Making innovation pay - Oracle

REPORT

Making innovation pay

In collaboration with:

CONTENTS

03 | Executive summary PART ONE

04 | Introduction 05 | Innovation challenges and barriers

PART TWO

07 | The study 07 | The Steering Committee 07 | Survey dimensions

PART THREE

09 | The results 09 | Preparing for innovation 18 | Implementing innovation 20 | Results from innovation programmes 23 | Making innovation pay

PART FOUR

29 | Examples of best practices 29 | A new type of bank 29 | Company-wide open innovation 30 | A focus on SMEs 30 | Aggregated accounts and alerts

PART FIVE

31 | Conclusions and recommendations 32 | Moving towards effective revenue management

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Executive summary This white paper is a report of a joint study by Efma and Oracle that seeks to understand what innovation activities are taking place in banks and which are working or not working. It includes practical observations and actionable insights that will hopefully act as a stimulus to banks. It also includes examples of best practice operating models which might help to turn the tide for the financial services sector. The vast majority of banks recognise the importance of innovation in a world that is rapidly changing, with new technologies arriving almost daily and with customer needs and expectations becoming increasingly demanding. The question remains whether banks are equal to the challenges ahead or whether they will tend to sit back and then find out too late that their customers have been stolen by new entrants and other competitors. The study suggests that some banks are making significant strides forward. However, others are lagging behind, some of them adopting the ‘wait and see’ attitude that has been prevalent in the financial services sector for many years. The other key question is how will those banks that embrace innovation make it pay? There are many good ideas floating around the industry but these will come to nothing if they can’t be turned into profitable solutions or products and services that address issues such as customer needs and the customer lifetime value. This study therefore looks at the overall attitudes of banks in more detail and at some of the different innovation strategies that are being developed. As well as examining some best practices, it explores those key factors that make the difference between the success and failure of an innovation programme. We hope you find the white paper both interesting and stimulating.

Vincent Bastid CEO, Efma

Akshaya Kapoor Senior Director, Oracle Financial Services

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PART ONE

Introduction In recent years, there have been many interesting and successful endeavours involving the digital channel. However, the financial services industry is still facing significant challenges in terms of achieving increases in profitability. In fact, profit margin levels across the industry have dropped significantly since the financial crisis and have failed to return to (or even approach) pre-crisis levels. This is why Oracle and Efma felt that a study of the current challenges and opportunities facing banks could be very helpful. The study involved online discussions led by Oracle. They were co-chaired by Alain Enault, Regional Manager, Efma. Meanwhile, with help from Oracle, Efma established a Steering Committee of senior banking executives to take part in the discussions and more in-depth interviews. A comprehensive survey questionnaire was also sent out to specially selected Efma members. This report draws together each of these three aspects – the online discussions, the survey and the in-depth interviews – to explore the current state of thinking in the financial services sector. It also looks at the challenges facing banks and at the actions they need to take in order to make innovation pay. Oracle has been working with a wide range of banks that want to be innovative and that are breaking through on various operating models. However, innovation needs to develop in a way that will have a positive impact on the bottom line. To achieve this, the key questions that banks need to address include: • • • • • • • •

hy are some banks still failing to increase their profit margins? W What are the key barriers that prevent innovation from becoming profitable? How can banks design and implement innovative programmes and offer bundles that customers will value? How can these ideas be translated into sustainable profits, revenue growth and profit margins? Should this involve a focus on a workflow and customer experience? What key factors have been involved where people have achieved success? What design process techniques have led to success? How can a bank bring transparency to revenue management?

These are typical of the questions that the Steering Committee explored.

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Innovation challenges and barriers

Common barriers to innovation in financial services

Pervasive product silos

Legacy system gridlock

Mythical profit margin controls

Business and technical systems evolved for product management not customer experience delivery

System and cross-system complexities are not often understood thus risks are amorphous and change efforts often stall

Management accounting provides post-hoc, summary profit margin metrics, but operational profit controls are missing

Only one customer hierarchy type

Dispersed and encoded business rules

Innovation is blocked

For regulatory and other reasons, only a single legal customer hierarchy is available, yet deals and offers need more flexibility

Every new product version results in a new layer of hidden yet interdependent web of embedded rules

Time to change, risks of change, costs of change – all combine to stifle ideas and eliminate test and learn evolution

From Oracle’s discussions with over 200 banks in the last four years, the issues shown above appear consistently as barriers to innovation. Some will be familiar to people in other industries but some are unique to the financial services sector. Pervasive product silos. This barrier involves the history or archaeology of financial services. From an operating model perspective, the focus in the past has been on a product development structure, with both the technology and the operating model being developed into silos around individual products. With the arrival of digital channels, there has been an attempt to bring these together to provide a digital customer experience. However, banks often run into challenges because their underlying architecture wasn’t really designed to enable the pieces to be put together easily.

