by: Steve Denning
In classical tragedy, the hero experiences a reversal of fortune, as the result of a mistake flowing from the hero’s own character. The mistake is no accident. The hero obeys his own nature, doing what he does, simply because he is what he is. In the greatest tragedies, the audience can see that the hero cannot do otherwise than take the actions that he takes and so he suffers the disastrous consequences. It is the inexorability of the action that inspires fear and pity in the audience and induces catharsis flowing from an appreciation of tragic beauty.
Clayton Christensen’s theory of disruption shares some of these features. One iconic company after another makes the tragic mistake of missing game-changing innovations in their industry and so suffers inexorable commercial disaster. In each case, the disaster occurred, as the Wall Street Journal, points out, “not because of ‘bad’ management, but because they followed the dictates of ‘good’ management. They listened closely to their customers. They carefully studied market trends. They allocated capital to the innovations that promised the largest returns. And in the process, they missed disruptive innovations that opened up new customers and markets for lower-margin, blockbuster products.”
Given the management mindset of making money for the firm’s shareholders and its executives, the threat of disruption isn’t perceived as a threat: the disruptor appears to the incumbent to be doing the incumbent a favor by relieving the incumbent of its least valuable customers. In due course, the disruptor moves upstream and relieves the incumbent of its most valuable customers.
Seemingly, no industry is spared: steel, computers, telephony, photography, stock markets; the list goes on. And now banks.
Burdened with legacy systems, antiquated infrastructures and increasingly complex security issues, banks are dealing with a double whammy: grappling with intense regulatory scrutiny as a result of a prior “missteps,” while a generation of disruptors is eating away their current business.
Can banks as we know them survive? Christensen is not optimistic. “Banks, many of them, won’t exist ten years from now. Their functionality will be taken over by IT companies who don’t have the same assets and income statement challenges.”
A new wave of banking innovation
Yet over the last year, banks have begun to address the prospect of their seemingly inexorable downfall and tackle the challenge of disruptive innovation with fresh energy. After a period in which they were mainly engaged in dealing with the aftermath of the global financial meltdown of 2008 (with fines and legal costs amounting to more than $100 billion), now the biggest banks have turned to innovation in a whirlwind of fresh activity.
Global investment in financial-technology ventures has more than tripled from less than $1 billion in 2008 to almost $3 billion in 2013, according to a report by Accenture [ACN].
The eight biggest banks have set up venture capital funds totaling around a billion dollars.
Just this week, Citi Ventures announced that it is partnering with Californian accelerator, Plug and Play, to launch a global FinTech innovation program, with locations in the US, Germany, Singapore, Brazil and Spain.
Also this week, TD Bank was reported to be partnering with Moven, whose app monitors spending habits of users and allows them to tighten up their discretionary spending and save money.
One of the industry orchestrators in this sudden whirlwind of innovation is Innotribe, the innovation initiative of SWIFT, the bank-owned cooperative that provides the communications platform, products and services to the global financial system.
Launched in 2009, Innotribe connects people, networks and ideas, bringing together global innovators and investors, strategists, and influential decision-makers from leading financial institutions across the globe. Innotribe bridges the gap between today’s brightest startups and innovators and the financial service industry, identifying products and innovations that could disrupt current business models and create opportunities for new ones. This is done through its strategic conversations and events, such as its Startup Challenge and Vertical Challenges.
SWIFT connects more than 10,000 banking organizations, securities institutions and corporate customers in 212 countries and territories. SWIFT’s annual convention—called Sibos—is a huge affair bringing together some 7,000 bankers. Innotribe uses Sibos to showcase the very best and latest in financial innovation to the banking community.
The transformation of the innovation scene in banking over the last few years has been striking.
At Sibos in 2009 in Hong Kong, Innotribe was located at the edge of the conference center, some twenty minutes walk from the rest of the action at the event.
At Sibos in 2010, Fintech startups were invited for the first time to the show.
