Cutty Sark, United Kingdom’s legendary sailing ship built in 1869 transported tea and cocoa beans across the world. Lots of incremental innovations and design improvements made the clipper to one of the fastest sailing ships in its time. Cutty Sark made several journeys to Africa.
Unfortunately, the owners did not see the disruption coming when steam technology took over and soon steam ships came to dominate the global trade routes. As a result Cutty Sark became a training ship and today you can admire her, beautifully restored at a dry dock at Greenwich, east London overlooking the shiny skyline of London’s financial centre. Will banks, asset managers and insurance companies face a similar fate, will it just be a question of time until some of them turn into museums as one author of The FINTECH Book (published by WILEY) predicted?
Disruption is part of our lives: What happened to the American company Kodak and its film business when they missed to respond to the trends towards digital photography? What happened to European telecommunications giant Nokia who owned 49.40 percent of the global mobile phone market in 2007 and ignored the launch of Apple’s iphone that same year?
Disruption has started in financial services – summarised by the term FINTECH. JP Morgan CEO Jamie Dimon warned of the growing competition by Fintech startups when he said in a letter to shareholders in 2015 “Silicon Valley is coming. There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking.”
The challenge – all of us who work in Financial Services face – is that digital transformation and corporate innovation is really hard. It is very difficult for financial services companies to come up with commercially successful innovation and to build an organisation which can remain innovative on an ongoing basis.
Already in 1942, the Austrian economist Joseph Schumpeter researched unexpected, rapid spurts of entrepreneurdriven growth and introduced the term “creative disruption”. The importance of this concept has grown steadily with an increased speed of change how companies disrupt and displace each other.
Profitable big incumbents normally have a blind spot towards disruption especially when it comes from smaller, more innovative players outside their traditional set of competitors. These fintech firms lack the incumbent’s fear of disrupting existing profit streams and do not have the burden of old legacy systems, or the high cost structure of existing banks, investment managers or large insurance companies.
In large financial services organisations, the “innovation muscles” are often weakened by growing bureaucratisation, loss of tolerance for risk, commitment to existing financial products and services and fears about cannibalising those, adherence to current business models, reliance on financial metrics to measure innovation and lack of innovation culture and leadership. Therefore it is estimated that 70 percent of organisational change efforts fail (source: “Cracking the Code of Change”, Harvard Business Review, May-june 2000 by Nitin Noria and Michael Beer).
The FINTECH Circle Institute works with financial leadership teams on Digital Transformation challenges both in the UK and globally via our Fintech Masterclasses. Below, I share a summary of the most important concepts how digital transformation can become a success including the important role the top leadership team has to play.
Scale alone is not an impediment to innovation capability. In 2007, when Apple launched the iphone, it was already 30 years old and it was number 123 on the Fortune 500 list. So what are the lessons large banks, asset managers and insurance companies can learn – how can they digitally transform their organisations?
Digital Innovation Strategy
It all starts with the leadership commitment to innovation and to embrace change as a matter of survival long-term. All financial services companies need to develop an innovation strategy to set the priorities between different types of innovation options and to manage the trade-off between short- and long-term innovation opportunities. It is also required to set the “tone from the top” and to align different parts of a complex organisation towards common objectives.
A good digital innovation strategy should provide direction so employees know in which direction the organisation wants to go and why. At the end of the day innovation strategy is about action and should be specific enough to help execute in terms of how to allocate company’s budgets and where to focus on.
A good innovation strategy focuses on both technological innovation and business model innovation, as not just the technology or legacy infrastructures can become obsolete, but also business models can become outdated. So, corporate innovation can be defined as a process that established businesses go through to introduce and implement new opportunities into their existing working practices. Larger organisations will often have a dedicated team to identify what the current trends and opportunities (both from a technology and business model point of view) are.
For any financial institution to remain competitive two organisational capabilities are key: first, the ability to identify valuable new ideas to solve problems and second, to know how to select well between all possible choices to focus on those opportunities best for your enterprise. In order to innovate well, a diverse talent pool is important who brings a variety of functional, technical and industry know-how together as many breakthrough innovations require diverse knowledge domains. Innovation requires rapid experimentation, iteration and learning by building and testing solutions in prototypes and getting customers feedback from very early on.
Corporate innovation models: Open vs Closed Innovation
Closed innovation models are those where the corporation seeks to do innovation in-house to build its own digital skill base. Innovation models consist of research, internal intrapreneurship programs and internal accelerator models.
Open innovation models are those where corporations work with third-party organisations including fintech startups to improve their business products and services, reduce costs or increase regulatory compliance led by an open innovation team. Open innovation models can also include innovation outposts, corporate venture capital and external acceleration programs.
There is no right or wrong corporate innovation model. It depends on the organisation, their objectives and budgets – however in practise we have seen that a combination of open and closed innovation models work best. No innovation model can be a ‘one size fit’s all’,instead they should be viewed as a guide to lead towards digital transformation. We will now look at these models in more depth.
Research and development
Most corporations will have some form of a research and development department/ team to research market trends, new technologies and their use cases for finance and investigate ways to keep that company innovating. Across finance, we are dealing with lots of new technologies from cloud computing, to big data analytics, artificial intelligence/machine learning, blockchain and distributed ledger technologies, the internet of things etcetera.
Most technologies are complex and unfamiliar territory for employees in financial services companies (we will talk about the role of education and upskilling financial services employees later). The role of the R&D function among other things is to assess these emerging technologies and new business models (such as crowd-funding, peer-to – peer lending, multi-sided platform business models etc) and recommend which ones will impact the organisation and should be explored further.
Most employees in finance need to learn more about technology innovation (to understand what is already available on the market and how it could benefit their own organisation), agile working practices such as design thinking methods and learn about new business & revenue models to decide on their product and pricing strategy overall. “Fintech” is the generic term for all types of financial technology applied to finance, consisting of several sub-verticals including:
Wealthtech – the application of fintech solutions to the global investment management, wealth management and private banking sectors
INSURTECH – the application of fintech solutions to the global insurance and reinsurance market
REGTECH – the application of fintech solutions to support regulated entities with the compliance requirements from KYC/ AML onboarding
PAYTECH – the application of fintech solutions to payments of all types (individual, company) and in all currencies (FX, remittance payments)
LEGALTECH – the application of fintech solutions to all legal work across financial services.