Legacy system gridlock. This has arisen from the investments that banks have made in the past. Legacy

core bank systems are often quite complex – especially as many banks have grown out of mergers. As a result, there are often many core bank systems. Sometimes there are different systems across different countries as well as different systems for the same function even within the same country. These issues are quite difficult to resolve.

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Mythical profit margin controls. Employees might be told by senior management to increase revenues and profit margins by a set percentage. However, they often have no view of the day-to-day operations that will allow them to know in real time what the possibilities are; or of the type of impact resulting from any changes. They often have to depend on information from financial personnel – and this information might not correlate with either the way in which the bank’s customers are defined or how its products are being used. They need to understand the impact of any changes so that they can make improvements in revenue management. Only one customer hierarchy type. The development of digital channels led to a tremendous leap forward in terms of integration, but the underlying integration across the other channels has become a significant issue. Technically, a customer is often defined in different ways, especially if the bank wants to deal with them as a household or family. The moment a bank starts to think about putting together all of the products and services that an individual customer or household has, it becomes difficult to interact with them. This is a serious challenge and many people have tried to integrate it into their CRM or finance systems. However, the challenge is at the operational level: being able to change the pricing or the experience of the product as a function of the other products that the customer has etc. Dispersed and encoded business rules. There can be many great ideas that are installed in a bank’s systems. This often leaves a trail of hard-coded rules that are dispersed across the various systems. The new approach might work for a particular programme but it can then run into a wide array of challenges relating to the interactions between the old sets of programmes and the new ones. This can be a major problem in many environments. Oracle’s conclusion is that, despite all of the best efforts of individuals to try and drive through innovation programmes, they are disrupted by one or more of these factors. They often stall, become much more expensive or fail due to an inability to overcome these barriers. Other challenges or barriers to innovation mentioned by the Steering Committee include the importance of security; a centralised control process that provides local autonomy; and the ability to prioritise, coordinate and implement the best ideas. Another issue is that in different geographies, a bank might have different innovation initiatives with different levels of prioritisation. It can therefore be very difficult to pin down the views of the various programmes so that the solutions that are best for the customer can be implemented. It can be easy for a bank to lose its focus with so much happening.

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PART TWO

The study The Steering Committee The Steering Committee was developed to gain some deeper insights into the challenges and strategies in which banks have been involved when trying to make innovation pay. Some of the Committee members were interviewed so that their ideas and experiences could be explored in more depth. The members of the Steering Committee were: Thibault Meunier, Head of Digital Development, Société Générale, France. Angelo D’Alessandro, buddybank Founder, Unicredit, Italy. Anna Filippova, Innovation Responsible, Ceska Sporitelna, Czech Republic. Paola Laruffa, Head of Digital Channels, Intesa Sanpaolo, Italy. Marcelo Frontini, Head of Digital Channels, Bradesco, Brazil. Mariona Vicens, Head of Business Strategyand Innovation, La Caixa, Spain. The Committee also helped to evaluate and strengthen the survey by looking at some of the key elements involved in making innovation pay and measuring the extent to which these are challenges that are likely to be important to most banks. They also looked at what is currently happening and the issues and successes that banks are experiencing. One of the aims was to try and determine the best practices in terms of operating models, which could then help to turn the tide for the financial services industry. The Committee’s findings, and those from the survey, would then be rolled out through communications to Efma members, through this White Paper, webinars, conference panels and other events.

