Blog By: Akshaya Kapoor, Senior Director, Product Strategy, Oracle Financial Services
It’s no secret that profit margins for most banks are still at or below the levels that they had reached before the financial crisis hit some ten years ago. At the same time, the banks recognise the importance that innovation will play in a rapidly changing world. This will need banks to think differently. It will help bank introduce cultural change that will help them be an effective player in the new Banking ecosystem. They can use these challenges as additional streams of revenue. However, they are failing to use innovation effectively in a way that will achieve lasting revenue assurance & profitability. When it comes to innovations, banks need to build an appetite for “Return-on-Failure” (ROF), rather than unilaterally measure each innovation idea against “Return-on-Investment” (ROI).
As a result, Oracle has conducted a study in conjunction with Efma, the independent non-profit making association that provides information and networking resources for financial institutions. The study involved online discussions between members of a Steering Committee of senior financial executives, chaired by Oracle; a few in-depth interviews with some of these members; and a detailed questionnaire sent out to select Efma members. The results of the study are available in a new joint report: ‘Making Innovation Pay’. As one of our esteemed EFMA Steering Committee members said “Banks know what to do, but don’t know how to do”.
Are banks taking innovation seriously?
This was one of the key questions that the study sought to answer. Firstly, why are banks failing to use innovation to boost their profit margins in a sustainable way? The results of the survey underlined the fact that they feel that innovation is important: 90% of those taking part said that they were likely to increase their investment in this area in the future. However, other results suggest that this might sometimes be a half-hearted approach, as only half of the banks surveyed currently have dedicated Innovation teams.
The financial services sector often lags behind other industries in terms of a real commitment to innovation. Reasons for this include the historical emphasis on product silos; complex legacy systems; a lack of integration between channels; and dispersed and encoded business rules. One particularly important aspect is the high level of risk aversion in many banks. The study found that over 80% of banks are either moderately or very risk-averse. Despite this, all of the banks that took part in the survey said that they would probably consider unconventional ideas and over half would follow these through in some way.
Current innovation programmes are focused mainly on issues such as increasing customer engagement; building brand value; and developing incremental improvements. Customer engagement was the area where there was the greatest gap between the focus of the programme and its resulting effectiveness. The types of innovation covered include payment enablement, chat-bots, artificial intelligence, biometrics and blockchain.
The study looked at innovation measurement – an area where banks again lag far behind other industries. It can be difficult to measure the success of an innovation programme, but this is vital if a bank is to know how a new project has affected aspects such as the customer experience and the brand value. These measurements need to be built into new innovation programmes before they start.
Again, in terms of measuring the revenues and profits derived from innovation, banks find this hard and often avoid it. However, 63% of banks said that innovation programmes had led to increased revenues - but only 42% said that this was reflected in higher profit margins. Perhaps one of the most important elements that should be measured is the customer lifetime value, although some banks have difficulty in understanding this concept.
Fintechs – friends or foes?
At least some of the innovation taking place in banks is a direct result of the perceived threats from fintechs or other new entrants. But should fintechs be seen as ‘the enemy’ or could they in fact become a useful partner in future innovation strategies?
Although very few of the survey participants had an established programme involving fintechs, over 85% saw the value of developing partnerships with them and were at least exploring the possibilities. A few have already been working on some joint innovation projects and, although many banks are still wary of such partnerships, it seems that this could herald a new focus for banks in the future.
Oracle has been working with both sides to try and help them to align their objectives. Banks can benefit because fintechs have a lot to contribute, as they are both more creative and more agile than banks. They have more new ideas, cutting-edge analytics and are good at online acquisition. Meanwhile, the fintechs can benefit from the far larger customer base and depth of experience of the banks.
The study shows that banks need to take innovation seriously. It must become an integral aspect of normal banking life. It needs to draw in people with different types of expertise and different ideas. However, support from senior executives – including the CEO – is crucial to its eventual success. Two other critical factors that emerged from the study (and which will be explored in future blogs) are revenue management and relationship pricing.
To see the full report on Making Innovation Pay, please visit