Despite all their efforts to pursue tech innovation internally and through partnerships, many banks are still struggling to turn those endeavors into practical solutions.
Over the last few years, banks have stepped it up. They are embarking on partnerships with fintech firms, they are incubating early-stage startups and they are trying to foster innovation from within. This multipronged approach might be creating problems, observers say. Essentially, banks are still trying to figure out their best method for innovation, said William Sullivan, global head of market intelligence for Capgemini Financial Services.
"There's kind of a spaghetti-on-the-wall approach," Sullivan said, meaning banks are trying many things to see what sticks. "They're doing hackathons, internal projects, partnering with fintechs … and a lot of them are doing it because they feel they have to be seen as doing it," he added.
According to the "World Fintech Report" released last week by Capgemini and Linkedin Marketing Solutions, more than 60% of the financial services executives polled said their institution was pursuing fintech partnerships, creating internal innovation projects, or both. But only 10% reported achieving "tangible results" from such projects, such as the creation of a new product or service or improving operational efficiencies, for example.
"Banks are pursuing innovation and trying to be more agile, but they struggle to find the relevance to the business" of innovation projects, Sullivan said.
Banks often try to bite off more than they can chew when pursuing innovation. They would be better off focusing on smaller, yet tangible improvements, said Jim Marous, owner of the Digital Banking Report and co-publisher of the Financial Brand.
"When organizations look to apply innovation, they must make sure to get the basics right first," he said. "Before organizations create an excellent delivery, deposit or loan innovation, it is imperative to first ensure that the most used current applications are simplified and designed for today's mobile consumer. Don't boil an ocean. Think big, start small."
To improve execution, banks need to not only narrow their focus, but also look at what must be done to weave innovation into the culture of the organization, so that it doesn't just seem like a fad or a marketing campaign.
These efforts "require support from the executive leadership, and an effort to change the cultural mindset internally," if they are to enact real change, Sullivan said.
Of course, many banks struggle with a risk-averse nature that comes from being highly regulated, which often makes internal cultural change difficult, said Jennifer Grazel, global director, vertical marketing for Linkedin Marketing Solutions.
Still, banks need to figure out a way to enact culture shifts if they want to push along innovation projects internally and attract the top tech talent, she added.
"They need to change their cultural DNA," Grazel said.
Doing that manifests itself in perhaps surprising ways. For instance Santander says its flexible working policy is one of the "clearest demonstrations" of how it fosters an environment where top tech talent wants to be.
"The policy was introduced over a year ago and has allowed more employees to take advantage of flexible working hours and telecommuting," said a bank spokeswoman. "The new policy includes improved technology and communication tools to improve connectivity and portability, simplified processes and less bureaucracy. It´s proving effective, particularly in concentrating working hours and increasing employee mobility."
Another bank usually noted for its innovation, BBVA, is successful in its efforts because innovation isn't simply relegated to one part of the bank, said Shamir Karkal, head of open APIs at BBVA.
"At BBVA, innovation is bankwide," he said. "It's building on the bank's strong culture and how it thinks and acts, so that every part of the bank is innovating."
Karkal came to BBVA from startup digital bank Simple (which it acquired in 2014) and said the bank is able to entice talent from the tech world because it enables its employees to "get things done."
"That's what entrepreneurs want, and at BBVA you know you can make things happen," Karkal said. "The Open API business is a great example — we've already got a working partner in Simple, nearly 200 companies using our sandbox in the U.S. and Spain and we're moving into beta with new APIs . "
But, it's more than just a cultural change that banks struggle with. Many are hampered by legacy systems, budgetary constraints and inadequate internal tech capabilities to pursue innovation widespread within the bank.
Nearly 40% of the executives polled reported that budget concerns were playing a role in thwarting innovation, while 28% said the presence of legacy systems was a hindrance. And though legacy systems are widely recognized in the industry as being inflexible, few institutions are considering replacing them, given both the cost and risk of doing so.
"The burdens and demands of running the existing institution are causing innovation to sputter," Sullivan said. "The incumbents have a lot of cost and regulatory pressures on them."
But this could all be changing. Advancements in cloud computing, for example, allow banks to create new infrastructure without the cost of running and maintain large data centers and hardware. And APIs and the concept of "open banking" will also enable banks to be more nimble and customer-centric, Sullivan said. As an example, he pointed to the European Commission's revised Directive on Payments Services (commonly known as PSD2) as a statute that will push banks to pursue innovation more. PSD2, among other things, requires banks to let apps access their customers' accounts when the customers wish, and goes into effect for European Union member states in 2018.
Ultimately, "banks need to leverage their data better, perhaps by partnering with fintechs, to deliver personalized and customized experiences," Sullivan said.