Innovation happens out of dire necessity. Innovation is not a fancy engagement but a response to severe market challenges and regulatory constraints and pressure. Innovation is a continuous change management process which is often messy and chaotic, striving to succeed amidst the complex silos in financial institutions. Successful innovation is determined by a combination of factors. The most successful financial institutions initiate a myriad of strategic and operational changes, involving processes and technology, workflows, changes in network distribution and service delivery to implement successful innovations. Financial institutions go through distinctive stages in innovation. Depending on the maturity of the market; banks go first through product innovation, then progress to sales innovation and market share innovation and eventually focus on customer service innovation. Retail banking in Asia has become more innovative. The crisis increased the level of innovation across the board although products and channels still remain the key focus of innovation activities. Despite the financial crisis banks continue to increase their investments in innovation. banks increased the level of innovation in the last few years.
The main objective of innovation is growth, mainly innovate to grow, while it may seek both growth and efficiency. It is observed it turns out that growth is the main driver, while efficiency is better defined as a supplementary goal. The majority of banks do not see the necessity of having a formal innovation strategy or of having a dedicated innovation department. Highly innovative banks without formalized. Structures indicating that there is no strong relation between fixed structures and innovativeness. Strategic innovation is rare and concentrates around international banks and small niche players mainly working on incremental innovation and only few focus on strategic innovation.
Managing the interface between technology and business people is the greatest challenge in the innovation process Corporate culture, management behaviour, employee adaption rates, legacy systems, and IT bottlenecks were all mentioned as obstacles by the respondents. Less important challenges mentioned are regulations & compliance and complex hierarchies.
Context of retail banking, the innovation of: Long term and sustainable banking franchises are not built on the backbone of hot products and one trick ponies, but on those initiatives that make a significant and recurrent impact to the institution’s bottom line. Very often, they are driven by a person, not necessarily in the CEO management office, but often business line executives that have clarity of vision and ideas that have the potential to reshape the terms of competition in their own markets and beyond, a thorough understanding of the industry and a readiness to take the necessary decisions with a core team, despite internal and external challenges. It is observed that innovation is done out of dire necessity; it is not a fancy engagement but a response to severe market challenges and regulatory constraints and pressures. Innovation is a continuous change management process, but it is often messy and trying to strive amidst chaos and the siloes complexity of financial institutions. Without innovation banks do not survive in today’s market place. This is in particularly true in markets where the traditional lending business of commercial banks and the ability to demand high net interest margins has solidified and players are forced to rely on other sources of income. It is observed that banks that are capable of extracting a high proportion of their fee income from the market show on average higher levels of innovative activities compared to their peers. Yet, overall, markets are unexciting and undifferentiated, with competition based on pricing. Price-based competition alone will need to give way to non-price innovations for developing core relationships.
Financial Institutions successful innovators, at when: Identified seven operational key building blocks that all successful innovative banks in this region that have spoken to have in common. These are not necessarily those banks that have disciplined innovation processes in place or committees; More important are the team characteristics; a culture of innovation, clear core business and stiff external and healthy internal competition. A growing number of banks are also leveraging on Voice of Customer systems and social media to stimulate innovation.
Observation prevailed that on average six out of ten innovation projects fail in the pilot phase. Thereafter, there is no guarantee that innovation will contribute significantly to the bottom line. Perhaps in no other business line than payments are the history of failure so high. Today, new payment innovations have to offer superior convenience, added security and better cost efficiency than existing payment systems in order to be adopted by consumers and merchants. Study showed considerable differences in terms of what banks in different markets want to achieve with innovation, and the actual innovation patterns and activities that are aligned with the stage of retail banking evolution they operate in. There are four stages of innovation regardless of the market a bank is operating in: Product Innovation Stage- In rapidly developing markets like Vietnam, China, Sri Lanka, Bangladesh and India, with large unbanked populations, regulations have been opening up in recent years to allow banks to diversify their intermediary services into new consumer finance products. Generally, financial institutions have a large mortgage portfolio, contributing 85% or more to retail assets. The market is relatively closed to competition from outside and is exclusively the realm of domestic banks. Banks launch new but basic products. Sales Innovation Stage- In markets like Thailand, Philippines, Malaysia, Indonesia and India that have already reached a fair level of basic infrastructure development, private banks balance efficiency and growth, considering them to be of equal importance for the bank’s future development. When banks are still strongly growing their customer touch points, they benefit largely from innovation in process efficiency, thus reducing turnaround times, reducing costs and streamlining processes, while centralizing operations. Ahead of further market liberalization, banks have been focusing on building up their asset portfolios, often using price innovation in order to gain market share. Market Share Innovation-At this stage banks start to introduce cheaper forms of distribution, which together with accessibility and convenience are the key to the bank’s competitive position. Banks are optimizing workflow processes, integrating transactions with the back office and rationalizing their network points. Players are not yet fully integrated from a customer point of view, but innovation in processes and operations is moving in that direction. These markets are also characterized by thinning margins in the traditional lending business. Highly effective organizations emerge, as they have been exposed to tough competition from local and international banks. Intent on achieving higher market share at all costs, results in increased risk and IT expenditure. As it becomes harder to achieve further gains from efficiency, banks focus on growth in market share. Markets at this stage are often unexciting and undifferentiated and have a full-blow pricing war raging. Customer Service Innovation- Reaching a strategic turning point, banks are forced to re-invent themselves by introducing new business models and nontraditional fee-based lending products. Innovations in customer experience and superior customer service delivery, network integration and franchise building dominate the operational agenda as banks move into this stage.
What are the key factors forcing banks to be more innovative: Growth in markets of strength, Compliance & risk management, Cost pressure, World-class customer service, Asset Quality, Growth in new global markets, Scaling technology architecture, HR.
Innovation strategy: Most banks do not have a formal innovation strategy. Although innovation in most cases is a part of the overall strategy, banks rarely deploy an innovation strategy, but rather have a statement to be innovative as one of their core strategy pillars. Most banks instead drive innovation on an ad hoc basis.
For strategic innovation projects, such as expensive IT infrastructure which relies on the integration and implementation of other systems and changes to the business model, the planning involved is more comprehensive and formalized, but still mostly happens on an ad hoc basis. For instance, a new Customer Relationship Management system (CRM) requires banks to also develop data warehousing, data analysis, frontline integration, complaint and sales management, etc., as well as training and cooperation across business lines. For such projects banks usually follow a specific strategy, but not a generic innovation strategy.
Concluding thoughts: Retail executives have come to think of innovation either as process re-engineering, added on products and service applications or network distribution enhancement. The majority of innovations, it is observed, are driven by unit or product heads who drive new ideas and changes with a minimum of innovation infrastructure and resources behind them such as monetary, structural, organizational or intellectual capital.
Md. Kafi Khan, Company Secretary, The City Bank Limited
