Are banks ready to innovate?
Financial industry has reached the point of no return: new start-ups and technologies are disrupting the traditional world of banking. All the things that were either unavailable, limited, expensive or poorly designed, now can be accessible from the third parties, which are not even close to banks. Small fintech companies are doing the job the big players forgot – or weren’t able – to do.
How could this be possible? Banks are spending zillions of dollars on their infrastructure and product development, employ hundreds thousands of people, so they can’t complain on the lack of resources. What’s really missing from this picture? Innovation.
Davids and Goliaths
The heavy corporate structure of banks combined with a tendency to avoid any risk mean there is only a little chance of developing extraordinary, innovative products and services. In this formalized and stiff environment the main business goal is to meet targets, not to revolutionize the industry—contrary to small fintech companies, which build their whole business and identity on bold ideas. They seek niches, new concepts, nonstandard approach and solutions, filling the empty spaces left by the big ones.
Banks may not be innovative, but they surely have enough money to buy innovations from third parties, customize them and incorporate into own offerings. This is the easiest way, although not the best one from the economical point of view. First, a bank have to spend some money on something, which still belongs to somebody else. Second, it doesn’t give a competitive edge, since other banks also can have the same solution. Third, it is simply more expensive than an in-house product.
If you can’t fight ’em, buy ’em
Rich enterprises — and banks are definitely ones of these – prefer different approach: buying providers of innovative solutions. This makes sense, as it addresses all three cons mentioned above. The acquisition of a solution provider lets a bank gain control over products, thus restricting their distribution to competitors. Or, even better, make additional profits from selling these solutions to other banks.
The cost of buying a company is obviously incomparable to buying its products, but this is an investment, not just spending. A buyer hopes not only to save on the cost of a license in a long term, but also to participate in future profits. And to cut some share in the market of new banking technologies.
The incompatibility within
The problem is, will the acquired provider still be innovative under the supervision of a bank? After all, its success resulted from NOT being a big company, but a small group of passionate visionaries who devoted their time and skills to develop some breakthrough solutions. They succeeded, because they didn’t have to waste their energy on procedures, paperwork, budgeting, accepts and other everyday components of corporate reality. Focusing solely on the product, they could deliver it faster and tailor it better to customer’s needs.
Meanwhile, corporate behemoths such as banks, squander lots of their resources on internal processes, losing one of the most important elements of today’s business: agility. They slowly respond to market trends and consumer needs, and their highly hierarchical structure with lengthy decision chains leaves small room for creativity, originality and innovation.
Of course, it doesn’t mean that the corporate culture of banks will always kill novelty and brave ideas. It is hard to imagine, though, that these giant, down-to-earth structures suddenly will become as effective as small teams working on projects so revolutionary, that no one but just the team members believes in.
Banks can innovate — in fact, they did so many times. But in the today’s fast pacing world of fintech companies they simply can’t keep up with new trends. They can embrace innovations and continue developing them by buying their creators, but it will not help if they try to impose the old fashioned style of management and decision making over the acquired teams. Creativity needs some chaos and craziness to grow on — it’s the high time for banks to loosen their collars a bit.
By Konstantin Rabin, head of marketing, Kontomatik