Innovation: there is a better way

US inventor Thomas Edison once said: “There’s a way to do it better – find it.” Such thinking helped him to develop the telegraph, electric light bulb and alkaline storage batteries, among others. These are all products that are still in use today, more than 80 years after his death.

Innovation in financial services may not generate products quite so world-changing, but the principle of finding better ways to do something does inform most developments. Through innovation, financial institutions are seeking to reduce costs (a considerable driver post-financial crash), improve efficiencies, reach new customers or improve customer experience and of course, make money. While innovation is often considered to be something new, it very often can be based on rethinking how existing processes or systems are used; in other words, doing it better.

“Innovation can mean improving systems, products or processes that exist already, or creating something new,” says Teresa Connors, head of client engagement, TS market engagement, international banking at Royal Bank of Scotland. “Increasingly in the financial institution and corporate space we are seeing innovation in areas that directly touch customers, as well as in the back-end processing area.”

Connors says this is because many of the previous inefficiencies in back offices have been driven out by initiatives such as the single euro payments area and standardisation. “More efficient back offices have created a platform for organisations to develop more client-centric solutions.”

David Watson, managing director, global head of client access products for global transaction banking at Deutsche Bank says for a long time, banks have been trying to determine how they can offer their broad sweep of products and services in a simple way for clients to access and use. “Traditionally, innovative products were perceived as new and rather complex solutions, which were not necessarily built with a specific market problem in mind,” he says. “Our understanding is that innovative products should help clients in a simple, easy and intuitive manner without adding further complexity to their daily work-streams. Our goal is to integrate ourselves into our clients’ business model and reduce their daily tasks rather than add to them.”

A client focus when it comes to innovation is also the philosophy at Citi. Hubert Jolly, global head of channel and enterprise services, Citi treasury and trade services, says: “Innovation is the development of new solutions that meet new requirements or existing market needs, ranging across different forms including products, processes and services. In the current, highly commoditised transaction banking market it is critical that innovation is used to improve accessibility of banking products and services, improve the client experience and reduce operational cost for both the corporate client and the banks.”

Financial institutions will always say that clients are at the heart of everything they do; but developments in other industries such as entertainment, retailing and telecoms have led financial services users – both corporate and consumer – to expect much more tailored services. Banks used to be able to tell their clients “here is the service we will offer you”. The client could like it or lump it. The development of digital technologies has rendered such an approach inadvisable; when a client can track a parcel with a logistics company easily, it expects the same sort of capabilities when tracking payments.

It’s a well-observed fact that consumers today have a huge preoccupation with technological innovations such as the latest iPhone or the launches of Google Glass or Samsung’s Galaxy Gear Smartwatch, says Francyn Stuckey, global head of strategic solution delivery at Bank of Americal Merrill Lynch (BAML). “Often this translates into companies feeling compelled to innovate for innovation’s sake.”

Stuckey says BAML believes that no matter how smart the innovation, if it’s not going to help solve clients’ challenges, it’s not going to be successful. “Beyond the normal day to day contact and client forums, one action we have taken to ensure we align our technology improvements with clients’ needs is through the formation of client advisory boards – one purely dedicated to our online banking portal, CashPro Online, and another that encompasses the entire transaction services platform,” she says.

This second Client Advisory Board comprises a group of senior finance executives from some of the world’s largest corporations. It was set up to spearhead leading-edge thinking on treasury issues and to facilitate debate and the sharing of ideas. But part of the board’s central purpose is around innovation: to identify new solutions critical to the issues facing today’s corporate treasurers.

“This dialogue provides a major influence for our product development strategy and enables the company to gain a far deeper understanding of the challenges that clients need our help on in order to better meet their business objectives,” she says.

Technology is the driver for innovation across transaction banking the world over, says Stuckey. “We are moving to an increasingly global, online, real-time environment and only by ensuring our focus is on people and relationships can we best leverage technology.”

