Why US banking innovation is falling short
The US banking industry is lagging other markets when it comes to innovation, says Jim Marous. Success requires a different approach.
The banking industry in the US has always been slow to innovate. When asked why this may be, most industry studies find legacy back-office infrastructures, the lack of leadership commitment, regulations and compliance, organisational silos and the lack of budget to be inhibitors.
Despite these limitations, the US banking industry has tried to increase its focus on innovation through upper management commitment and support of innovation initiatives, development of innovation labs, increases in dedicated financing and even an openness to invest in, or partner with, fintech firms. Some may question if the increased level of attention has had any measureable impact.
Just look at the numbers. Over the years, multiple global trade organisations like Efma have sponsored innovation competitions. With very few exceptions, banks from the US have been absent from the winners’ circle and even when they do win, it is usually for improvements to traditional distribution networks or completely new banking organisations like Simple, Moven or BankMobil. Conspicuously absent are the big five banking organisations in most cases.
Outside the awards designation, there is some innovation occurring in the US, but the majority appears to come from those organisations with overseas ownership (BBVA and Santander), smaller digital banking organisations (Simple, Moven and Bank Mobile) and US based fintech firms. In fact, 35 of the ‘KPMG Fintech 100’ were from the Americas.
The lack of meaningful innovation in the US is a threat going forward. With expectations of the digital consumer rising rapidly, and competition from fintech firms and global financial innovators increasing, the need to ‘move the needle’ by legacy banks can’t be overemphasised. And while the largest banks in the US are seeing very positive customer satisfaction results from their digital banking improvements, there is the question of whether that will be enough in the future.
So why is it that, in the USA, home to some of the largest banks in the world, true innovation is so difficult to find? Bradley Leimer, head of fintech strategy and innovation at Santander US, says: “While there are many reasons US banks are innovation laggards, I think legacy technology, regulation, compliance, and risk aversion have to top the list of reasons why we’re not seeing more movement.”
“The US is a major leader in Internet innovations but, outside this, it has been behind most other regions of the world on mobile developments, adds Chris Skinner, CEO at The Finanser Ltd. “This is largely due to the tariffs and state splits between cellphone usage and providers which, when you get to China or Africa is a totally different position. These newer markets do not have the old systems in place and therefore saw mobile as a leapfrog for digital services to the customer. American banks just don’t see it that way, and see it more as an overlay to what’s already there.”
The general banking culture also seems to be a considerable barrier to innovation. “Innovation is simply not in the DNA of most bankers,” explains JP Nicols, managing director of Fintech Forge. “They’ve been trained throughout their whole career to identify and avoid risks, and innovation is about taking small risks and failing fast and cheaply and learning from those mistakes to get to the right answer quickly.”
Looking ahead, we will certainly see more examples of innovation in the US, either by traditional financial institutions, by one of the many newer neo banks that have been created, or from some of the financial intermediaries that are providing the tools for US banks to serve customers better.
One of the major changes that will need to be embraced will be to move what is being developed in the newly outfitted innovation labs to customer-facing environments. In research done over the past year, The Financial Brand and the Digital Banking Report found that, while new ideas are being tested in many organisations, few make it out of the lab.
One banker admitted: “Our innovation lab looks great for the investor public, but in reality, the best ideas are coming from the front line and from our test branches. The digital banking areas of the bank think completely different than the legacy banking departments and even the innovation lab…they get ideas to the consumer faster.”
Most importantly, the biggest adjustment that will be needed in the US is a much stronger culture of innovation and acceptance of tolerable risk. Just read some of the annual reports from banking organisations like BBVA and it is clear that the innovation culture starts from the top. Without this level of commitment, innovation will come slow.
Many bankers became bankers because of the promise of a lifelong career, where advancement was guaranteed with tenure and change came without hurry. That is not a recipe for success in today’s banking environment.
The barbarians are at the gate, and these are the digital consumers who expect the kind of innovation (and digital experience) they receive from large technology firms like Google, Amazon, Facebook and Apple. If the US banking industry continues to be complacent, eventually the digital consumer will notice that the grass is truly greener across the street and they will switch providers.
Read this article and much more in the Efma Review 2017
Jim Marous will speak at the Distribution Summit that will be held in London on 26-28 April 2017. Check the program and book your seat here