Survey dimensions

Demographics: job title

5%

Head of innovation

5% 22%

7%

Head of channels CEO/head of LOB Head of marketing

7%

Heads of product and development Heads of R&D/strategy

7%

15%

COO Other

10%

CIO 10%

12%

Head of sales

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The audience for the survey has been carefully selected. It was targeted at financial executives who are involved in the decision-making process and operational management in the various innovation areas, and in the operational areas where innovation is needed. A wide range of executives was selected so that the survey could take into account many different viewpoints. For instance, a Head of Product Development has a different perspective on innovation from a COO: the former is more interested in issues such as Key Performance Indicators (KPIs), whereas the COO is more interested in profitability. A Head of Sales and Strategy or Head of Innovation might have yet another focus, such as new technologies and the opportunities they provide. By questioning such a broad spectrum of opinion, the survey was able to gain a more rounded approach to current thinking on innovation – and the question of whether (or not) banks are able to make innovation pay. The survey also had a balanced representation of views from both Western and Eastern Europe, as well as some valuable opinions from executives as far afield as Africa, the Middle East, Asia Pacific and the Americas. Similarly, the participants came from different types of banks – mostly from either universal or retail banks – again providing different viewpoints.

Demographics: region and bank classification Western Europe

5%

7%

9%

7%

Eastern Europe

33%

10%

Middle East Asia Pacific 51%

Africa Americas

10%

35%

Retail bank Universal bank Commerical bank

33% Region

Other Classification

A total of 43 senior executives answered the survey. This white paper has been developed from the survey and the Steering Committee discussions. There will also be a presentation at the Efma Innovation Summit in Rome. The sections that follow give a breakdown of the key results as well as the thoughts of the Steering Committee and those people who were interviewed in more depth.

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PART THREE

The results Preparing for innovation Innovation strategy

One key question underlining the whole study is: how serious are banks about innovation? This starts with the principle of whether or not they’ve actually developed a firm innovation strategy. This might involve a central approach to innovation or garnering ideas from different areas.

Q1: What is your firm’s overall innovation strategy?

35%

37%

23%

5%

0% Non-existent

Opportunistic to address external trends

Opportunistic to address internal ideas

Centrally planned Centrally planned, and orchestrated but administered in relevant areas across the firm

It’s clear that the vast majority of the participants have adopted a centrally planned approach, although over a quarter favour a more opportunistic strategy. An example of the central approach is a bank that has an Innovation department for the whole group. The department looks at the new needs of customers; what its competitors are doing; and tries to identify and prioritise new territories and opportunities. It’s currently working on aspects such as artificial intelligence and expects a significant increase in its investment in innovation programmes in the future. Another bank has adopted a more structured central approach, with a senior executive committee for innovation, attended by the main division heads. There is also an Innovation department that helps all of the divisions to accelerate and elaborate innovation and prototypes new technologies. Each of the main business areas has its own innovation committee that aligns with the Innovation department and attends the senior executive committee for innovation. However, the execution of any new ideas is being decentralised. The bank has believed that there is a compelling case for innovation for many years. It has now developed its strategy to the point that it has asked for suggestions from thousands of employees. This shows that the business case for innovation is clear, compelling, consistent and well-communicated, because so many people are engaged and involved.

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Other centralised approaches include a bank that has a dedicated department for innovation as well as an Innovation Centre. The centre’s goal is to find new solutions both from a technological point of view and also for customers. So it looks for young start-ups, new ideas and new technologies and then proposes these ideas and the department then decides whether to implement them. This model is working very well. The bank is currently working on ideas that include artificial intelligence. So what other approaches do banks take? One financial institution has been developing an interesting opportunistic strategy over the last seven years. A project sometimes starts intuitively and the bank’s innovation team then helps it to evolve in a way that will help to ensure that it pays off. For instance, for one large project involving a bank with a new concept, the team firstly designed a feasibility plan and a business plan. They asked customers not only to test the innovation but also to pay for it in terms of the premium services that would be provided. The team calculated the break-even point for the new bank as being around the fourth year. The bank had to take risks, but a team member observed: “If you want to change, you have to take risks.” One of the most challenging aspects of innovation is that some intangible aspects of the business case end up being extremely important. Sometimes the business case is more of a bridge to potential future revenues. When asked about how their innovation strategy was likely to change in the future, virtually all (90%) of the banks questioned envisaged an increase in investment in this area, with innovation taking a higher priority. Points to ponder • A n important aspect over the next few years is the need to create more awareness internally that innovation has to be part of the organisation’s processes. Colleagues within the bank need to promote innovation and feel that it’s part of their working life. • One particularly interesting point of view was that the real chief innovation officer of a company must be the CEO, as this is the only way to ensure that innovation will work properly. • Banks claim to be serious about innovation but will their stated commitment to more investment in innovation become a reality? As will be seen later, they often lag far behind other industries in this area.

