Is it innovative for banks to do the same thing in a new way, or do they have to do something new altogether? The debate is far from over, says Chris Skinner.

I was having a debate about innovation with a friend. They said that most of what banks were calling innovation is actually business optimisation or, as I call it, incremental improvements.

Incremental improvements are carrying out existing processes cheaper and faster, more effectively and more efficiently, with little change. One clear example of where this can be applied is customer onboarding, with many of the challenger banks using smartphone pictures, video and biometrics to register users in minutes, rather than demanding that they come into a branch with valid paper identification. This collapses a process of days to minutes, and is clearly better. But it is not transformational. It is just better.

Same old new ideas?

Then there is transformational change. I would personally call this innovation, but my colleague disagreed, because transformational change happens more around re-imagining an existing structure and making it radically better. For example, a transformational change is moving from institutional lending to peer-to-peer (P2P) lending. It is completely different to what was there before, but is still providing the same service, as in loans.

So, I asked why that isn’t innovation, which is what I would call it. She replied that innovation had to be completely new, not just doing something today better or differently. An example would be Alipay and WeChat Pay, providing a completely mobile micro service for everything from commerce to socialising to paying to saving and borrowing. I thought about it, but felt such nuance was too fine a line. I maintain that transformational change is the same as innovation.

It is either doing what we do today in a completely new way, or doing something completely new. I would argue that P2P loans, mobile wallets and the Chinese internet giants are doing what we have done before in a completely new way, so that is transformative innovation. Transformative innovation is therefore what I’m always looking for.

The invention of the car, to replace horses and carriages, was transformative innovation.

The invention of the aeroplane, to replace car, ship or train journeys, was transformative innovation.

My colleague said that I hadn’t quite got it. What she considered to be transformation is not P2P loans replacing bank loans, but more direct banking replacing branch banking. In other words, it is not doing what we do today in a completely new way but doing what we do today in a different way.

I got confused, and so the conversation went on for a while and ended up like this:

• Most banks start with business optimisation: doing what we do today exactly the same, but faster and cheaper through change.

• We then move into business transformation: doing what we do today in a new way that replaces the old way of doing things.

• Finally, there is business innovation: doing a completely new thing in a new way that replaces old ways of doing things.

Starting from scratch

I’m not sure we need such a fine distinction between transformation and innovation, but the reason I am sharing this here is that I would urge all industrial-era companies to strive for transformation and innovation. It is no longer good enough to just do what we’ve always done cheaper and faster with technology. We need to start from scratch with new thinking inspired by technology. That is what digital is doing: creating whole new structures of transformative innovation that shape the future. That is what the P2P lenders, robo-advisers, application programming interface players and Chinese and African mobile wallet providers are doing: creating the next generations of finance that will replace the old generations.

This is what we mean by both transformation and innovation: they replace what was there before.

Now it is fine for banks to watch these developments and deploy services to imitate or compete with such new structures, but the challenge is when to shut down the old ways. This has always been the biggest concern for most banks: they launch new things but never take out the old.

That is why we offer mobile wallets, apps and digital services, but still operate branches and process cheques. When can you get rid of the paper and the bricks?

My answer to this challenge is that you have to have developed, nurtured, evolved and matured the digital models in a process that brings the customers along, before you can get rid of the old things customers like and use. You must bring the customer along on the digital journey.

And this is the part that I think we are all culpable of doing badly. After all, why does the media bleat and moan every time a bank shuts a branch or refuses to continue older services, such as stamping passbooks (of all things)?

It is all to do with a balance between transformative innovation and business optimisation. And that is the core of the discussion I was having with my friend. Whether it is a transformation, innovation or both, the challenge is not to achieve the change but to achieve the change while bringing the customers along with you.

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

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