20 August 2017
Stanley Epstein
Stanley Epstein

Stanley Epstein

Stanley Epstein - Citadel Advantage Ltd

44Posts 178,565Views 52Comments
Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Do banks really understand innovation?

29 July 2009  |  3736 views  |  4

A current question doing the rounds about banks and innovation really got me thinking. Are banks really interested in innovation or are these "innovators" just few and far between?

When we speak about innovation it is not only technology. Innovations can come about without any technological advance. There is a distinction between "product innovation" and "process innovation". In the former, the factors of production are rearranged in new, hitherto non-existent forms - no technology needed. "Process innovation" does tend to use advances in technology or new technologies - mobile payments are a case in point.  

The underlying cause of financial innovation is self interest which manifests itself through the maximization of profits. Banks seek out, through the innovative process, the most efficient, cost effective way to maximize their profits either on existing products or potential new ones. Financial innovation comes about on the basis of anticipated material gain.  

My feeling is that most banks don't care about innovation at all. If a bank comes up with a new idea or process, and other banks feel that it can tag along to the benefit of their own bottom line, they will do so. In time a whole bunch of banks will do the same simply not to be left out. This is a simple application of the "Bandwagon" effect. And what is more many of these banks will have jumped onto the bandwagon without thinking the whole issue through, be it a new product or a new process.   They simply don't want to miss out, so they will "do it" at any cost. I have seen this time and time again.

The current financial mess that we are in and its precursor, the "sub-prime" debacle, is a case in point. Everyone was doing it. Profits were great. And no one gave much thought to even trying to understand either the product or the risks?  Well, no one cared, and look where we are now.  

TagsRisk & regulation

Comments: (4)

Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 31 July, 2009, 15:45

Unfortunately I have to agree with what is said here. New customer value through new combinations of technology and services and embedding banking services into e-commerce is far too often low on the agenda. Same goes for simplifying offerings and communication.

This all is naturally rather boring compared to high profile risk taking in investment banking and so forth. Tax payers now have the right to ask for innovations in return for money spent on rescue operations.

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A Finextra member
A Finextra member | 01 August, 2009, 08:51

"Tax payers now have the right to ask for innovations in return for money spent on rescue operations."

Sounds ideal but in reality, it does not happen.

Take for example the case of CITI. "It's official: You own a piece of Citi", Citigroup has converted a big chunk of the government's stake into common stock, meaning that (U.S.) taxpayers now have a 34% stake in the banking giant. Does this mean that U.S. taxpayers, I for example, can ask for innovations in return for the money that was given to CITI? 

And what about this related news : Citi opens Singapore operations and technology hub? Citi has opened a global operations and technology hub in Singapore that houses 2000 staff supporting various bank businesses across 40 countries. While unemployment in the U.S. is still a major issue; demand for H1B visa workers (foreigners that would work for a lot less money) has not dissipated - thereby displacing american workers; the unemployed defaulting on their mortgages and credit card bills, is Citi's project to house 2000 staff (I hardly doubt that these will be American ex-patriates) in Singapore consistent with the bailout and rescue that it has received from American taxpayers? 

As far as innovation is concerned, big banks that are too big too fail - yes you got it - don't care about innovation at all. They stay on the safe side of not doing anything : no innovation / no risk.

CITI is indeed too big to fail but since it needed bailing out, one should consider that it has perhaps not been managed properly to begin with. Here is another news : "No profits? Here's a fat bonus! Citi and Merrill Lynch paid big bonuses despite losing money last year while fellow TARP recipients Goldman and JPMorgan paid more than they earned.

It would truly be ideal if the US government get's on CITI's face now that taxpayers own a sizeable piece of CITI. 

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A Finextra member
A Finextra member | 03 August, 2009, 21:58

I agree that many banking innovations aim to increase the bank's profits.

However in the bank I work for, profit is not the principal driver. Here’s three reasons we get into innovation:

1) Customers complain that something isn't working.  Every week we discuss customers' complaints. Often we realise that something needs to be done. Sometimes it's simple and we just do it. Sometimes it's complex and it leads to 6-sigma process innovation.

2) Customer experience drives innovation. Sometimes we're not lucky enough for customers to directly tell us what could be better. However we have a dedicated customer experience team, which identifies opportunities to make customers happier. Sometimes it's a simple change to prices. But sometimes it's a concept like 'the customer should only have to tell us a piece of information once', which requires a huge amount of process innovation behind the scenes to make happen.

3) Brand drives innovation. We're seen as an innovative bank, and it's part of our brand promise that we'll lead in many spaces, including mobile. So when an opportunity comes up to do something cool that we think customers are going to love, we get in there! And if we happen to pick up some awards along the way, then all the better for our brand.

You could argue that everything above is just boosting profits. But that’s too reductionist.

We innovate to make the bank better for our customers. Our customers have the highest net promoter scores in our region. And in the end, this translates into profits. But it’s the customer focused innovation that gets us there!

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Stanley is a Director and co-founder of Citadel Advantage Ltd., an international consultancy to the financial services industry that provides specialist services and training in the areas of operation...

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