How can banks achieve better returns from their innovation investments?
Partner, EY Financial Services ASEAN Digital Lead
Despite million-dollar investments in innovation efforts, a significant majority of banks are failing to deliver any substantial benefits.
New research shows that less than a quarter of the banks in the Asia-Pacific (APAC) region are getting the benefits they want from their innovation investments. EY 2018 APAC Banks Survey found:
banks reporting the benefits of their innovation efforts as "below expectations" in terms of impact to their main bank business
said it’s “too early” to tell
Given the quantum banks are spending on innovation, this is a disappointing finding – and a trend that must be reversed. Especially, because innovation is a key driver to market capitalization, and today’s market capitalization is being driven by estimates of future value (what value will your future business deliver?), just as much as current value (what value does your current business deliver now?).
When it comes to valuing banks, the measures of success have changed
Previously, market analysts compared banks on standard financial metrics, such as ROE, NOPAT and IM. But, now, they’re being compared with digital exemplar banks on digital business metrics: percentage of digital sales, transactions and servicing; net promoter scores; influencer ratings; mobile coverage, among others. And more importantly with the technology giants and big platform players on digital economy metrics such as data assets value; share of mind, digital platform value; and ecosystem value.
To boost one’s future value, a laser focus on digital business and digital economy metrics is the need of the hour. These metrics are heavily influenced by the pace and elegance by which institutions leverage innovation. Critically, institutions need to demonstrate how innovation “wins” also helps their current / core business.
Quality ideas are not enough
Banks are perfectly capable of generating 100s of fantastic ideas – and working up the most promising into a proof of concept (PoC). The sticking point is getting a PoC deployed to the “main” bank.
When we asked the region’s banks what has led to successful innovation in their organizations, the top three reasons were:
- 1. Clear purpose of the innovation unit
- 2. Evidence of delivering business outcomes
- 3. Execution capability: idea to PoC to production
Only 45% of respondents nominated “quality of ideas” - a distant 7th in the list.
To ensure quality ideas are executed, you need to get all three elements of innovation success in place:
- Innovation agenda – are your innovation efforts focused on the right intent and are you focusing on what matters to the institution?
- Innovation operating model – how does one remain connected to “main” bank but without thwarting creativity and nimbleness?
- Innovation execution – how does one move from “innovate” to “change” to “run” elegantly?
Getting the innovation agenda right starts with the right intent
Banks must recognize their dominant innovation intent. Typically, innovation efforts focus on (a) moving market perception to a more innovative brand, (b) embedding innovation in the bank’s DNA through the right learning and development programs plus culture change efforts, (c) deploying innovative products and services to customers and staff, and (d) driving alternative / non-bank revenue streams.
Most banking executives will tell you they want to do all four, and they’re certainly not mutually exclusive. The key is to recognize which domain is most important and build an appropriate portfolio of initiatives to enable that.
Furthermore, banks frequently mistake ‘change’ for ‘innovation’. Implementing a digital marketing platform or automating back office is ‘change’, not ‘innovation’. Innovation is more disruptive with high novelty and uncertainty, and therefore by definition needs a PoC to test and learn as failure rates could be high. At the other end of the spectrum, some innovation units focus on moon-shots. My advice is to leave this to Google.
Instead, focus innovation efforts on novel and uncertain sets of problems that are neither moon-shot (e.g. delivering electricity at scale via balloons) or change (e.g. implementing a BPM platform).
Finally, banks need to realize that there are no binary choices in innovation. You should focus on innovating in customer facing channels, mid- and back-office operations as well as new business models. So, a balanced portfolio will keep the efforts focused on the drivers of business performance.
Your innovation operating model is the engine that drives innovation, but there is no “one model to rule them all”
Since 2014, new trends have emerged in the region’s banking innovation models. The dominant model was to democratize innovation by infusing innovation-related investment across every line of business and corporate function. Today, the majority (60%) of the region’s banks have a separate, dedicated unit driving innovation, with linkages to lines of business in a hub and spoke model.
And a new model is also becoming more popular. In 2018, 18% of the region’s banks were driving innovation out of a completely separate organization – three times more than in 2014. This is certainly a model where the intent might be investment in non-traditional businesses or driving non-banking alternative revenue streams.
Each model has its own pros and cons. Choose the model that matches your innovation intent.
Proof of the pudding is to move from ideas to PoCs to a project
Critical to innovation efforts delivering business outcomes is the clarity of the right process and governance by which funding is provided for an idea to get to a PoC and if successful, the mechanism via which that PoC moves to a properly scoped, sponsored and funded project.
This is easier said than done in most banks. We have seen that the most successful banks have clarity in the “innovate”, “change” and “run” functions, and standing forums and processes that routinely assess idea, PoCs and fund them before approving a move to projects.
So, the question is what will you do to improve your return on innovation investment?
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
EY Financial Services ASEAN Digital Lead