Disruptive innovations do not necessarily lead to an incumbent’s downfall. Startups introducing disruptive technologies are more likely to agree to be acquired rather than turning into rivals eventually.
How many times have you heard something to the effect:
“If banks don’t innovate, they’ll be disrupted.”
The reality is that Big Banks are so large and powerful that it’s next to impossible to disrupt them.
Startups introducing disruptive technologies are more likely to agree to be acquired rather than turning into rivals eventually. Once the technology is proven, among other factors, startups tend to form alliances or merge with market leaders, and this preserves the status quo.
The best strategy for many startups in the banking industry is to cooperate with them rather than compete.
These doomsday predictions are never going to happen:
In reality, Big Banks need to be able to do the following:
In actuality, Big Banks do the following:
Bank executives aren’t going to read the headline “banks don’t have to innovate” and cancel their (so-called) innovation efforts. However, if they cancel innovation, they’d be left with the fear that by continuing to do what they’ve been doing— monitoring, acquiring, deploying— they’ll fall further behind.
Banks feel they must “innovate.” But what we’ve got here is a failure to communicate.
When executives say “we need to innovate,” they often mean “we need to do something different.”
What the rank and file hear is “we need to create something new.” And then they freak out because they:
Bank teams think the best place to start is a brainstorming session where “no idea is a bad idea!” is the mantra. Ideas proposed in brainstorming sessions might not be bad ideas, but they are often the wrong ideas for innovation because they focus on “what should be done” instead of “what problem should we solve?”
Banks face a few innovation challenges:
1) Paying for it. According to Cornerstone Advisors, banks with $1 billion in assets spend about $3 million on IT and about $1 million on marketing each year. In other words, they won’t pay for innovation.
How can a mid-size institution with $1 billion in assets—or even one ten times larger—sustain the spending needed to innovate? They won’t.
2) Getting it done. The vast majority of financial institutions rely on third parties for technology development and deployment. Their technology teams aren’t filled with developers, and they have little experience with emerging technologies. Few have new product development people.
How can banks innovate with emerging technologies when they don’t have internal staff able to innovate. They can’t.
3) There’s risk involved. All Bankers want “riskless” innovation. Despite all the announcements about the “need for change” and to “take risks,” when it comes time to write the check, risk aversion wins out every time.
If you’re going to punish someone for signing a $10,000 contract that ends up being a miss, how can you expect employees to come up with a new million-dollar product idea?
Banks think they’re “innovating” because they’ve deployed digital account opening meanwhile:
What good is “innovating” if you don’t out-innovate the innovators? Banks don’t need to innovate—they need to adapt and catch up. Banks require an adaptation process and don’t demand an innovation management process.
Reestablishing value and relevance is what Banks need to do. In other words, develop technological transformations. Banks must find creative ways of deploying copies of what innovators are doing. Reverse engineer, copy, and find the cheapest way to deploy. This approach is what Big Banks have relied upon for the past 50 years, and it works.
Today’s business environment requires Banks to adapt. History has shown the following phases of Bank adaptation:
Fintechs and startups create these new services; however, they find it difficult to:
Big Banks help the innovators scale by customizing and adapting their innovations to align with their current and future customer base.
There will always be rare exceptions, and some Banks will succeed at creating and nurturing genuine innovations; however, most don’t need to innovate.
Banks don’t need to innovate; they need to continue to change, copy, and improve. Giving up on innovation gives Big Banks freedom to focus on what they are good at and to opt out of what they can rarely achieve-- innovation.