Take it to the bank

I was speaking recently with a new contact and potential partner who alerted me to a great series of articles about innovation in the banking sector. I have not had much experience in the financial services and banking arena, so I was interested to read more about what's possible in the world of financial services from an innovation perspective.

The articles can be found here. The editor's note for the July/August issue seems a little dire: "What constitutes "working different" in an industry whose executives are bound by the rules and can't afford to ignore the status quo". The editor quotes a consultant from the financial services sector who says "The last major product innovation we've seen in banking was the introduction of free checking" almost 10 years ago. Ouch. So they dug deeper and found innovation the financial services area, but the interesting work is being done by firms that are not traditional banks but are encroaching on the banking and financial services industries.

In the credit card industry, for example, most IT dollars have been invested in driving costs down (sound familiar?) but now more money is being spent on management of the credit card portfolio to better understand customer preferences as a way to build new revenue streams.

Here's one that has been lying around out in the open for years. Why are banks the only "service" oriented organizations with few or no hours on Saturday and almost none on Sunday? Just now, some banks in New Jersey are beginning to open on Sundays. Commerce Bancopr has a motto of being the "most convenient bank". That would put them well past my current bank, which is never open on Saturdays or Sundays. Really, this isn't much of an innovation though.

Another interesting firm to watch is Prosper Marketplace. Prosper was formed by the original management team that started and sold E-Loan. Prosper provides an internet-based loan origination program, eliminating the middleman. Any person can request a loan, and any person or organization can offer the borrower money. This is a revival of one of the original promises of the internet - a frictionless trading exchange. Of course this type of innovation is being offered by a non-bank organization.

Innovation in financial services is clearly happening outside the US, however. In different regions there are different pressures on the financial and banking community which forces them to be more competitive and original in their offerings. In areas with high inflation, such as Brazil and Argentina, there have been processes implemented to speed transactions and reduce float. In Singapore, according to the articles at www.bai.org, a person can conduct over 37 different transactions on an ATM, even purchasing stock.

In the final article, written with consultants from IBM, the consultants note that traditional innovation in the financial services industry has been focused on PSM (products, services and markets) but the emphasis is changing to business model and operations innovation. What's driving the new innovation focus in financial services? "Commoditization and the similarity of products and lack of pricing power are strong indicators that the current approach isn't working".

In this massive industry, change has always come slowly, however globalization and the internet have brought new services and new competitors to our doorsteps. The US financial services industry needs to innovate in order to differentiate itself and offer customers the services we expect, otherwise more and more firms that are not traditional banks will enter and fill the gaps.