In recent years banks have been a target for criticism, ridicule and vehemence. They are, for example, said to be slow and reluctant to innovate. But is it all fair?

JP Rangaswami, chief scientist of Salesforce.com, has some significant experience in this area - when he was chief information officer at Dresdner Kleinwort Wasserstein, he was involved in the bank's Digital Markets project, deploying internet technologies and  social networking in the trading room. Speaking at a London Financial Services Club session last year, he described some of the difficulties he had trying to persuade the bank to innovate. He said that innovation requires change, but banks are traditionally conservative in nature and it doesn't come readily to them - at least this was his view at the time.

This doesn't mean that banks don't want to innovate, but it does suggest that they often take their time to catch up with their markets and even with their customers. Rangaswami doesn't feel that this is necessarily the fault of the banks. For example, banks tend to face higher levels of legislation and compliance obligations than non-financial services organisations, which are now entering the market. Their complex back-office systems are also problematic. They too can inhibit innovation.

For example, with regards to the data protection compliance issue, Rangaswami says the banks are reluctant to share infrastructure. This means they aren't taking advantage of the value of the cloud for managing payments, funds transfers and credit-rating information to the extent that they could do. Data compliance issues make them wary of exploring this kind of technology for what is judged to be highly sensitive data. The public cloud is therefore more often considered to be out of bounds to any transactional data. Due to legislation it needs to be tightly controlled.

So, in his view, the markets make it very difficult for banks to innovate and, since the beginning of the financial and economic crisis in 2008, they have been required to be more risk adverse. Yet innovation requires risks to be taken. Banks therefore often face huge obstacles before they can even begin to think about innovating their products, services and processes by using technology and other means. This perhaps unfairly leaves behind a perception that banks are slow behemoths that react only when non-banking players like PayPal and Apple heave into sight.

Yet he is right in saying that there is the innovator's dilemma to consider. He explains that this means that the incumbent player "looks at having a high performance threshold, but a low level of innovation". The trouble is that it eventually becomes too late for the incumbent to respond to market changes, but this leads to the organisation operating at a lower performance level.

So banks that don't keep ahead of change may find that they are painting themselves into a corner, and at worst he suggests that they could die if they don't embrace change. He also warns that banks shouldn't look at the incumbents to find ideas for innovation; they may only wish to adapt to new market demands, and this includes exploring how the generation gap alters customers' attitudes to technology. They should also look internally as well as outside the industry for inspiration. Younger members of staff, for example, can be a source of inspiration as they can speak for how their own generation uses technology and present fresh ideas to their senior executives.

Darren Armitage, head of technology innovation at HSBC, agrees with this opinion: "Innovation is creative, so of course a company looking to innovate needs to look outside its own industry, and financial services is no different in this respect." He adds that financial services customers don't exist in isolation. Each one of them interacts with a wide range of technologies and services each hour of the day. He believes that this means HSBC needs to keep innovating to keep up with the changes in their lives and with their expectations. Armitage also believes that mobile technology will bring the bank and its customers closer to each other, while enabling the customer to control how they access their own banks accounts wherever they are with the help of mobile banking and location-based services.

Yet should they wait for customers to decide how the banks should use technology to innovate their experience of using or buying financial products and services from the banks? Apple's late chief executive, Steve Jobs, is reported to have said that there is not much point in waiting for focus groups of customers to decide what they want because they don't always know what they want or need and they are likely to ask for something they are already used to having in their lives. There is still a sense that the banks are reacting to change rather then driving it, and that innovations in things like payment systems have been coming from outside the industry.

To this charge George Kelsey, chief of integrated architecture at Royal Bank of Scotland, says that it is not the bank's job to lead technological innovation.  "It is our job to look at what's happening in the technology landscape in relationship with what our customers want, and I welcome technical innovation." He says that Apple is seen as the organisation that "has set the bar for using mobile applications, and there are others like SAS and Teradata that are looking at how you process and gain insight from the vast quantities of data that we have on our customers". So the customer is at the forefront of his mind, but is he missing a trick from Steve Jobs' book? Maybe, but it's true to say that without Apple's iPhone, mobile banking would not be what it is today.

Paul Say, head of marketing at HSBC's First Direct telephone banking subsidiary, thinks innovation in the banking sector should be about ripping up the rule book to avoid getting stuck with outdated practices. He argues that taking a step back from adopting a traditional approach can reveal new opportunities - ones that might not have been previously considered, and ones which mean that banking will be truly social in the future. A large part of this comes from mobile technology, which he claims is a very effective marketing channel as just about everyone in the UK has a phone about them. His colleague Aden Davies, who works with HSBC Technology Services' innovation team, believes that companies like Apple and PayPal aren't necessarily doing the job of the banks. "I don't see Apple building complex anti-fraud systems, or systems that track potential terrorist funding," he says. He also doesn't think we will see a ‘Facebook Mortgages' in the immediate future, but who knows? It could happen. Virgin has recently bought Northern Rock, and the advent of Virgin Money as a bank is expected to lead to certain kinds of innovation and increased competitiveness in the banking industry. Davies nonetheless thinks that the day might come when the daily experience of customers managing their money has become the domain of Google, Apple and PayPal.

