Banks are no strangers to innovation, but are they keeping up with the times? What strategies are banks using to deal with rapid innovation in the financial industry? These topics were central to a panel on Innovation Hubs and Sandboxes at Columbia University’s 6th Annual Fintech, DFS (Digital Financial Services) & Payments Summit which took place in early June, 2017. The panel had participation from Citi Fintech, Open Innovation at Barclays Bank, Deutsche Bank’s New York Innovation Lab, the Center for Financial Services Innovation (CFSI), the UK’s Financial Conduct Authority, and KPMG.
The conversation was very enlightening. Even though the banks represented in the panel share common characteristics (large in their markets, global in their reach and open to innovation), their implementation strategies diverged substantially. The discussion delved into how (large) banks interact with fintech companies, adapt to emerging technologies and fund innovation.
To deal with today’s rapid innovation, some global banks are creating specialized divisions – called innovation hubs or labs – designed to operate at the margins of day-to-day operations, in order to ensure agility and responsiveness. These banks tend to establish such specialized operations where they can find concentration of talent (New York, San Francisco, Berlin, Tel Aviv, Singapore, etc.) to facilitate interaction with up-and-coming innovators. Virtual co-working spaces are also part of these initiatives.
Although innovation hubs are created with a similar purpose, they operate following different strategies. Citibank for example, invests, accelerates and incorporates viable new solutions for their clients. Through its innovation labs, Deutsche Bank works with comparatively mature Fintechs and ventures that can show value to the bank’s clients and management in a relatively rapid time-frame. Barclays Bank has a Fintech acceleration programs designed to support nascent and promising Fintech companies. Another way to leverage engagement with innovators is by outsourcing some activities, such as the case with the CFSI-JPMorgan Financial Solution Lab partnership.
These examples show how banks can influence the new financial ecosystem (banks-fintechs-think tanks) while at the same time get first-hand market intelligence. Banks are creating spaces for knowledge exchange, business development, and investment opportunities. Banks are even looking for ways to generate internal momentum for disruption from the inside out. JP Morgan recently created a position solely devoted to innovation and which has been touted by the press as the bank’s “chief disruption officer”.
Clearly there is no single recipe to deal with today’s digital innovation. It is evident that banks need to strike a balance between their long-standing proprietary systems and a new digital open-source ecosystem that thrives on collaboration. This is not an easy task. In the United States alone, about 43% of all banking systems are written in COBOL, a programming language created nearly 60 years ago. Needless to say, for innovation to take root, banks need firm commitment and collaboration at all levels of the institution.
We described here only a few ways on how large and global banks are dealing with innovation through innovation hubs and labs. This model, however, might not work for medium-and-small incumbent financial institutions with limited resources. But can a financial institution, or any institution, afford to stay behind? As Chris Skinner, Chair of the European networking forum the Financial Services Club, said in his speech, fully committed leadership is needed for incumbent financial institutions to stay relevant in the internet age of marketplaces. So, what is your strategy? Do you need an innovation hub? Let us know what you think.