Working with fintechs

Many banks feel threatened by fintechs and other disruptive innovators in the market. But for those banks that are happy to work with fintechs, do they adopt a disciplined approach to assessing the various fintech disruptors or do they focus more on their own vision and then see to what extent any fintechs might help?

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Q3: What is your firm’s current approach to working with fintech firms?

47% 37%

14% 0% Ignore them

2% Study them for ideas to be taken internally

Assess and develop partnerships with them

Developing Continue to evolve a strategic mature programmes ecosystem for with fintech partners fintech partnerships already in place

It’s interesting to note that very few of the participants in the study already had a mature programme involving fintechs. However, nearly half are assessing and developing partnerships with fintechs whilst a further 37% are developing a strategic ecosystem for partnerships with them. Undoubtedly, long-held traditional views are now changing. For instance, in one bank’s major innovation project, one of its missions was to transform the perceived fintech ‘attack’ into a business opportunity. It wanted to use fintechs to improve its banking business, because fintechs have a focus on transactions and payments. The bank is now starting to involve fintechs and says that part of its back end will be enriched by them and it will involve them in the front end eventually. It’s a matter of sharing the risk with the fintech and starting to test products with both them and with the customers.

Fintechs bring a culture that is different from the traditional banking culture and this is something that is crucial in our vision

Another bank has been developing several different approaches to partnering with fintech companies, as well as providing an ecosystem between suppliers and its IT group. It observed that many people choose to see fintechs as a threat but an increasing number of banks are now starting to see them as a partner.

An Innovation team is already looking at fintechs as possible suppliers or vendors and has been assessing some as possible partners, working on specific projects. For instance, a small fintech helped with an investment project, working on market quotations and has now become one of the bank’s main partners for building investment procedures. One of the team commented: “It’s very useful for us to work with fintechs because they are very quick and it’s very easy. They bring a culture that is different from the traditional banking culture and this is something that is crucial in our vision.”

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Typically, many banks are wary of fintech partnerships, because fintechs tend to work in a very aggressive and risky way compared with the approach used by traditional banks. However, bridges need to be built to overcome such barriers, as it will be more important than ever for banks to work with fintechs in the future if they want to make the most of the opportunities available. This is why Oracle has been trying to build such bridges between the banks’ technology and risk management and the fintechs – by working with both parties and helping them to see how they can align their objectives to their mutual advantage. The company sees this as one of the most important barriers to the ongoing success of innovation programmes. Points to ponder • F inancial institutions need to start involving fintechs when designing the innovation of the future. • The fintech ecosystem should perhaps be seen as a source or driver of innovation instead of as a threat. • In many industries, developing a partnership with innovative start-ups is key, because they tend to have more advanced thinking on new topics. The same is true of fintechs and banking.

The focus of innovation

Banks have different points of focus for their innovation programmes. So what are the key points to consider? Some banks are focused more on incremental improvements, whilst others are seeking to deliver breakthrough results. Yet others are wanting to transform the game completely, through a transformation of the business model. However, some banks claim that they’re focused on transformational change but then they don’t align this with the need to increase profitability.

Q4: Please rate how your innovation programmes have been focused on results in the following areas and how effective they have been: 1=low/5=high Focus on results Effectiveness

4.02

3.54

Increase customer engagement

3.85

3.46

Incremental improvements

3.85 3.66

Build brand value

3.69

3.38

Drive profitability

* Transformational = Change the game, create a new market, new revenue source or category

