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As Belts Tighten, Innovative Thinking Gives
Financial Institutions an Edge

Experts encourage “process innovations,”
with a focus on the account holder

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As the economy continues to stagnate, it’s a good bet that bankers are more preoccupied with focusing on the bottom line than with shepherding new ideas to the finish line. Yet surprisingly, belt-tightening can be a good thing for the innovation process. reported that promising innovations can be wrecked by too much time and money, and by the involvement of too many people. Likewise, CEO Jeff Bezos told BusinessWeek that scarcity can be good at prompting new ideas. “Constraints drive innovation,” he said.2

And one of the greatest business innovators of all time, Steve Jobs, told Fortune magazine: “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led and how much you get it.”3

Your organization can become more innovative by fostering that kind of environment, according to Glenn Voss, Ph.D., an associate professor of marketing with the SMU Cox School of Business in Dallas. “It’s about having the right people in place with a knack for identifying successful innovation. It means having leaders who understand the complexities of the innovation process,” he says.4
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Michael Bencic, executive director of client strategy for Harland Clarke, agrees with this view. “The biggest factor for success is a culture that supports and encourages innovation from the highest levels of management,” he says. “One that is willing to — as Jack Welch once said — celebrate the wins as well as the losses.”

Despite the grim reality of the current economic recession, now is an opportune time for financial institutions to think creatively and strategically in order to get a step ahead of competitors.

Effect of Economy on Banking Innovation

Although opportunities abound, Voss notes that the current recessionary climate is acting as a bottleneck on retail banking innovation. Smaller financial institutions cannot invest in innovation if they lack basic resources and federal bailout funds. On the other hand, organizations with greater access to resources may become complacent. “Competition drives innovation,” says Voss.“ When you see contraction and consolidation, it’s because the marketplace is seeking stability.”

The growing recession may not be conducive to radical innovation in retail banking. He does not expect a lot of innovation from financial institutions in the near term due to the lack of ability (low levels of financial resources, high levels of capital assets that are difficult to sell) as well as a lack of incentive resulting from the government bailout.

However, on a positive note, Voss adds that there may be a shift to purchasing under-valued assets and that the trend toward consolidation will create a stronger need for more efficient internal processes. “I’d expect banking innovation in the coming year to focus on integrating internal systems,” he says. “These process innovations should focus on standardizing products and improving account holder relationships.”

Radical Innovation Versus Incremental Innovation

This makes sense because, overall, financial institutions rarely engage in radical innovation. A paper titled “Innovation in Retail Banking,” released in 1998 by The Wharton School, stated: “…innovation in banking lies more in process and organizational changes than in new product development….”

Underscoring this, Bencic points out that most financial institutions are focused on what is called “disruptive” or “incremental” innovation, which is improving an existing product or service in ways that the market does not expect. For example, a product may be offered at a lower rate or re-designed for a different set of consumers. Conversely, an example of radical innovation is the invention of the MP3 player. Bencic notes that Apple did not invent the MP3 player, but instead focused on solving what was essentially a customer service problem — that is, the public’s ability to legally download music.

“Identifying what the account holder is looking for is the starting point for innovation,”


For financial institutions to do this effectively, they need to improve their knowledge of customer needs, behaviors and attitudes. “Identifying what the account holder is looking for is the starting point for innovation,” says Bencic.“ From there, it’s all about determining how well your current solutions meet those needs and how well you create new solutions if necessary.” He foresees a continuation of both evolution in payments and movement of interactions away from the branch, which are likely to be adopted by Generation Y.

The bottom line is that there is relatively little risk in incremental process innovation. The question becomes, “How can we re-engineer a process to deliver greater value to the account holder?” Start by hiring creative people and by being a “close follower” — that is, replicate or leverage the innovative technologies developed by others. The more the value proposition is improved, the more significant the innovation.

Putting the Customer Before the Product

Focusing more intently on the account holder is key to success. Most banks and credit unions are organized from a product perspective, whereas Voss believes that financial institutions would benefit if they re-organized processes with a priority on the customer. “U.S. financial institutions have excelled at customer service. A perfect example is offering consumers the convenience of drive-thru banking,” he says. He thinks that an even sharper eye on building customer relationships would be timely, and that innovative services which focus on convenience are ripe for development. “Busy account holders want one-stop-shopping,” he says. “They don’t want to log on to five different websites and remember five different passwords.”

Voss advises establishing a process innovation department to address these goals. But he cautions that innovation is not necessarily about generating high customer satisfaction scores. “Those scores won’t tell you whether you have efficient internal processes that increase profitability,” he says. It is important to look beneath the surface because, while your account holder may be happy with your product or service, your financial institution may be losing money because of it.

For an innovation to succeed, your account holders have to see some tangible value in the new product or service. Bencic says that this is why account aggregation failed. “Consumers didn’t understand how the information they provided ultimately would help them,” he explains. “All the benefits seemed to go to the financial institution.”

Bencic once worked with a company on a new product, an experience he now views as a cautionary tale. “The company thought the new product was an absolutely great idea,” he says. “But amazingly, there was no customer research to indicate that anyone wanted or needed it.”

For more on innovation, see "Seven Steps to Make Your Financial Institution More Innovative". Feb. 3, 2009, “Innovation Lessons From Small Business”
2BusinessWeek, April 17, 2008, "The World's Most Competitive Companies"
3Fortune, Nov. 9, 1998