I am seeking an answer to a question that’s been bothering me – why does banks’ interest in innovation not translate into intent that is as strong as the interest itself? The latest in a series of our studies on innovation shows near unanimous agreement on the importance of innovation among banks across the globe. Nearly 80% of 72 West European banks, over 90% of 35 Central & East European banks, all the 7 Russian & CIS banks and 31 Middle Eastern & African banks that we interviewed said that innovation was important (or highly so) to growth or efficiency. However, despite increasing their investment in innovation over the past year, few banks have made it their strategic priority. To illustrate this point, none of the 4 largest banks in a Scandinavian country even mentions the word “innovation” in their 2009 annual reports!

The problem seems to lie in a preoccupation (at some banks at least) with inorganic growth through acquisition, and hence with acquisition integration, rather than innovation. But this could be dangerous, because once such opportunities dry up, organic growth would be the only way ahead, which by the banks’ own admission needs innovation to drive it. The laxity of West European banks can be traced to the inertia of customers, who by not asking for innovation create no pressure on the industry to supply it. In contrast Turkish banks, which have now acquired a reputation for innovativeness, are keeping the industry on its toes. But a more fundamental issue is that it is hard to establish a link between innovation and performance, especially since it’s not always clear what constitutes innovation and what does not.

In my view, these are excuses for strategic myopia, which sooner or later, will manifest as an erosion of growth, efficiency and competitiveness. Banks that have not set out innovation as a strategic priority need only watch the progress of innovators like South Africa’s First National Bank or Spain’s Bankinter to understand what they might be missing. But whether they will wake up to reality, only time will tell. Or can you?