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3.59

3.18

Deliver breakthrough results

3.51

3.32

3.43

3.07

Address Transformational* regulatory changes or risk control

The survey suggests that the areas in which fintechs are winning the race are those where banks are focusing on revenue opportunities. The most important emphasis appears to be on increasing customer engagement, building brand value and incremental improvements; although most of the other areas surveyed were also seen as important. And this seems to be because these areas give the greatest results – when the participants were asked to rank the effectiveness of their innovation programmes, customer engagement and brand value again came out on top. However, although most of the banks’ innovation programmes aim to increase customer engagement, this is also the area where there is the largest gap between the focus and the effectiveness of those programmes. One bank ranked transformational change most highly, followed by customer engagement. This bank is particularly interested in interactions: people don’t If you’re not ready to take interact with banks every day, because they think risks in innovation, you’re that they don’t need banks. They only interact when not ready to do innovation they have a problem or need money to buy a house etc. The bank has therefore been looking at ways of increasing the interactions, by offering customers something that is linked to their daily lives. It is therefore starting to offer concierge services, based on their lifestyle. A Committee member commented, “If you’re not ready to take risks in innovation, you’re not ready to do innovation.” In some banks with a more mature innovation programme, is the innovation programme seen as making a difference? Does the end customer really care about the bank being innovative or are they more interested in services that help them? A Steering Committee member commented that it isn’t innovation that attracts customers to a bank – they don’t usually change banks just because one is more innovative than other. Sometimes, banks that are less experienced with innovation programmes don’t measure the actual customer needs or customer satisfaction - they just look at whether the product or service is perceived as innovative. However, innovation in a bank probably won’t be seen as exciting by customers – banking is seen as a commodity. One Committee member commented that it’s important to understand whether there’s a direct connection between innovation and, for example, sale processes. When a bank makes a sale and then the process is changed due to innovative new features and technologies, it isn’t always easy to see whether or not any new sales have been generated because of the new processes. In summary, many of the most significant innovation programmes are going to involve a transformation of the business model. This applies whether a bank is, say, developing an ecosystem perspective and creating a partnership with its customers, or building brand value, increasing customer engagement and driving revenue growth. Points to ponder • A ll banks involved in innovation tend to be doing similar things. To acquire new customers, banks might have to create a vertical solution that’s dedicated to a specific customer segment. • U ltimately, innovation needs to be a new way of working that forms part of a bank’s DNA. • T his is why it’s important to be able to measure the impact of innovation in terms of revenues, the reduction of manual processes etc.

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Senior management, cross-functional teams and external partners

A survey participant commented that everyone in their bank sees themselves as a supporter of innovation. This highlights the shift that has taken place over the last two years in the retail bank environment. However, in corporate banks there is still a lot less leadership involvement in innovation. Retail innovation has been driven by changes in the customer experience, through the advent of mobile and other technologies, so banks have had to change. But how involved are the senior management in new innovations?

Q5: In the last three years, how involved has senior management been in sponsoring the development of potentially big ideas?

60%

24% 0% Not visibly

12% Internal discussions have occurred, but minimal resources have been assigned

5% Resources are allocated, but minimal leadership participation

Innovation is a clear goal with resources provided, but management is only sporadically involved

Innovation is a prioritised goal with ample resources and ongoing senior management engagement

The survey suggests that innovation is seen as a priority, and assigned the relevant resources as well as backing by senior managers, in the majority of all of the organisations questioned. It is also a clear goal for a further 24%, but senior management are only sporadically involved. As will be seen later, the involvement of senior management is generally regarded as one of the most important best practices in terms of the success of innovation programmes.

Retail innovation has been driven by changes in the customer experience, through the advent of mobile and other technologies

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A bank that has a high commitment to innovation at a senior management level explained that it isn’t always easy to create the right mood for innovation. For instance, in the branches, relationship managers have a different type of job and a different approach to customers. The Innovation team is therefore trying to create awareness across the bank to show that the approach to customers has to change, as the environment is changing.

Do banks set aside a percentage of their budget for innovation or, once a programme is approved, do they get prioritised for that budget along with everything else? In terms of resources, 33% of innovation programme resources are allocated as part of the development budget. Resources were allocated in reaction to a specific objective in 40% of cases; and on a temporary basis, as needed, in another 21% of the firms.

Whilst innovation is important, almost half of the banks still don’t have dedicated Innovation teams

A bank commented that its Innovation department negotiates its budget every year. It has some funds for prototyping research, but its innovation committees prioritise ideas and then the department tries to estimate the cost and submit the budget. If new products are included, some 20 to 30% of its investment is in innovation.

Q8: How often does your company... … populate innovation team with cross-functional members?

33%

… engage people from outside the firm in its innovation projects?

