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A roadmap to banking innovation

By Rajashekara V Maiya, Associate Vice President & Head of Product Strategy – Infosys Finacle 

In recent years, traditional retail banks have had to cope with the influx of a new wave of “digital native” challengers. These new institutions, unburdened by vast and complex legacy IT estates, have been able to develop innovative new services that resonate with a population that expects everything to be delivered online.

While established banks have worked hard to develop successful new digital and mobile services, they are increasingly having to contend with new contenders joining the scene. And these new contenders are not only the agile Financial Technology start-ups, but technology behemoths with deep technology and analytics expertise. The likes of Facebook, Amazon, Google, and Apple are using their technological nous and massive data sets, their thorough understanding of customer experience, and their enormous cash piles to encroach further still on banks’ territory.

Competition in itself is not the problem: traditionally, it has forced established organisations to up their game and deliver better services for their own customers. What’s worrying about the entry of technology firms into the market is that they are managing to hollow out banks’ value propositions, even as the retail banks themselves rely ever more heavily on these same firms to compete. With one hand, the tech giants give; with the other they take away.

Faced with this new source of competition, the retail banking industry faces a dilemma: do they attempt to compete directly with the visionary technology firms and invest significant sums on future-looking services and applications? Or should they focus their attention on applying technology to address the most pressing issues they face, be it regulatory compliance, anti-fraud measures, or security?

Bank’s response to this unique and fast-changing landscape is one of the key features of the 2017 Innovation in Retail Banking report, the ninth annual industry study from Infosys Finacle in partnership with Efma. This year, Infosys focused particularly on whether financial institutions have a clearly-defined innovation strategy in place, if they are increasing their investment in innovation (and how), their priorities for digital transformation, and the biggest challenges they perceive standing in the way of innovation.

The Innovation imperative

 At first glance, the research shows that the proportion of banks with a clearly-defined innovation strategy decreased compared to 2016, falling from 74% to just 43% this year. This, however, is because this year’s report included a much more representative sample of smaller institutions, which itself reflects how the industry has changed in such a short space of time.

When we look at the level of innovation maturity from the perspective of size of organisation, it’s clear to see that larger financial organisations are more likely to have a clear innovation strategy, to invest in innovation and to have a chief innovation officer.

That is not to say that smaller organisations are ignoring innovation. In fact, in the last year there was an increase in investment of over 70% in channels and the customer experience across every size of retail bank. One perennial problem that the sector has still not banished, however, is the drag that legacy systems and outdated technology places on institutions, preventing them from innovating as effectively as they would like.

Taking a ‘wait and see’ approach to innovation is not a viable option. Instead, banking management teams need to commit to investments that limit risk and allow an organisation to take advantage of market opportunities. More than ever, the banking industry needs to manage for the long-term, through cycles, even as they adapt in the short term through continuous test-and-learn experimentation.

 Challenges to innovation

Unlike new entrants to the retail banking market such as global technology firms, most banks do not have the luxury of being able to tolerate failure. Tech companies can experiment and innovate without any real risk to their core business or their reputation, whereas the same cannot be said for established banks.

The innovation gap between banking incumbents and nimble players is therefore unlikely to shrink, as the former continue to struggle when discerning disruption from distraction, while the latter are free to experiment, fail, and pivot. This gap is even more dramatic when we look at smaller organisations, who may not have the talent or financial wherewithal to embrace digitalisation or innovation.

According to this year’s research, banking organisations are facing the greatest challenges to innovation from their legacy systems, technology and funding. We asked our subjects what caused the biggest barriers to the innovation process, and ranked their responses on a seven-point scale. Systems integration was the biggest concern, ranked at an average of 5.17, followed by legacy technology (4.93). Meanwhile, resources availability ranked highly, with time / cost required from concept to reality ranking at 4.91, and budget constraints following closely behind at 4.8.

Somewhat surprisingly, the ability to get executive level sponsorship and support and the lack of expertise and talent were not cited as greater challenges, especially given the shortfall of skills in advanced economies around the world. We believe that talent will become pressing issue in the future.

Innovation priorities

At a time when most organisations are still playing catch-up, a new wave of digital technology has the potential to change the way organisations deliver banking services even further. These new technologies include artificial intelligence (AI), the Internet of things (IoT), blockchain, open banking platforms with application programming interfaces (APIs) and robotic process automation (RPA).

With the potential to increase efficiency, decrease costs and enhance the customer experience, these digital-enabled technologies will result in disruption in the way people   bank and the organisations that deliver these services. We are already seeing organisations testing many of these digital technologies in areas such as personalising customer journeys, providing platform-based offerings, and more intelligent use of expansive data, all in the hope to win the battle to become the ‘bank of the future.’

What is interesting from this year’s research, however, is that organisational priorities for innovation are more focused on “point” solutions for specific topical areas such as information security, advanced analytics and open banking APIs, rather than future-looking areas like RPA, augmented and virtual reality, or IoT.

Cyber and information security ranked highest at 5.51 on our seven-point scale, with advanced analytics and big data following at 5.19. Open banking APIs and cloud processing scored 4.78 and 4.41 respectively.

These could be considered ‘iterative’ technologies compared to the more ‘disruptive’ technologies mentioned above, but they appear to reflect the fact that banks are focusing on using technology for very clear strategic imperatives, rather than rushing to deliver innovation for its own sake.

Analytics far from universal

 When we asked financial organisations about how advanced they were in applying data towards an improved customer journey and experience, there was a vast distribution of analytic maturity. Not surprisingly, the largest percentage of organisations (37%) believed they were only able to tell customers what had already happened.

More advanced organisations (usually larger firms) could help consumers understand why something happened (27%), with one in five being able to assist customers in understanding what will happen in the future. Finally, 16% of financial institutions who responded were able to provide advisory capabilities around what the customer could do given the insight known.

Analytics is a key technology for banking institutions, enabling them to deliver a consistent and optimised experience to each individual customer across the entire organisation. It enables customer-facing representatives to provide the best response to customers’ inquiries, and to deliver messages using the channel most preferred by the customer as opposed to the channel most preferred by the institution. Finally, detailed insights into individual and organisational behaviour enable an organisation to proactively resolve issues that may impact a specific segment of the customer base.

The innovation opportunity

The Bank of England has just released the results of its latest “stress tests” which, while generally satisfactory, has done little to quell accusations of complacency in the industry. While retail banks must ensure that they do everything to guard against future economic storms, they must not miss the opportunity that technological innovation presents them.

Our research found that half of all respondents (50%) said that they expect their investment in innovation to yield returns within three years, while around a third (30%) said they would see the benefits within a year.

The pace of digital change, already rapid, is only going to accelerate. In the blizzard of new technologies such as AI, robotics, blockchain, and the Internet of Things, banks need to determine their business priorities, develop innovation strategies and build teams that can deliver them. While every retail bank is different, all should be guided by one star: a relentless focus on customer-centricity and improving the customer experience – something that the big technology players and the new entrants to the market are equally  good at, and which other institutions would do well to follow.

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