Innovation and opportunity in the banking sector

Paul Jozefak is managing director and co-founder of innovation laboratory Liquid Labs

Prior to the financial crisis, innovation within banks and many other financial institutions was sporadic. While many expected this to change as the full implications of the crisis and ensuing recession hit home, innovation within banks actually decreased, writes Paul Jozefak.

In contrast to many other industries, the chaos of the crisis did not spark renewed interest in innovation. No new ideas of note were created within banks and surprisingly few people left their jobs to launch start-ups. However, the innovation gap within the financial sector has been largely filled by the growth of the fintech start-up sector.

The lack of innovation within banks can largely be explained by the archaic regulations which plague the sector. A myriad of rules make the barrier to entry for new products and start-ups frustratingly high, and scare off would be innovators. Again, this is in contrast to other major industry segments such as marketing and commerce which are arguably over-serviced by start-ups.

While this may sound like a very negative assessment of the sector, it actually means that there are plenty of opportunities. There are a number of aspects of the banking sector which are ripe for disruption. If the regulations are successfully navigated they turn into a barrier to protect start-ups from competition. The breadth of expertise within banking also provides plenty of talent for start-ups to poach.

For an innovative product, the rewards are also much higher than in many other industries. Banks have plenty of money to purchase anything interesting or with the capacity to grow and eat into their business.

Some entrepreneurs have recognised this. The fintech sector has grown steadily over the past five years from comprising of a handful of start-ups into a sector of note. There is also a growing flow of expertise out of the banking industry into fintech. Hand in hand with this expansion is the changing attitude of consumers. People are now much more interested in new financial products and want the legacy institutions to evolve and become more innovative.

Investors have recognised this trend and are now more willing to invest in the fintech sector too. However, despite this growth, the sector is still relatively immature. Although some mergers and acquisitions have taken place and a few companies have successfully exited, the numbers are still relatively small.

The economic revival starting to take place will change this by increasing interest and investment in fintech. Investors will look to sectors where big exits are possible and given the global nature of fintech, this makes it a very attractive proposition.

As legacy institutions become less risk averse they will be more willing to use the money they have saved during the recession to buy technology that they cannot build themselves.

While the financial crisis may not have sparked the explosion of innovation many analysts expected, the rewards on offer for a quality fintech start-up, coupled with the increased investment the economic recovery will unleash, gives the sector a very healthy prognosis.