40%

36%

33%

24%

2% Never

5% Rarely Sometimes Usually Always

7% Never

7%

12%

Rarely Sometimes Usually Always

Over half of the organisations surveyed said that during the last three years, innovation was staffed by dedicated teams. A further 31% had formal teams, but members still tended to maintain their existing roles. The vast majority of the respondents said that their company sometimes, usually or always has cross-functional members in its innovation team. In relation to engaging external people, most firms do this at least sometimes (with 45% of the respondents usually or always employing external people). A wide range of external specialists are used, including firms such as McKinsey, EY, Deloitte and Accenture. However, every bank has its own approach. For example, one that has its own Innovation team tends to use people from other areas of the bank, but only for specific aspects of the project. It has experts in particular subjects that aren’t assigned to the team but are available for advice when needed. However, the trend is to gradually use more people from different areas – and the Innovation team itself is always populated with people from different disciplines.

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Another bank has a consulting partner but its Innovation team works mainly with in-house personnel. The consultants are mainly used for design. The team works with them to build the customer interaction in channels etc. However, what is most important is the everyday working relationship with the Innovation Centre. The centre works with the team when they meet the customers, because after the first design phase, the bank tests its ideas through A/B trials with real customers. Yet another bank uses external consultancies on a regular basis but they are just brought in to help with specific initiatives. Overall, it’s not easy to get change accepted in a bank. It seems that many organisations have difficulty in selling the idea of innovation internally but if a competitor launches a similar programme, they are very fast followers. Perhaps the industry needs more leaders rather than followers. The traditional banking approach has been to have huge projects that try to change numerous things at once – core bank transformation projects etc. These can take a very long time and cost a huge amount and many of these projects fail. So the real question is: can banks start thinking about change from an individual customer experience or benefit perspective? If they approach change piece by piece, they can start to build momentum traction and success. Points to ponder • D igital is now a fact of life and everyone needs to accept innovation as a part of banking life. • Some senior executives with a traditional banking background find it very difficult to support innovation, because they just see it as risk. • For an innovation programme to work effectively, it needs to bring in people with different experiences and ideas, whether internally or externally.

Trends, drivers and risk

How do banks view the latest trends and drivers in terms of customer experience, technology, competition and regulations? For example, when tracking the impact of regulations on innovation, do they look at the regulations and think not only how they can comply with them but also how they can find an innovation opportunity? When assessing trends and drivers of innovation, the survey results were fairly even spread over the four areas mentioned. Most companies said that they are at least effective in some areas, and there were many instances of effectiveness going across the board (either with or without broad internal engagement). One bank reported that it is working mainly on the customer experience. It isn’t using technology as a driver but just as an enabler to carry out its aims. It isn’t looking at its competitors. However, it is trying to convince the regulators to change some of their rules to embrace the future of innovation. In the US, there’s a strange relationship between regulations and innovation. Banks spend so much time complaining about and trying to change the regulations that they don’t spend much time thinking about how to innovate within the scope of the regulations. Another bank said that technology still drives its innovation activities because sometimes the technology is used to create a business model and a customer need for that and then test it with the customers. Yet another bank believes that it is effective in all four areas, even though the national regulations are very strict and there are many constraints on items such as loans and mortgages.

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Q11: What is the risk tolerance in your company?

55%

26% 14% 5% Risk-averse

Moderate risk acceptance

Occasional big bets

Very risk Tolerant

Turning to risk tolerance, some banks are very conservative and will avoid anything that is obviously innovative. This is usually tied in with their approach to risk – some are incredibly risk-averse. Most of the respondents in the survey regarded their organisation as being moderately risk-tolerant, although over a quarter classified themselves as risk-averse. When asked how their company would treat unconventional ideas with potentially good business cases, 44% said that they would sometimes be followed but without any follow-through. A further 41% said that they would be given full consideration; and 15% said that they would be actively solicited and used to generate broader thinking.

When the CEO is taking risks, innovation can work more easily

A financial institution that has been developing a new type of bank said that this has been formed as a separate body so that it can be more risk-tolerant and innovative than the parent bank. It has a highrisk tolerance because it is trying to transform its approach from the inside. The bank commented: “The only thing blocking innovation is people who don’t want to take risks, because they don’t want to risk their jobs.” This means that the innovation culture isn’t working. However, when the CEO is taking risks, innovation can work more easily.

Although banks are risk-averse, they will still consider unconventional ideas

In terms of the business case, one organisation said that its people build the business case together. They find the idea then try with a proof of concept to see if it is good or not. Then the main people involved build a business case together in terms of the costs, possible revenues etc. The Innovation team then works from this proposal.

More generally, however, most banks will tend to consider an innovation proposal. However, even if it’s backed by a good business case, the banks often lose interest after the initial excitement and the proposal starts to slip quickly down their priority list.

