Banks love innovation but hate risk, which is why they spend so much on outside consultants. So how do you get round this and get funding for your project? With a bit of creativity, says Chris Skinner.

I was in a conversation about innovation with a bank executive. We all know the Catch-22 that banks face: you want to be innovative, but only if there is no risk – but with any innovation, there must be risk. You can play in the sandbox like little kids but if you try to step out of the sandbox, we will slap you back down. That is your place, stay there.

Any innovation that comes out of the sandbox is incredibly hard to internalise as banks’ cultures are designed to resist radical change, which is why heading up innovation in any financial firm is a frustrating job that often makes the move to a financial technology start-up an attractive alternative.

No place for failure

The banking guy reflected on this and then said: banks don’t like failure. It is all to do with the compliance culture. Failure implies issues and can raise regulatory alerts; as banks want to avoid regulatory alerts at all costs, failure is not an option.

I took the view that micro-services architecture in an open marketplace of application programming interfaces allows failure, as it doesn’t have the same repercussions. 

He said: “Look Chris, you should know this. We, as a bank, find it difficult to invest in conjecture. So if we trial a project for $1m and it fails, then we soul-search to see what went wrong and, more importantly, who led the wrongness. Someone must be blamed, and that someone is then fired. 

“However, if we are thinking about a $1m project and can hire a consulting firm to investigate the project and tell us whether it will work or fail, then we are far happier. So we might hire one of the big consulting groups and spend $1m on a report that tells us our project – which would have cost the same to trial – is going to fail. Then we are happy because while they told us it would fail at a cost of $1m, look how much further cost, embarrassment and shame they allowed us to avoid.”

Whoa. I realised the enormity and, at the same time, the reality of his statement; I have seen this happen at first hand. Banks believe it is far better to get someone externally to come in and tell you if something is right or wrong because if it later turns out they gave the wrong advice, then you have someone to blame. However, if an internal guy says it, woe betide that person if they are wrong.

It ticks so many other boxes. For example, I remember a C-suite member of one bank talking about business cases, return on income, cost-benefit analysis and the future project revenues and costs. He said the bank was rigorous in ensuring that there was a business case for anything and everything. If you wanted to do any new project, you had to show the numbers. 

That is difficult if you’re innovating as it has never been done before. The trick of the game, he said, is to make the numbers convincing. Show that you’ve done your research. Show that you used some consultants to bring together some customer focus groups who overwhelmingly believe your next generation app will get 1 million users in a month, and then flesh that out with projections and graphs. Make it look amazing. Don’t just put it in a PowerPoint presentation – PDF it with the best graphic designers in town, and add some GIFs or videos that, when in the boardroom, keeps the management awake.

Who dares wins

The reason why this is sage advice is that once you get the money, you can stop worrying. You got the money based on your sound (but fudged) business case. You actually made the whole business case up and the numbers are all estimates based upon a finger in the air and a discussion over coffee. The fact you have numbers and seem to have substantiated them, and have research and presentational material that looks amazing, gets you the money.

Once you’ve got the money, don’t worry because no one ever, ever, ever goes back and looks at the numbers from last year to check. Yes, they may check if you have a substantial failure – but if you work the numbers and the politics, you can pretty much get away with anything for a long time.

OK, the two conversations seem a bit at odds. On the one hand, if I fail secularly then I’m out but if I do the analysis, I’m in; on the other, if I present a load of fictional thoughts, I get the money while if I tell the truth, I don’t.

But this is how it works. Not just in banks, but in any large corporation. It is called politics. If you are seen to fail, you are out; if you are seen to be doing the right things, you are in. Bear that in mind when you innovate. Large firms will not allow public failures; equally, large firms rarely invest properly unless they have numbers.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

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