Financial Services is an industry under pressure.  Even now, when profits are generally on the rise, the UK’s major banks remain stalked by the problems of the past.  So HSBC in its third quarter update announced that it is setting aside £237m to cover investigations into currency trading as well as a further £368m for PPI, while Barclays and RBS have allocated £500m and £400m respectively for the currency trading probe.  Meanwhile, the update from Lloyds was dominated by news that it plans to cut 9,000 jobs and close 150 branches.

Repeated misselling enquiries and regulatory fines, allegations of rewards for failure and over-inflated bonuses, deep-seated public scepticism – all of these things have left the sector embattled and deeply war-weary.

To make matters worse, competition for share of the customer’s wallet is fierce as institutions fight for business.  Margins are low in the low interest environment and new ‘challenger’ banks are also upping the ante.

One of the great legacies of the financial crisis is that a major trust gap has opened up, which the banks now desperately need to close.  A survey earlier this year from Viacom found that a third of millennials believe they won’t need a bank in the future, while three quarters of them are more excited about new offerings from the likes of Google, Apple and PayPal – all of whom are developing new payment products and services – than they would be about new services from their traditional bank.

This links directly to another of the major challenges facing the sector: the digital transformation.  Banks urgently need to develop their offerings beyond mere ‘online banking’ if they are to drive greater engagement and loyalty from their increasingly connected customer base.  This is a fact not lost on them – Lloyds’ job cuts and branch closure announcement was driven by its aim to become increasingly digital – but they are wrestling with how to do it – and how to bring a demoralised workforce with them.

Banks need to attract people with the right ‘new model’ digital skills – but the challenge is made harder by the fact that the people doing the recruiting are generally themselves from the ‘old model’.  Do they really know what they are looking for?

And, just at the time when they need to be innovating and gaining digital advantage over their competitors, many believe that the fear of falling foul of regulators is holding them back.  Howard Davies, former deputy governor of the Bank of England, recently warned of a “disproportionate risk aversion creeping into decision-making”.

But the fact is, banks simply can’t afford to fall back on regulatory pressures as a reason to play safe, avoid risk – and fail to innovate.  They need to re-invigorate a culture where there is a careful balance of innovation and risk so that they can be agile and responsive to the fast-developing market in which we all live.

I believe that in fact many financial institutions are sitting on a massive potential differentiator in this – the huge ranks of their middle management who are frequently mired in administration, disillusionment and bureaucracy.  New products and innovative ideas are generally created from the middle of the organisation – but in most financial services organisations the middle is worn down and resigned to the “way it is” (or has become).  Sadly, they have lost their pride and enthusiasm at working for a bank.

This can be changed.  By introducing a mind-set change in this ‘frozen middle’, banks could reap the benefits of a huge shift in productivity and enhanced performance.  A newly inspired middle management could help them drive innovations and new services that get the risk-reward balance right.

How can they do this?  In my experience, there are four key steps:

• Retrain the middle management on what they believe it is possible to accomplish.  By raising their aspirations and inspiring them to be bolder, a new mind-set can start to be born
• Help them blow up conventional wisdom and assumptions. By encouraging open discussion, in which anything can be challenged, the middle layers can start to look with fresh eyes at ways of working. For example, when Egg introduced 0% balance transfers it was an unheard of practice in the industry. It changed the game, and the rest of the market promptly followed their lead.
• Help them see that they can be accountable for delivering on things that are missing and essential. By giving them a sense of empowerment to change things, they will feel a new level of engagement and commitment
• Open conversations about the future they want to build. Encourage discussion of the place everyone wants to get to and help to create

This is not something that can happen overnight and it is not straightforward.  It takes genuine commitment and an investment of time and energy.  It requires much of senior leadership.  They must be as committed to the process as anyone, and it requires them to believe that what they are really there for is to unblock potential and creativity – rather than simply to control and manage.

If senior leadership can create the right environment, they could be genuinely astonished at the results they can achieve by unlocking the potential of their frozen middle.  They can create an environment characterised by genuine innovation, the constant and productive challenging of the status quo, and collaborations across the organisation.

I believe that banks currently operate far below the permission that we give them.  In handling our money and recording all our financial transactions, they are sitting on huge amounts of information about us, as individuals or as businesses.  They need to break out of traditional silos to harness this knowledge and start acting more as coaches and partners/advisors – especially in the investment banking space where there is a real opportunity to help promising companies grow.  If they can do this, and deliver it through sophisticated always-on technology, the opportunity is there for the leaders to put clear water between themselves and their competitors.

And one of the first places to start with this needs to be the great ranks of their frozen middle.

The writer is Mike Straw, CEO of Achieve Breakthrough, an award-winning consultancy that provides organisations with news way of thinking and acting to deliver better business and people performance. Achieve Breakthrough has worked with a number of financial services organisations including Lloyds TSB, Aviva and American Express.