In 2013, the Innotribe Tent was the first thing you saw, right in the middle of the conference: in this central location, innovators and bankers could bump into each other as start-ups competed for a prize money of $50,000.
In September 2014, at Sibos in Boston, startups were not only competing for a modest prize at the main conference. They were presenting to a panel of six bank owned capital funds with some $600 million in spending power. The Innotribe events were among the top rated sessions of the whole conference.
Since the inception of the startup competition, several Innotribe Startup Alumni have received significant funding from venture capital funds and financial institutions.
Next year, Innotribe will take the main stage at Sibos 2015 in Singapore.
To add additional fire-power to the Start Up Challenges, Innotribe is partnering with Finextra in the UK, with NextBank in Singapore, the Bank Innovators Council in the US.
The challenges faced by the banks
The innovation challenge facing the banks is tough as they have inherited obsolete legacy systems and mindsets. “When 40-year old legacy banking systems meet the two-month old iPhone 6, the results aren’t pretty,” writes fellow Forbes contributor, Tom Groenfeldt. “The bank systems were built on mainframes and designed to process transactions overnight, in batches. Smartphones want to operate in real-time, unless there’s something faster. Customers don’t like to see one account balance at the bank, another on the ATM, perhaps a third online and a fourth on mobile. (The problem is compounded in the U.S. with a payment system that also operates in batch and often takes 3 to 5 days to deliver a final payment.)”
Not surprisingly, customers have higher expectations. “According to [one] survey,” Groenfeldt reports, “43 percent of U.S. customers believe their primary bank does not understand their needs; 31 percent feel their bank is not helping them reach their primary financial goals…Financial services institutions have an enormous opportunity for growth when they become just as digitized as their customers.”
As one might expect, non-banks are moving in to meet the need. This includes IT giants like Google, Apple and PayPal, traditional retailers like Wal-Mart, and new firms like Moven and Venmo.
Yet some bank executives have yet to recognize that there is a problem. “Over the summer payment executives at two leading money center banks in New York told me the existing system was just fine,” writes Groenfeldt. “The biggest banks in the U.S. have opposed a new infrastructure because they haven’t seen a cost justification for it.”
Even worse for the banks, competition is coming not, as in other sectors, from tiny startups, but from some of the biggest firms in the world, such as Google and Apple. These firms are dangerous competitors, as they may well offer “banking” services for free, using the information they harvest from the transactions for the rest of their businesses.
In September 2014, Wal-Mart, announced that it would be offering basic checking accounts to consumers in partnership with Green Dot.
Yet some bankers remain in denial, as if hoping, like King Canute, to hold back the tide by fiat. “Wal-Mart should not offer financial services,” declares Viveca Ware, executive vice president of regulatory policy at the Independent Community Bankers of America. “Wal-Mart is a retailer, not a bank.”
If this kind of hubris prevails, the tragedy of disruption will inexorably unfold and the banks will be doomed.
Innotribe’s multi-pronged strategy
Innotribe seeks to help the banks avoid this fate. It is also maturing, and becoming steadily more relevant to bankers’ central concerns..
Innotribe has a carefully planned strategy for 2015 with four main areas of activity—discover, connect, create and share—at three different levels: trends, platforms and capabilities and new product development.
The four main areas are:
Discover through thought leadership and strategic conversations: Innotribe seeks to identify trends and disruptions both for the industry and for SWIFT, and share those findings with the industry.
Connect through events and brand recognition: Innotribe is not so much in the events business, as it is in the business of creating high quality feedback loops to enable immersive learning experiences. The goal is to create strategic conversations, connecting people and creating serendipities. This is also where the Innotribe Startup Challenge and Innotribe at Sibos are positioned.
Create: Innotribe seeks to create and validate innovations through laser-focused competitive challenges to tackle cross-industry problems. Innotribe’s “Startup Alumni”—which is steadily becoming a quality label—are invited to co-create solutions for industry with the core of SWIFT and present their working prototypes at the annual Sibos conference.