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Points to ponder • M any smaller banks don’t take much notice of the regulations when they streamline their processes – but larger banks can’t afford to do this. • Stringent regulations can mean that it isn’t easy to create very effective customer journeys. Some banks see regulations as a problem, whereas others see them as an opportunity. • Innovation and risk tolerance go hand in hand. It’s difficult to get innovation off the ground – never mind making it pay – if a bank is risk-averse. • Banks are risk-averse and worried about cost more than innovation, because there’s no clear return on investment (ROI)

Implementing innovation Innovation types

Banks are looking at many different types of innovation, ranging from blockchain for authentication through to artificial intelligence and machine learning. But which types are the most effective in their eyes – and how profitable are they?

Q14: Has your firm engaged in innovation programmes in the following areas? If so please rank the priority and the expected revenue impact: Technology

Priority (1=low/3=mission critical) Expected Revenue Impact (1=minimal/3=significant)

2.58

2.33

Payment enablement (peer-to- peer or real time)

2.45

1.95

Chat-bots

2.26 2.15

2.10

1.74

1.79 1.58

Artificial Biometric/ intelligence/ voice machine learning

Blockchain

Participants in the survey said that the greatest priority would be given to payment enablement and chat bots, followed closely by artificial intelligence and biometric/voice solutions. Of these, however, payment enablement was regarded as having the greatest expected impact on revenues. Blockchain was largely regarded as being less of a priority.

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One reason for these results is perhaps because areas such as blockchain authentication are seen as research into platform technology. But many banks prefer to focus on innovation as seen from a customer’s viewpoint. With an issue such as blockchain, the customer doesn’t either know or care about it. They want to know about something that will reduce their costs or offer them frictionless services. One financial institution said that it doesn’t have any complete projects on blockchains but is starting to look at them. At the moment, its platform has a search engine that is able to understand natural languages and the bank wants to evolve this engine by using artificial intelligence. Points to ponder • It can be useful to identify the new trending technologies that are likely to have an impact on banking. • S ome banks are still in an exploratory mode but others are already thinking about how to build the business model with these technologies. It depends upon the maturity of the bank. • In parallel with the technology discussion, there are sometimes specific product areas or customer segments that are more active in terms of innovation.

Different operating models

Innovation is often driven by new entrants or fintechs but there’s now also a lot more activity in relation to small and medium-sized enterprises (SMEs). The relationship between segmentation and innovation is interesting – and the extent to which banks are focusing on innovation that will meet specific needs in various segments. For example, one type of innovation that could be worth watching is the use of roboadvisory services by the affluent customer segment. Two other areas of payment innovation that might be worth investigating are the use of new channels for making payments and the use of artificial intelligence. In terms of disruptive technological innovation, one issue is how this will affect the evolution of the value proposition or the product platform in certain situations.

Q14: Has your firm engaged in innovation programmes in the following areas? If so please rank the priority and the expected revenue impact: Operating models

Priority (1=low/3=mission critical) Expected Revenue Impact (1=minimal/3=significant)

2.50 2.51

2.40 2.29

Micro Small business enablement segmentation or full personalisation

2.16 2.11

Partnership offers

2.14 2.17

1.95 1.97

Cross-product Relationship/ bundles subscription pricing

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In terms of operating models, the model regarded as being of the highest priority by survey participants is small business enablement, followed closely by micro-segmentation. This suggests that some banks are beginning to focus more on profitability, as these two operating models are also those that banks believe are likely to have the greatest impact on revenues. In terms of the length of time needed to justify and design an innovation solution, 64% of the respondents felt that this could be accomplished within six months. Most companies (80%) thought that it could then be built and launched within 12 months. However, one bank said that it was concerned about the time taken to implement new ideas. It’s currently prototyping blockchain and peer-to-peer ideas but these can take at least 12 to 18 months to implement. Although it regards itself as an early adopter, it isn’t good at being a fast follower because of the time it takes to implement new ideas. Another bank commented that its greatest challenge in terms of launching new products is to reduce the time of development and to decrease the time to market. This area is one in which Oracle has been working closely with different banks. The company’s ultimate aim is to help banks to launch new products and services in days rather than months.

