains.

As we enter 2013, the banking sector must revive its will to innovate-rethinking what, where and how it serves an increasingly informed and demanding customer base. Those banks unable to adapt in time and develop and execute a credible strategy will be at risk. But as we turn the page on another year, taking us further from the difficult events of 2008, I have great faith in the industry to awaken and answer the call.

Jeff Carter is chief strategist at Eyelock, an advanced iris identity management firm. He founded the Center for Future Banking, a joint venture between MIT and Bank of America.

 

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