Sharing is interactive, both outside-in so that the banking sector learns from other sectors and inside-out in terms of showing the surprisingly large amount of innovative activity in the banking sector. The goal is for the banking sector to transform itself from a a sector that is perceived as stodgy and boring to one that is a magnet for attracting hot young talent. This entails creating organizations that can learn at scale, organizations where talented young millennials will want to work.
In all four areas, Innotribe is pursuing branding associations to provide additional scale and scope.
The three levels of activity are:
Strategy and trends: This includes subjects like peer-to-peer payments and crypto-currencies, such as Bitcoin. Innotribe monitors the scene and informs the banks, who may have missed what is going on.
Capabilities: Innotribe is focused on developing five main categories of innovation capabilities:
- Content – how well a company is adapting to managing large quantities of information.
- Platform – the readiness of core technology, including the capability to operate in the Cloud and manage large ecosystems of partners and customers.
- Leadership – the adaptiveness of leaders who recognize market changes (mass differentiation), actively seek new revenue streams, and are prepared to move boldly into new areas (radical adjacencies).
- Strategy – the readiness to create a holistic strategy, and a direct connection with customers, acquisition strategy, and an ability to transition to process innovation and velocity as competitive strategies
- Externalization – the willingness of executives to open up the organization to the external world.
In 2015, the major focus for Innotribe will be on platforms.
New Product Development: Innotribe is principally interested in products and services that are common across the industry. For example, SWIFT has been providing a messaging service as a utility for the last 40 years. Innotribe is seeking to create a secure place where ideas can be shared and solutions can be provided as utilities to the community at large. This is not about how Citi can out-compete HSBC: that’s the competitive domain between the banks. What Innotribe seeks to find out is: what are the common problems that the banks have that would make sense to have done at the utility level? Potential areas are common platforms, common standards, compliance, regulation and identity management. These are things that the banks have to do anyway. Some of them may not appear to add value to the bottom line, but they may help to reduce costs if they can be done more efficiently.
Today, technological innovation in the financial industry—what is known as “FinTech”—is booming. “Startups, bootcamps, accelerators, incubators and innovation labs are popping up like mushrooms,” says Peter Vander Auwera, a co-founder of Innotribe. “Almost every day, I am adding a new one to my list. The question though is: will it have a net impact at the end? A lot of those initiatives are very tactical and some of the organizations lose sight of the big picture. Many of these firms are moving very quickly into tactics. Somebody said, ‘Platform.’ So, ‘Ok, let’s build an API,’ without thinking through the business strategy for creating and capturing value. Innotribe seeks to help banks think through the deeper strategic issues of innovation.”
Innotribe already has data on 600 to 700 startups FinTech startups out of an estimated 3,000 FinTech start-ups in the world today. “Today it is less about finding startups,” says Vander Auwera, “In the past, we would have these finalists presenting a SIBOS and somebody would win a cash prize: but that was where we stopped. Now we want to help SWIFT and the banks embed these startups in their core businesses. That way, we hope to help the banks see the meaning of what is going on.”
What will be the outcome of this frenzy of innovation activity in the banking sector? Only time will tell. In any sector, market-creating innovation is a difficult business, with many failures for every success. It is a safe prediction that some banks won’t make the transition to the emerging customer-oriented digital world.
A key determinant of success will be management mindsets. If banks continue in their current modus operandi of maximizing shareholder value as reflected in the bank’s stock price, along with the hierarchical bureaucracy that inevitably accompanies that goal, the likelihood of generating innovation that adds significant value to customers is remote.
At the same time, intensified regulatory scrutiny of the banks is likely to continue, given the report released this week from the Treasury’s Office of Financial Research, which concludes that the overall financial system is becoming steadily riskier, owing to the financial sector’s involvement in riskier businesses, insufficient liquidity and lack of transparency.
What is encouraging to see is that there is now a large-scale focused innovation effort by the banks that is apparently aimed at averting an inexorably tragic end.
About the Author
Steve Denning writes about radical management, leadership, innovation & narrative
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