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Innovate or die – the importance of innovation in financial services

Wazoku’s Simon Hill looks at why good business ideas have never been as important as they are now and how financial services organisations can be turned into hubs of innovation
UK Innovation foundation Nesta recently launched its 2012 Innovation Index, which spoke of a ‘lost decade’ in UK innovation. Investment in new products and ideas across industries was shown to have fallen by £24bn since the 2008 recession and is not yet showing signs of recovery. Innovation Wazoku
Financial services (FS) was one of the chief offenders in cutting investment in innovation according to the Nesta report. This contrasts sharply with a McKinsey Report in 2007 that revealed FS executives saw innovation as important to the performance of their companies and that they expected their spending on innovation to increase.
This clearly hasn’t happened, yet given the almost continual crises in the finance sector over the past four or five years satisfaction with banking is arguably at an all-time low and in great need of innovation. Are these factors linked and what can banks and other FS organisations – whether multi-national businesses or UK-focused SMEs – do to encourage innovation?

Why good ideas are so important
Amazing and inspiring ideas are all around us. From technology to business and from sport to culture, ideas and innovation are at the very heart of almost everything we do.  Apple is a classic example of how a company can thrive based on a simple yet ingenious idea, yet one wonders how many similar ideas within business all over the world lay dormant – unseen, uncovered and unloved?
Innovation is important to business for a number of reasons and is recognised as having a significant impact on productivity and overall business performance and success.  In banking, there is a requirement to balance funding for innovation with expected returns, either through customer fees from customers or other means. But there is still no real reason why banks and FS organisations cannot be more innovative in their approach. This adds immense value to customers who would benefit from new ways of banking, different approaches, new products and services, which in turn can have an impact on the bottom line that will always be important in the sector.
Contactless payment capability such as Near Field Communication (NFC) has been discussed for years in the sector and the convenience it will potentially provide to customers and businesses is huge. Yet until recently, who was really out there pushing the message that this is a new and innovative way of paying and highlighting the benefits to customers of a wider-scale? Doing so could actually be a key deciding factor in someone choosing a bank.

Different levels of innovation
Not every innovation needs to be a massive game changer though – good ideas come in all shapes and sizes. As an idea management firm we work with businesses across industries, including a number of FS organisations, and have found that innovation can be defined in three hierarchical levels.
1) Core innovation: In most businesses the most effort (circa 70%) in terms of time and resource will be given over to ideas and innovation within this category. These typically deliver more incremental improvements to products or services to optimise the delivery, return and experience for existing customers.
2) Adjacent innovation: The level of complexity and risk involved changes as you move out from the core. Adjacent innovation may not be possible for all FS companies, as it can be extremely complex and failure rates can be high, especially when looking to take existing products to new markets. The most common strategy is to seek incremental ‘value-add’ products or services to layer on to existing core propositions. Around 20% of a company’s overall innovation effort would typically be given over to this type of activity, which in FS would include a company looking to exploit new markets through mobile, such as Barclays PingIt for example.
3) Transformational innovation: Not all innovation must be new but at the transformational level, businesses are looking for new products or markets, step change and big ticket items. This is higher risk than other levels of innovation, so whilst an early stage business would give up to 20% of their innovation portfolio to this, a more established business would allocate 10%.

Unlocking innovation
It is hard for any business to be good at all three innovation types, but there are measures that FS firms can put in place to ensure they are best placed to unlocking the untapped innovation in their business.
Capturing the ideas: This sounds obvious but too many good ideas are lost in quickly forgotten coffee break conversations or remain unnoticed in someone’s inbox. Having somewhere that people can submit their ideas, secure in the knowledge that those ideas will be read, evaluated and feedback provided is a key component for any organisation serious about innovation. Staff need to know how and where to share their ideas and know that ideas will get listened to by the right people in the organisation to provide feedback and to take that idea further.
Ensure the culture is right: If there is no culture of innovation, any FS firm will struggle to get innovation programmes off the ground. One way of addressing this is by rewarding people in terms of the ideas they contribute. This can be done officially, such as including innovation in staff performance reviews, linking implemented ideas to pay reviews. Or it can be done in a more ad-hoc fashion, with a bottle of champagne, or vouchers to a shop of people’s choosing given to the best idea submitted in a month.  Either way, incentivising ideas will encourage people to come forward.
But developing more open cultures and more collegiate ways of working is also incredibly important. The best ideas do not necessarily come from the most senior people or from those that shout their ideas the loudest, so providing the platform for anyone to submit ideas will reap dividends.
Financial services is an industry that perhaps more than any other, could benefit from the companies that operate in it adopting a more innovative approach. Consumer-confidence is down and the introduction of new products and services is one way in which trust can be rebuiltand for that to happen FS organisations need to embrace innovation more fully than they have done to date.
Wazoku is an idea management firm that works with SMEs and individual departments within large enterprises