Allen Weinberg has a great report on the first day at Payments 2008 that confirms some of the thoughts I’ve had in the past few weeks: that non-banks are becoming the primary source of banking innovation, threatening to relegate banks to mere accountants.
Allen cites the difficulty for banks to hire innovative employees because their lack of coolness, and I partly agree, but I think that is a bit too imprecise. It’s a bit like saying “We failed b/c we are were not lucky”. I think smart innovative employees go to companies that have an innovative management environment and culture, and there are very practical ways to create such an environment and culture, if the top management wants to.
To me such a culture starts by embracing the facts that:
- Committee planning does not work for innovation because most innovations fail and slight differences between similar projects can be huge key factors of success, and as a result it is impossible to predict from which team innovation will come from.
- People with innovative ideas (ex. new online service, new investment theory) as well as execution capabilities (ex. coding, sales skills) are a company’s greatest human asset and should be given opportunities before they leave and join a company that does.
Such an innovation culture consists then in implementing a management policy where such people can submit their plans, get a green light to allocate part of their time (whatever their direct manager says) and get a bootstrap budget as necessary. Then, just like a good option portfolio manager, define progress/success metrics, and allocate more resources to those with the most traction. And finally, reward success. All of this is something Google seems to be doing very well.
Banks are now at a most critical time and their ability to innovate in sustainable business models will be key to their survival. Nouriel Roubini noted this morning that banks’ unsustainable “originate & distribute” business model of the last few years is crumbling with the broken “securitization food chain”.
Banks are social intermediaries, and as a result, social services that focus on social lending or social saving pose a major threat to them, but could also turn out to be a major opportunity if they manage to re-intermediate these relationships and combine it with their unique competitive advantage: creating money from thin air.
Think for instance about the idea of a “college car” savings account solely dedicated to buying a car and that grand-parents could contribute too knowing where the money would end. Think of the negotiating power the bank could have by aggregating all the buying power behind these savings account and exchanging secured rebate from car manufacturers with secured future sales. This is what SmartyPig does, but environment/culture aside, it seems to me much easier to do it from the inside of a bank than from the outside. John Gaskell, SmartyPig co-founder was quick to comment that they have a patent pending on this process, so banks may actually not have this option.
Think also how a bank could leverage the fact that 50% of your student loan on a peer-to-peer lending site comes from your mum and dad, and grand-parents, and how little risk it would be for a bank to lend the remaining 50%, especially if the bank gets preferred re-payment rights.
Banks have some of this social data, in a way that is most likely much more authentic than a Facebook (think about all the documents you need to provide to open a checking or brokerage account compare to what you need to provide to open a Facebook account). It is just a matter for them to put in place the right environment and culture in place to attract people.
If they cannot change their culture, their next best bet might be to do what Apple or Facebook do: expose some of this information via easy-to-use APIs in a way that is more secure than their startup competitors. Then, allocate a VC fund to fund startups using this API (which is equivalent to buy an option to invest more/buy out the most promising ventures later).
In response to your statement “Think for instance about the idea of a ‘college car’ savings account solely dedicated to buying a car and that grand-parents could contribute too knowing where the money would end. Think of the negotiating power the bank could have by aggregating all the buying power behind these savings account and exchanging secured rebate from car manufacturers with secured future sales” it would be worth nothing that SmartyPig has a patent pending on our process (which you describe here) and fully expect the patent to issue by year’s end. Thanks, Jon Gaskell, Co-Founder SmartyPig
Very good article, however there are a few challenges that make it very difficult to bring to pass. 1. Because banks take deposits from the public they are a public trust – you deposit money you trust you will get your money back, as such they are heavily regulated. Those regulations require banks to do things in a certain way. (I am not suggesting this as an excuse for a lack of innovation it is just a problem they have to deal with.) For example 8 years ago a group could charter a bank with an 850 page application/business plan, qualified management team, and $5 million in capital; now the applications are running 2200-2500 pages, the management team has to be far more qualified in terms of banking experience, and $10-15 million in capital. The shift is because of greater regulation.