There is also the issue of value chain slicing to consider. "PayPal is a great example of this as you don't need a bank to trade, you just need a reconciliation service, which can be created easily and cheaply," says Stuart Rye, director of financial services at Fujitsu. The effect of this is that banks can end up finding themselves disintermediated, and are "left with expensive payment systems that provide bulk payment at the back end of the process". Rangaswami pointed out in his speech that PayPal is integrated into the current technical infrastructure of the banking industry to allow payments to be deposited into bank accounts.

Disintermediation or a lack of innovation don't necessarily mean that banks as a whole will die: they still play an integral role in society, and they are very much embedded into its fabric. Yet individual banks could lose market share, or some may fade away by becoming less competitive as a result of not exploring technological innovation - wherever it lies internally and externally.

The risks associated with change can be managed, but there can be no improvements without it. A certain amount of risk can therefore be good if it leads to ongoing improvements that benefit the organisation's stakeholders. Be aware of the law of unintended consequences though. If a bank focuses on what might go wrong rather than what might improve as a result of change, then innovation is dead and the bank might find itself being left behind in the market.

Andrew Bale, chief executive of Resilient Networks, thinks that banks are trying to act almost like a telecommunications network operator. In his view they are increasingly dependent on technology to improve the delivery of their products and services. So banks will need to continue to find and implement new technological innovations from IT companies, but they should also think about how they can use, implement and develop technology to innovate from within. 

Bryan Foss, independent director and visiting professor at Bristol Business School, is still not sure that "the existence of tactical innovations" like smartphone mobile banking is sufficient "to demonstrate that the banks really ‘get it', and considerably more needs to be done by their boards to re-emphasise the critical future role of the banks for consumers and businesses". 

The impact of innovation can be clearly seen: the iPhone is a prime example. It reshaped the market and created a new ecosystem with a new device and associated applications that could do everything a PC, laptop or a Mac can do. This galvanised consumer interest in the product, and created a competitive advantage for Apple. This has had a wide-ranging impact on other industries, including banking.

So the key lesson that banks can learn is perhaps not to wait for customers to decide what they want, but to take the lead when it comes to developing new technologies. Companies like Apple aren't sitting and waiting for innovation to happen: they are proactive and their innovation processes never stop.

Although Apple has faced stiff competition since the advent of Google's Android, it does demonstrate that innovation can help any company - including a bank - to at least temporarily capture a greater share of its market and become a trend-setter than influences other industries. Yet there is still an inherent need in the industry for regulators to understand the need of the banks to be able to innovate as prohibitive regulatory practices will also slow them down.

So, with this in mind, were Rangaswami's comments  about the conservative attitudes of banks fair? To a degree, yes, but the banks can't always help being slow. Yet they can still learn many lessons from their non-financial sector counterparts. BT

Sidebar: RBS takes charge of innovation

Royal Bank of Scotland is one bank that is keen to develop its products and services with the help of technological innovation. On the mobile front, it has applications for Apple's iPhone and iPad, Research in Motion's BlackBerry and Google's Android.

George Kelsey, chief of integrated architecture at RBS, thinks this is evidence that the bank is beginning to take charge of technological innovation. "We have successfully deployed a mobile banking application across five of our brands now, and they include: RBS, NatWest, NatWest Offshore and Ulster North and South," he explains. Customers are apparently enthusiastic, and he describes its uptake as "staggeringly good". There are now 1.2 million customers using it, and they have used it 102 million times. This equates to the completion of £2 billion in transfers and payments since May 2011, and he claims that these figures are continuing to grow exponentially.

"I call it the ‘one thumb transfer', and it is the highest rating financial services application," he says. This is because RBS and the other brands within the group are watching the changing needs of their customers and then matching technology to them. Yet these applications are considered by him to be the start of his bank's journey because there are also plans afoot to launch similar applications for its business and commercial customers.

Much of the impetus for innovation is being created by a shift in how customers wish to interact with technology, which has been created by the growing proliferation of the smartphone and social media networks like Twitter and Facebook. This trend is supported by Accenture's research and its reports, Banking 2012: Revenue Growth and Innovation and Achieving Strong Returns in Mobile Banking: Here's How Leading Banks Do It.

Jonathan Gray, a senior executive in Accenture's Financial Services practice, explains why this research is important: "The research we have done shows that customers are much more ready to purchase goods and carry out transactions over digital channels, and initial results indicate a big jump in customers using their mobile phones for banking services each month - up from 10% last year to 18% this year."

Teradata and SAS analytics enable RBS to see what its customers are doing. "The technology landscape is rapidly changing and we need to know ourselves how these shifts could be used to better service our customers," explains Kelsey.  Social media also plays a role, enabling staff to share and vote on mobile applications and other ideas that could eventually be used to improve customer service. Only the good and most popular ideas will see the light of day though. This concept is called the 'App Bank'. With it Kelsey can find ideas that would not otherwise have arisen.