Banking industry heroes and villains have risen and fallen, respectively, on product innovation. Whether looking to profit handsomely or simply to survive, the creation of new products has been the default focus for decades. But our reliance on this paradigm may be hampering the banking industry in a time when innovation is increasingly equal parts necessary, rampant and regulated.

On the one hand, the pace of product innovation has sped up dramatically. Data show an innovation surge in the banking sector fueled, in part, by "a proliferation of innovation budgets." A recent survey from Infosys revealed that 60% of retail banks now have an "innovation strategy," when only 37% had one five years ago. Financial firms are spending unprecedented amounts on social media, mobile offerings and online-only direct banking. Some efforts are extravagant. A CNBC Megatrends article describes how Grow Financial is using giant video screens outside branches that allow passersby to play a game and win money.

On the other hand, the pace of product innovation has been forcibly slowed. State and federal governments have stepped into the mix, perversely expecting to improve and incent innovation through regulation.

In effect, the government is riding the brakes. The Volcker Rule, other Dodd-Frank financial reforms and stricter monitoring by financial watchdogs, including Janet Yellen, chair at the Federal Reserve, exemplify regulatory enforcement. For instance, we are in the third consecutive year of a virtual freeze on new banking charters. This is quashing competition and, by extension, innovation. Obstacles for new products coming to market are plentiful enough to stem the flow of new concepts.

In addition to regulation, another drag on innovation is reputation – or disrepute. Financial institutions are still working to recover the trust of a public that most often views product innovation as yet another attempt to skirt regulations and line the pockets of banks. Moreover, customers are increasingly demanding better and more personalized service, over new products.

But what if we changed the question from a "what" to a "where" and "who"? Have we overemphasized the "what" of innovation – i.e. new products – when we should be asking, "Where else can we innovate?" and "Who else can contribute to innovation?"

Delving into the customer as the "where else" of innovation is hardly a new pursuit: many train their customer-facing employees to execute change and innovation. However, in most, if not all, cases, retail bank employees are told what to change and what to innovate. Initiatives tend to involve only small populations and/or are temporary. Customer service, customer experience and customer loyalty initiatives shape with fanfare under slogans like "The Year of the Customer!" and fade over 12 months.

The customer focus remains right. But banks need a customer strategy that is defined as much by the depth and endurance of its application as by the shiny surface of its service offerings. We can accomplish this by taking a new approach to an old source, one that is an innovation wellspring. It is based on who does the delving – and for how long. The foundation here is a human-centric model for innovation, one based entirely on the concept of insourcing: your people and their motivation, ideas, execution and leadership.

This model permits large volumes of employees across ranks, roles and functions to form a coordinated network that generates strategically important, customer-focused innovations – continuously. It is designed to engage their heads (idea generation), hands (targeted activities) and hearts (motivation and belief).

By taking a diagonal slice of the organization, from senior management to tellers, and giving them permission to innovate, banks can draw on the broader, more diverse knowledge of existing talent. They can tap into those with the best first-hand experience of what works and what doesn’t on a day-to-day basis. These people are your new drivers of innovations that extend, by design, far beyond product and live in the customer realm where service is king. This is in direct opposition to outsourcing.

The first ideas from the employee-led innovation network may be small, but they will build on each other quickly. And as each small innovation improves the overall function of the organization, it unleashes the energy and entrepreneurial spirit throughout the structure to think more about the big shifts – the innovations that can revolutionize the company, or even the industry.

Gregg LeStage is executive vice president at Kotter International, a consulting firm specializing in large-scale transformation.