Banks are Laggards in Research and Development

Banks don't even show up on Booz & Co.'s Global Innovation 1000 spending report. They are lumped in to the "other" category of all industries except the top nine. All of the other industries combined only account for 2% of the $603 billion spent on research and development in 2011. Average R&D intensity, that is R&D spending as a percent of sales, across all industries was 3.43%.

According to the FDIC, the banking industry generated more than $529 billion in revenue 2011 (net interest income + non interest income). If the industry spent at just the average rate of all industries, that would mean more than $18 billion in research and development spending. That doesn't seem unreasonable, since the banking industry contributes about 3.6% of U.S. GDP.

That would have put the banking industry tied for 8th place with Consumer companies at 3% of the total and just ahead of Telecom. (Adjusting for the fact that the United States makes up about 31% of the total global spend, that would scale out to about 10% in total, tied for fourth place with Industrials.)

Whatever the right number should be, I suggest it has plenty of room to grow.

"Banks bury R&D, such as it is, in equipment, outside data processing, telecommunications and other operating expenses." said Fred Cannon, Director of U.S. Research for Keefe Bruyette & Woods. "R&D would be a small share of that. Most of them aren’t really talking about it these days and the focus is on controlling expenses."

Competition for the products and services provided by the banking industry will increasingly come from outside the industry, and that competition will only increase. Overall R&D spending has been growing at a robust  9.5% CAGR since the financial crisis, and banks are barely participating in that trend.

As I wrote in this space last week, Banks Face the Innovator's Dilemma, I believe that banks that will thrive in this new era will find new ways to be relevant and provide value to their customers, and some of those ways may not involve traditional banking products. Bankers need to really listen to their customers, discover their financial pain points and embrace creative ways to address them.

If they don't, someone else will.