It's now about as hard to innovate in banking as it is with cars.
The problem is not a dearth of ideas: just about anybody you speak with nowadays seems to have a great idea for how to structure mortgages or loans or executive compensation in a way that they think will prevent anything like the modern crisis from happening again. And the problem is not a lack of talent: good salaries continue to attract the world's top programmers and developers to work in various aspects of banking, from IT to research to trading to compliance to operations.
The problem is regulation.
Consider how hard it is to get approval to tweet even something innocuous if you are a banker. Now imagine trying to get approval for a new retail product, especially in the current environment.
Individuals and companies still try, but the only ideas that seem to have any hope of getting approval internally, and ultimately from regulators, are those that are humble, bureaucratic, and, frankly, kind of lame.
Bear in mind that not every new idea needs to get approved by a regulator, at least not directly. But if an internal review determines that the innovation may ultimately be frowned upon by regulators, it would be a poor business decision to proceed. Indeed, it is possible that the threat of additional regulation is an even greater barrier to banking innovation than the already large corpus of existing regulation.
So what happens in an environment like this, when innovators are exposed to a potentially negative regulatory review at some unknown point in the future? We have two ways of knowing what will happen: theory and history.
In theory, we can look to financial models themselves, specifically options pricing. The kinds of innovative ideas that are likely to raise regulatory eyebrows are the most successful. If a regulator sees a bank making a lot of money on some newfangled product, they may have questions, and if they don't, the innovator's competitors will keep complaining until they do. So innovators are in a way writing a kind of call option: their profits are capped at some arbitrary limit they do not know in advance.
In general, when investors are short options, they are short volatility, meaning, they lose more money when the idea is volatile or risky, even if the "risk" is that it may be wildly successful. Thus, innovations will tend to be of the tweaking variety, making slight, unobjectionable improvements: streamlining a website, introducing mobile apps, gradually introducing features like remote check deposits from scans or photos, enabling person-to-person payments, adding the ability to open new accounts via phone, and the like. In the broad scheme of things, these are unexciting innovations. But in modern banking, these win awards.
The important guidelines to innovation in a regulated environment are, first, to let people do things that they already can do in an easier way, and, second, to limit the amounts and frequencies that people can do those things in the easier way. The second part is important to keep regulators and competitors from shouting that the new tools suddenly aid money launderers or criminals or terrorists. Checks deposited through your mobile phone and person-to-person payments have an upper limit, both per day and per check or payment, and they can still take several days to clear. Thank you, government regulations. Imagine if we had similar kinds of "reasonable" limits on emails. After all, only enemies of the state need to make lots of transfers or send lots of messages.