At the International Payments Summit in London earlier this year many of the sessions focused on innovation and the new, ‘disruptive’ players in the payments industry. For many payments professionals, PayPal is considered the biggest disruptor of them all. However PayPal is on something of a charm offensive with financial institutions, promoting the idea of partnership in order to offer a more useful experience for its clients and its banking partners’ clients. Dan Schatt, general manager, financial services innovation at PayPal, said advanced technologies such as geolocation were best left to technology companies to integrate into banks’ offerings. “PayPal can partner with banks and yes, we are also a big competitor. But we have generated a lot of greenfield interchange revenue for the banks. Banks can integrate PayPal capabilities and we can provide more data around consumers’ transactions than can the big card processors.”

Mike Jones, senior manager, financial innovations at PayPal, expanded on the organisation’s collaborative approach. By making its application programming interface available to the development community and those who want to interact with PayPal, the firm is “allowing innovation to happen outside our world”. PayPal gives a set of tools to developers but controls the processes for onboarding new applications. “Connecting to the development community has helped us because we did not have the capacity or developers to do this ourselves.”

Marcus Treacher, global head of ecommerce for payments and cash management at HSBC, says it is important for banks to work with other organisations because they often bring different perspectives and ideas, which can greatly help innovation. “The real value-added products of the future will be a result of collaborations between different groups.”

Deutsche Bank’s Watson is also a proponent of the collaborative approach. “We see innovation as something clients and banks have to do together. This type of approach ensures that products meet client needs and solve their day to day problems.”

To be a good innovator, says RBS’ Connors, a bank has to be on top of existing and future customer needs. An organisation also has to be close to the regulatory agenda and develop propositions that support regulatory intent. “The amount of regulation we face as financial institutions demands a lot of resource, particularly compared to some competitors in the payments space who are non-banks.”

Arthur Brieske, global head of innovation and commercialisation, global transaction banking at Deutsche Bank agrees that the regulatory agenda is important when it comes to innovation. “Deutsche Bank maintains close relationships with regulatory bodies and we are building systems that are viable for the regulatory environment.  Regulation can drive us to innovate and to re-evaluate the way we are doing things today.” The bank creates new solutions with regulatory requirements “built-in” so that they are easier to implement for clients. “Additionally, we are helping our corporate clients to incorporate regulatory requirements into the next evolution of efficiencies as they move to centralised treasuries and shared service centres to collect payments.”

Banks face a conundrum when it comes to innovation. Regulatory pressures and the need to be seen as trusted institutions means that very little experimentation can take place within a banking environment. Entrepreneurs can fail and fail again; but a failed development at a financial institution attracts headlines and ultimately heads roll.

For this reason, some banks are taking a similar approach to Swift’s Innotribe Incubator. The goal is to identify business opportunities in which Swift can co-invest, from a €5 million fund allocated to the purpose. The Incubator acts as a “sandbox”, enabling firms to work in an environment of limited risk, where financial institutions can judge innovations on facts and procurement officers can see applications in action.

HSBC set up an innovation group a year and a half ago, as well as strengthening its e-commerce team. Says Treacher: “This innovation group can draw on a pool of funds in order to try things out. We prioritise developments based on a number of factors such as market gap and the potential of the idea. We select the ideas that we believe have the most chance of becoming a transformational success. These ideas must be able to make a difference for a large number of our clients.”

For example, the bank is working on a prototype for a smart phone-based collections solution. This would be particularly helpful for large multinationals that supply many small items to a wide distribution network, says Treacher. “Once we have tested the prototype we look to make it available more widely, by testing, ensuring robust security and total reliability across all the markets where a mobile collections solution will be available.”

Regulation is sometimes the spur for innovation, in some cases financial institutions will develop a solution internally to address a regulatory demand and then develop the solution into a product for clients. For example, RBS has developed a liquidity dashboard in response to intraday liquidity requirements that will be offered to clients  to support their liquidity management needs.

Good innovation teams should be able to both judge the market to see when a new solution is needed and also to determine when a product needs to be retired. “There should be a conveyor belt of products and solutions, and the team should know when to bring new developments to market,” Connors says. “The team should comprise creative thinkers who are prepared to take calculated risks and also very strong analysts. These involve different skill sets and personalities.”

The interesting thing about innovation, says Treacher, is that you can get the technology right but the acid test is how new products and services are received. “We are always prepared to evolve the channel to meet the needs of our customers.”