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What is the right innovation paradigm around banking?

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What’s the big picture around banking, payments and innovation? Maybe the new paradigm will be the bank as facilitator of innovation rather than innovator. Maybe we want banks to be boring and efficient.

In the opening talk at this year’s NetFinance Interactive, Vince Hruska of City National Bank made the very good point that innovation in banking is harder (for a variety of reasons) than innovation in a whole range of other areas and focused on mobile as an area where you see innovation and growth has been outside of banks (he used Venmo as an example) and he left me wondering how exactly banks will change their structures when they have an elephant in the vault.

Here’s what I mean. There was a special feature on the future of banking in the July 2014 edition of Prospect magazine. The Director of Strategy at the British Bankers’ Assocation, James Barty, said that banks have to innovate otherwise competitors will eat away at their business (which I’m sure we would all agree with) and that the biggest innovation challenge facing the banks is their own legacy IT infrastructure.

I’m sure he is right about this. Legacy infrastructure is a huge problem. But legacy thinking is too. I remember a depressing, but accurate, comment on this from Erin McCune at Glenbrook that framed a particular aspect of this problem.

The revolving door of leadership between banks and their solution providers doesn’t help.

[From Co-Dependence Between Banks and Their Technologists: Hampering Innovation — Payments Views from Glenbrook Partners]

I’m convinced that the only way to bring real innovation into the finance sector is by separating the lines of business. In particular, we should pull payments away from the bank and both the payments business and the banking business will benefit. Let new people have a go at payments. Let new people look at the areas of payments that are not systemically-risky and try to work in entirely new ways. The payment systems we are familiar with, such as card payments and direct debits, date back to a time before the internet and mobile phones. They are remnants of an antediluvian ecosystem, ill-suited to the new climate and destined for extinction.

This doesn’t help the core banking business. Despite all of their labs and accelerators and incubators, the focus of their spending remains the legacy infrastructure. So this makes me wonder what the cross-over point is, where it no longer makes sense to keep patching up the legacy infrastructure and instead just chuck it (and Erin’s “military-industrial complex” that comes with it) and start again.

If we did start again, one of the things we (i.e., the industry) might do differently is change the focus of innovation. Back in 2012, Nasir Zubari wrote that banks were being “selfish” with innovation, in the sense that their view of innovation is shaped by the hard statistics. He said that out of the 64 million bank accounts in the UK, less than 0.1%, had voted with their feet and shifted banking provider in the four years to the end of 2011, and even then they were shifting to another bank providing essentially the same service as the one they left. This set the dynamic for innovation.

For specific services at the consumer and SME level, banks rarely bother with improving services and incurring R&D expense. Why should they? They are not going lose nor gain any customers regardless.

The fact that 1) banks don’t share their innovation benefits with customers 2) banks can avoid innovation in services altogether, spawns opportunity for innovators to do the opposite. Welcome the “New Finance” sector.

[From Nasir Zubairi: Selfish Shylocks]

Maybe this is the right structure. Maybe what Nasir called the “new finance” sector or what we call the “fintech” sector should be doing the innovation that shares benefits between stakeholders. It is at least a plasusible hypothesis that banks innovate to make themselves more efficient, while supporting innovation from non-banks and near-banks (look at the case studies of Simple and Moven, for example) to deliver new products and services. Matt Harris framed this new business perspective very well, saying that:

In 10 years, I suspect that these lines will have entirely diverged, as the banks become relatively stable financial utilities, their vendors settle into a symbiotic but unexciting and slow upgrade and refresh cycle and the Finsurgents complete their takeover of customer facing applications and innovation in the sector.

[From Redefining FinTech | Finsurgency]

I made a note of these comments from Nasir and Matt a couple of years ago because they fit with an API-based approach to services that we were looking at for one of our US financial services customers and reviewing them now I think they provide a decent paradigm for linking the technology roadmap with the bigger picture around the banking business. It’s about banks helping others to share.

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