“If you always do what you always did, you will always get what you always got.” – Albert Einstein
Even though we have witnessed a number of helpful innovations in recent years (i.e. mobile banking apps, QR-code based peer-to-peer payments, digital advisors, gamified savings accounts etc.), I think it is fair to say that banks and insurance companies are not the most innovative organisations around. Despite this, change is in the air and there are signs that the finance industry is finally beginning to realise the importance of innovation – but it is also clear that there is a long road ahead if banking is to catch up with other sectors such as I.T and Healthcare.
Our suggestion: Move innovation beyond the castle, into the sandbox!
Financial innovator Kosta Peric speaks about how the core business of a well-established organisation can be seen as a fortified castle – high, strong walls: everything is set in place to defend the existing business model and sources of income. It can stand a hit and is built for resilience. And today, most banks believe they are innovating by changing the looks of their castles, the shape of their towers and the location of their windows. However, this is optimising, not innovating. Moving simple transactions or even complex advice from a physical channel to a digital channel is plain and simple optimisation. The castle is important and needs to be safeguarded. Let’s be clear about that. But it is not the best place for innovation as heavy procedures, planning and governance lurk around every corner.
True innovation and creativity blossoms in a very different environment – one where creatively playing around, experimenting and failing are part of the game and do not affect the castle: this place is called “the sandbox”. Only when organisations create a culture for their people to experiment with new ideas, away from the existing business, will true innovation emerge. Where the castle is built for resilience, the sandbox is characterised by flexibility and openness. Both castle and sandbox are important and both are needed. Yet many financial services organisations still live in the castle age.
Based on a screening of hundreds of financial services innovation projects in (2010-2013), we categorized projects as being scientific discoveries, creative combinations or asset optimisations. The majority of the projects were classified as asset optimisations: refurbishing the castle. Over the years we do see a small shift towards more creative combinations yet asset optimisation projects still dominate financial services innovation projects. Shifting transactions (payments, consulting your accounts) from the branch to online or mobile channels is an asset optimisation. You make it more efficient and the client likes it, even demands it. And yes, banks need to do this. Yet, the competition can and will copy this very quickly. They have very similar castles and will defend them. In their seminal book “Blue Ocean Strategy”, Kim and Mauborgne call this competing in a Red Ocean – an existing market space where the well-known players compete fiercely – putting profits and possible growth under heavy pressure. Banks, operate in an overcrowded, aggressive Red Ocean industry. But asset optimisation will not help them to remedy this. Blue Oceans are what they call uncontested, newly created markets where you don’t have this cutthroat competition. Shifting transactions to mobile is what we call defending the castle in a Red Ocean environment. It will always be important for banks to defend the castle; however they should also move beyond this.
A good example is the Australian Commonwealth bank which uses augmented reality in their property app – this is not an asset optimisation but a creative combination. They built a financial ecosystem by teaming up with the real estate sector and offer clients fast and easy access to real-estate data when they are in front of the house (price of the house, sales history, auction data, suburb profile, demographics of the environment, etc.), enriched with their own client data (can you afford this house, number of repayments, interest rate they can offer, etc.). The reason they did this is because they understood very well that buying a house is an emotional decision. Either you fall in love with it or you don’t. And when you do, the bank is there, at the moment of truth, to help make that dream come true. Much like car dealers are able to offer car loans at that emotional moment when a client decides to buy a car.
Commonwealth bank tries to change the customer journey, reducing the number of “mortgage shoppers”; trying to lock-out competition by keeping the client close to the bank. This fits with ecosystem-thinking as they team up with the real estate sector to do this i.e. seeing a bank no longer as a product factory and a sales channel but as a platform, a financial hub. Much like Google is dominating the “search” ecosystem, Facebook the “sharing” ecosystem, Amazon the “buy” ecosystem or the Telco’s the “connect me” ecosystem, banks should strive to be at the core of the “financial choices” ecosystem. To do this they will need to spend more time in the sandbox, experimenting with creative combinations, looking for Blue Oceans.
In conclusion, there is still some work for bank before we can call them truly innovative organisations. Their journey towards innovation has clearly started. They are slowly starting to move up the innovation learning curve. Going from an innovation portfolio mainly consisting of asset optimisation projects to one more dominated by creative combinations. Moving from innovation focussed on protecting the castle in a Red Ocean environment to innovation focussed on exploring the sandbox to create a Blue Ocean market space. This will be their journey: from the Red Castle to the Blue Sandbox. Because to move to the centre of the “financial choices” ecosystem, banks will have to move beyond pure technology innovation to value innovation: where technology innovation is aligned with utility, price and cost. Or put differently, where they use technology to enrich their own corporate DNA to bring true value to the customer.
Bjorn Cumps, PhD
Post-Doctoral Research Associate at the Vlerick Business School in Belgium
Vlerick Centre for Financial Services
Walter Van Dyck, PhD
Professor of Innovation at the Vlerick Business School in Belgium