Knowledge and Insights
This article is featured in the Spring 2018 issue of NJ Banker Magazine.
Stop and think about this: We keep hearing about innovation in just about every facet of our life. Everywhere you look or turn, the word innovation seems to be there. It’s an agenda topic in most board rooms and is causing some level of anxiety because people simply do not know what it really means. Over time, the definition will evolve because innovation will impact our lives more and more. Many will view innovation as a threat, but we view it as an opportunity to thrive.
Wikipedia states, “Innovation is also viewed as the application of better solutions that meet new requirements, unarticulated needs, or existing market needs.” Innovation can take the form of products, services, technologies, or processes. Synonyms are change, modernization, creativity.
Innovation is greatly impacting the world as we know it today at an alarming pace. The only constant is change. Several years ago, Uber arrived, disrupting the transportation industry. They are now the largest taxi company and they do not own a fleet of vehicles. Then, more recently, Amazon acquired Whole Foods disrupting the grocery industry and questioning the delivery models of traditional carriers like Fed-Ex and UPS. Robo-advisors are utilized in wealth management, and we can just speak to Alexa at home to have a product to our door that same or next day. In banking, we have had our share of disruption, from fintech companies to the rise of crypto-currencies. No industry is going to be untouched.
And don’t overlook blockchain, which is being described as the most disruptive of any modern technology and is being compared to the invention of the internet in relation to the transfer of data. Likewise, banks no longer own the end-to-end payment chain and the number of consumers utilizing non-bank payment providers is growing in leaps and bounds.
How is a traditional brick and mortar bank to remain competitive and relevant in this era? Innovation is the answer. Innovation is making new use of the old. It’s not invention, although it could involve invention.
The innovation gap within the financial sector has been largely filled by the growth of fintech start-ups. The main causes of sluggish innovation within the banking industry include, (1) numerous industry regulations, (2) perception of risk or uncertainty, (3) lack of sense of urgency, and (4) legacy systems that cannot support modern technologies.
The banking industry cannot be solely focused on the here and now. They must think of and plan for the consumer of the future, who already demands an immediate need for interaction and delivery of products and services from anywhere at any time. Banks need to find ways to better leverage technology to enhance customer experiences. Banks must become customer-centric and intuitive for both the consumer and the small business, with easier, more convenient and faster ways to bank.
Big data and analytics will allow your bank to understand how your customers behave, and what products and services to launch to keep them at your bank. Banks may take for granted that once a solution is introduced to their customer base, all is well. However, you will need a feedback loop with customers to make sure that your bank is keeping pace with expectations and that the innovative products, services, and payment channels you are offering are meeting customers’ needs.
Banks will need to expand beyond traditional products, services and channels as open Application Programming Interface, the Internet of Things, and more fintech/banking partnerships take place. As a prime example, TD Bank recently acquired a technology artificial intelligence company to explore innovation further.
Innovation in the banking industry requires a bank to examine all operations and infrastructure. No department should be overlooked. Some examples are as follows:
- Human Resources departments need to change the focus of their recruiting to look beyond the traditional hires to those that have a technology and data analytics background. Without these skill sets, a bank cannot properly manage the risks of modern technologies, including artificial intelligence. Also, how the bank will train its current staff on the modern technologies and promote innovation from within are key success factors.
- Information Technology departments need to find ways to work with their legacy banking systems and integrate the modern technologies into their products and service offerings. They need to assess the risks related to the modern technologies to ensure they are properly mitigated. Everyone has heard of botched system roll outs that resulted in outages which brought an onslaught of complaints on social media platforms. Every mistake is amplified in this digital era and no mistake truly forgotten. A digital imprint remains forever.
- Lending departments need to continue the efforts to eliminate paper-based credit underwriting, and to introduce automated score card models to speed approval and funding, to stay competitive with the likes of SoFi, who is marketed as a modern finance company. SoFi’s dramatic rise proves the need in the market for quick decisioning and superior service.
- Deposit and Operations departments should look at ways to create leaner front-line offices and branches and increase customer reach through digital means, with instant access and around-the-clock customer service. Payment technologies need to be assessed and deployed to speed the transfer of money. This may include NACHA same-day ACH, peer-to-peer technology whereby your bank partners with another in-network bank (e.g. Zelle) or participation in third party platforms (e.g. Venmo). Consumers will be more accepting of these types of payment methods if they are offered directly by their bank, a partner they can trust.
- Bank Secrecy Act and Fraud departments need to assess artificial intelligence platforms to assist in the customer transaction-alerting process to more readily filter out the noise of false positive alerts.
- Regulatory Compliance departments need to align the bank’s business strategy with their compliance program and continually evaluate process innovation, which, in turn, will increase your efficiencies for cost savings and turn-around time.
- Internal Audit departments must be nimble to adapt to innovation changes throughout the bank. They need to ensure that their audit universe and audit programs reflect the changing landscape, while remaining cost effective. Process innovation is key to this success and will include continuous audit techniques. Auditors need to continually think outside the box to ensure risks associated with innovative products, services, and processes are properly mitigated. Consider the audits you undergo now for mobile banking and cyber security. These audits didn’t exist 10 years ago or, at least not in the way they are conducted now. Internal auditors who understand the evolving risk landscape both from a business and technology perspective will be better suited to challenge the business stakeholders. Model risk governance will continue to grow in its importance; therefore, having the right staff with technological and analytical skill sets is a must.
We live in exciting times that are filled with great opportunities to rise to the top of our industry and really differentiate ourselves. This can only be accomplished by embracing innovation and not remaining complacent while the world passes us by. Innovation is a journey. Savvy leaders take seriously the work of making their financial institution ready for that journey. Fostering your institution’s innovation begins with a mindset, vision and culture, meaning, understanding where you are today and your desired future state, and getting buy-in from leadership to make change. So, the questions remain – Where is your institution today and where do you envision it to be in the future? How do you plan on getting there? I suggest that you embrace and leverage innovation; the opportunities for your institution’s competitive advantage follow. Good luck on your journey.