“Committee planning does not work for innovation because most innovations fail and slight differences between similar projects can be huge key factors of success, and as a result it is impossible to predict from which team innovation will come from.” 2. This is very true – I believe that a challenge with committees are the people are not team members – they want to protect their own turf and there is a natural contention built into a committee. Teams on the other hand have a single goal – WINNING. Minor change in semantics, but a real change in purpose. I don’t know of much innovation that comes from a committee, but a good team with a real purpose and you have winners.
“Banks are social intermediaries, and as a result, social services that focus on social lending or social saving pose a major threat to them, but could also turn out to be a major opportunity if they manage to re-intermediate these relationships and combine it with their unique competitive advantage: creating money from thin air.” 3. This is a great observation and one banks can leverage, if they can get the customers permission (Privacy Act) to create more social interaction between customers, which will help foster business.
“Banks have some of this social data, in a way that is most likely much more authentic than a Facebook (think about all the documents you need to provide to open a checking or brokerage account compare to what you need to provide to open a Facebook account). It is just a matter for them to put in place the right environment and culture in place to attract people.” 4. Good idea but, the regulations don’t allow it – they have a responsibility to ‘know their customer’ this helps with preventing money laundering, and other illegal acts that can be done through banks and their systems, the Congress has in some sense made banks part of the eyes of the government to watch over the flow of money. (makes sense that is where the money is). So it is not an easy thing to open an account, however with some innovation – it could be simpler. For example if you have one account at a bank – you should be able to open another account with out going through all the same stuff all over again. After all they have your information for the first account.
W Brock – http://www.denovostrategy.com
This is one reason we started Zopa. The deteriorating economics of retail banking are simply accelerating the Web 2.0 trend that has already disrupted other retail spaces.
Realistically, banks can only hope to be the back office service providers for the retail financial service providers of the future. And only then if they can match their most cost-effective, reliable capabilities with the needs of truly innovative customers.
Very good article, however there are a few challenges that make it very difficult to bring to pass. 1. Because banks take deposits from the public they are a public trust – you deposit money you trust you will get your money back, as such they are heavily regulated. Those regulations require banks to do things in a certain way. (I am not suggesting this as an excuse for a lack of innovation it is just a problem they have to deal with.) For example 8 years ago a group could charter a bank with an 850 page application/business plan, qualified management team, and $5 million in capital; now the applications are running 2200-2500 pages, the management team has to be far more qualified in terms of banking experience, and $10-15 million in capital. The shift is because of greater regulation.
“Committee planning does not work for innovation because most innovations fail and slight differences between similar projects can be huge key factors of success, and as a result it is impossible to predict from which team innovation will come from.” 2. This is very true – I believe that a challenge with committees are the people are not team members – they want to protect their own turf and there is a natural contention built into a committee. Teams on the other hand have a single goal – WINNING. Minor change in semantics, but a real change in purpose. I don't know of much innovation that comes from a committee, but a good team with a real purpose and you have winners.
“Banks are social intermediaries, and as a result, social services that focus on social lending or social saving pose a major threat to them, but could also turn out to be a major opportunity if they manage to re-intermediate these relationships and combine it with their unique competitive advantage: creating money from thin air.” 3. This is a great observation and one banks can leverage, if they can get the customers permission (Privacy Act) to create more social interaction between customers, which will help foster business.
“Banks have some of this social data, in a way that is most likely much more authentic than a Facebook (think about all the documents you need to provide to open a checking or brokerage account compare to what you need to provide to open a Facebook account). It is just a matter for them to put in place the right environment and culture in place to attract people.” 4. Good idea but, the regulations don't allow it – they have a responsibility to 'know their customer' this helps with preventing money laundering, and other illegal acts that can be done through banks and their systems, the Congress has in some sense made banks part of the eyes of the government to watch over the flow of money. (makes sense that is where the money is). So it is not an easy thing to open an account, however with some innovation – it could be simpler. For example if you have one account at a bank – you should be able to open another account with out going through all the same stuff all over again. After all they have your information for the first account.
W Brock – http://www.denovostrategy.com