Are Banks Truly Innovative? It is Time for a Rethink

The way in which banks focus on innovation is crucial for their long term survival. However, are they focusing on the right things?

There are times when you are writing a book and your mind, body and soul get drawn into directions that you neither dreamed nor envisaged when you first started out. It is a wonderful thing when it happens because it means your passion for what you are doing is driving your thought processes and stirring your imagination beyond the realms of cold logic.

It is a very nice feeling.

In the middle of writing Clearing The Bull questions about what it meant for organizations to be innovative and whether or not banks were truly innovative entered my mind. I was grappling with the idea that in general, organizations that were truly innovative were both economically and competitively sustainable. However, given that I was writing about the banking industry and the financial crisis, it had occurred to me that given such a definition, banks were clearly not innovative.

I was in a quandary. I had spent more than twenty years working for various investment banking entities in the City, much of that time on the trading floor. During that period I had witnessed an amazing proliferation of products and product applications that were simply mind-boggling even to those like myself who were close to the process, and which were therefore utterly bewildering to the rest of mankind.

Every instinct within me said that banks were highly innovative and yet this core belief was being challenged. I decided that the only way forward was to man-up and face that challenge.

One of the first things I did was to look at the mission and value statements of many of the world’s leading banks. For the most part they mentioned leadership, teamwork, meritocracy, integrity, respect, professionalism and so on and so forth. I was struck by the uniformity and similarities across the various banking entities and realized that there was nothing here to distinguish one bank from another—which I surmised was probably the reason why they all fell down the same hole.

I then compared those mission statements to Google’s, whose mission was: “To organize the world’s information and make it universally and useful”. Wow I thought—what a refreshing difference. I know exactly what Google wants to do (even though I might not always be in total agreement on how they do it).

Still, I was not going to give up so easily on the industry that I had been a part of for so long. Thus, I decided to look at the list of the world’s most innovative companies which in my opinion was sure to include a few banks.

I started with the Fast Company and its list of “The World’s 50 Most Innovative Companies”. Apple, Google, Twitter, Facebook et al were all there but alas, there were no banks. I managed to temporarily quell my disappointment with the thought that Fast Company described itself as “Progressive” and was thus probably to the left of the political spectrum. As such, it would not be inclined to include banks in its top lists after witnessing the worst financial crisis since the Great Depression.

Therefore, I turned to Forbes, a veritable bastion of free market economics. Surely they would have a bank or two in their list of top innovators.

In compiling their list Forbes had enlisted the services of not one but three university professors; Clayton Christensen of Harvard, Jeff Dyer of Brigham Young and Hal Gregersen of INSEAD. The three had collaborated on a book entitled The Innovator’s DNA and it was from this research that the list of 100 most innovative companies was compiled—described those that were likely to succeed in the future.

I looked the list up and down. Then, I looked it up and down again to make sure. No matter how many times I looked at the list the outcome was unchanged. There was not a single bank there. It appeared that Messrs Christensen, Dyer and Gregersen did not believe that banks had a very bright future.

In order to be sure that the financial crisis has not colored people’s judgment I looked up the list of “The World’s Most 25 Innovative Companies” by BusinessWeek in 2006. This was before the crisis and at a time when banks would have been at their profitable best. Yet, there were no banks on that list either.

By this time I had begun to realize that since the rest of the world did not think banks innovative then by definition that must be due to the nature of the relationship between banks and the rest of the world.

However, I was still too restless to let go. I had seen too much of what banks were capable of over the years to readily accept that the industry was not highly innovative. It was then I decided to write to the authors of The Innovator’s DNA to find out why they had not included my beloved banking industry in their list of innovative companies.

The response when it came was both surprising and telling—the authors of The Innovators DNA had simply excluded banks from their research. Initially that was somewhat of a relief but then I quickly realized that if these eminent professors had truly believed that there were innovative banks they would have included a few in their research.

Sometime later, in an interview with Zane Safrit, Hal Gregersen gave a definitive opinion of what he thought of banks and innovation:

But I look back to the financial crisis in 2009 and wonder how many of the CEOs and executives of the major banks in the world ever took the time to get out of their offices to walk down to their home loan making office and just watch the process of how these loans were being made?

I bet if they had they would have sniffed something ugly really fast. And they would have done something.

Banks had failed in two of the most important qualities of innovation; discovery and observation.

After some more scratching around I finally asked myself the killer question. What is innovation about? Is it about how many PhDs and rocket scientists a bank has? Is it the flexibility of its risk management system? Or is it about the complexity of its pricing and valuation systems?

The reality was that in the long run none of these are important. What is really important is the impact that banks have on their customers and their community. That is the only way in which innovation, and with it economic and competitive sustainability can really be measured.

The last few years speak have spoken to the banking industry in very loud and very clear terms. They are saying to banks that if innovation is necessary to your future then; “It is time for a rethink”.

Jonathan Ledwidge has more than 20 years experience in investment banking and is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Web: www.ledwidge.com Email: jonathan@ledwidge.com

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2 responses to “Are Banks Truly Innovative? It is Time for a Rethink

  1. Robert Arvanitis

    Interesting observations.

    Let’s consider the structural issues that hamper creativity in banking, versus the opportunities going forward.

    First, banks are in many ways over-regulated and have been made a tool of public policy.

    Thus, much intellect is squandered on regulatory arbs (mortgage-backeds face half the capital charge of bonds? OK then, we’ll slice the same bologna THIS way!).

    And why innovate when you can simply be the Fed’s flunky in money creation? See for example “How the Fed Favors the 1%” (WSJ, 4/20/12) It’s far easier to be a conduit for a guaranteed spread. In fact, it would be downright foolish to actually take business risk when there is free money available.

    On the flip side, think back to the traditional merchant banks which financed the discovery of the New World, and then the building of the same. Shipping loan for 20%. Else we can innovate and lend for just 12%, once we get this new Lloyd’s to take sinking risk for 6%. Everyone wins when intellect is put to proper uses and not squandered.

    ******

    Right now, the regulatory and other feedback mechanisms are badly misaligned.
    I mean, just imagine a thermostat designed by government.
    That’s why we have regular crises. We don’t learn, we make new and more subtle errors.
    Dodd-Frank has already embedded the problems that will be forecast in 2014 and actually hit in 2016.
    The right, indeed only, solution is to return government to its proper role enforcing the premises of free markets (many small agents; free flow of information; no subsidies; and no TBTF).

    Bankers used to be experts in identifying and placing ALL the risks in the best most appropriate markets. There is huge potential to parse, price and move low beta risks from the capital markets.

    Once we remove the dead hand and restore market forces, they can, and will be, again.

  2. My perception as former banker with 35 years of experience and experiment prompts me to tell that, the word innovative is to be applied with all inbuilt insulations against various risk factors. Hundreds of innovative ideas are floated and prompted with a malicious design to break the calculative risk factors. Hundreds of trial and error were later redressed .Managing a huge financial empires without leakages or breaches may look conservative to those whose projects are excellent in papers, power point presentations and board room talks, when “diligence” applied sometimes everything turn to be colourful rainbow or collapsible castles. In my view banks are innovative with hundred schemes but they are not crossing the frontiers. it is one way will strengthen and prolong the growth of the state
    economy.

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