Results from innovation programmes Innovation measurement

A key question for banks revolves around how metrics can be used effectively to measure the success of innovation. Measuring whether a firm is seen as innovative is not as important as whether the customer appreciates the new offer. The actual innovation might just be improving something that might not seem to be new - but from an internal standpoint, it’s breaking through various process inefficiencies and process barriers. So internally, it can be an innovation but from a customer standpoint it might only be seen as a general improvement. The survey results suggest that nearly three quarters of firms frequently or always develop and promote a full business case with success metrics for innovation programmes. And over half of all participants would usually measure the success of the programme after it had been implemented. However, in general, banking is far behind other industries in terms of measuring the success of innovation. One bank commented that it’s not always easy to determine issues such as how many new customers have been acquired as a direct result of innovation. But there still needs to be a discipline in place that looks at a project after six months or a year to see how it has performed compared with the initial expectations. Monitoring feedback from customers is also important. One aspect that is difficult to measure is not just to what extent people are focused on innovation but also to what extent the innovation programmes that they’ve used have paid off. A Committee member commented: “It’s very important to get this context because one of the main questions that we have to answer to our Board is how innovation is helping to improve the customer experience, brand positioning and brand value.” So what are the most important metrics to use? The metrics that innovators in banks are told to measure often aren’t the ones that a Board really cares about. For instance, the Board might want to know the impact on customer lifetime value. Some Boards are primarily interested in long-term metrics, especially when these arise from external sources.

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A bank might therefore need to carry out (for example) customer surveys on how the customer perceives innovation through its brand or products. This could also be evaluated in comparison with competitors and with the market. Another potential long-term metric involves the measurement of innovation across different industries. A third involves measuring the value of the bank’s brand (which could be carried out by an external company). One important metric is the measurement of the impact of innovation on customers, which might involve surveys on customer satisfaction. One bank said: “We try to have a long-term view of the impact of the innovation that we deliver through channels and also in branches. We also use more traditional metrics such as the increase in the number of customers on digital channels, or the increase in sales made through digital channels. This is because many of our innovations are connected to sales processes on digital channels and also in branches.” Another bank added that it can be useful to monitor the reaction of customers when there are problems with the innovation. For instance, when a bank delivers a new platform or a new complex product, in the first phase after the launch there can be technical issues. The bank needs to consider and manage the reaction of customers. This is also true in the world of apps, where the customers can give their feedback online. However, it’s not easy for a bank to manage those feedbacks and the online relationship with the customers – but it is important. A bank said that its Innovation team tries to define the Key Performance Indicator (KPI) before the project development and then it compiles the project according to this KPI. It then tries to define a KPI for the use of the services. The team then discusses the project with the Marketing department to identify if it could be eligible for monetisation: whether it’s likely to bring enough value to the customer. Potentially, some of the KPIs could involve measuring increases in profitability rather than just top-line revenue and metrics such as customer engagement or customer adoption. However, most of the bank’s current projects aren’t focused on profitability but on cost-efficiency, for example, and customer retention.

Banking is far behind other industries in terms of measuring the success of innovation and is taking far too long to implement innovative ideas

Another financial institution occasionally used to develop and promote a full business case with success metrics. Now it does this frequently – and always measures the programme against those metrics once it has been implemented. Apart from the top-line metrics, a key consideration should be whether the innovation has brought in more revenue or increased the usage of the digital channel. A subsequent metric is how much more profit has been generated per customer because of the innovation programme. Points to ponder • It’s important to have information benchmarking and to look at ideas from other industries - how they measure innovation success and how they can help the financial services sector to measure it. • In general, compared with other industries, banking is less focused on increases in revenue and more on protecting their existing business. • M any banks don’t design the measurements into the innovation programmes that they’re implementing. So they’ll often reach the end of the project but can’t even measure its profitability.

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Innovation results

At the very heart of the topic of ‘Making innovation pay’ is the types of results that banks have seen from the innovation programmes that they’ve already run. Can they evaluate these in terms such as an increase in revenue or profits? How do banks calculate the return on their investment? It seems that in many cases, they don’t. Oracle has found that in many innovation programmes, the revenue impact and the profit impact are often so hard to measure that banks don’t do it - or just do it once and then give up. When Oracle returns to look at an innovation or transformation programme that has been implemented, it often finds that there’s been some significant revenue leakage. This is either because the project wasn’t well designed conceptually or because during implementation, it’s so difficult to evaluate the experience in a way that allows the bank to track its financial impact. This is one area where there’s a significant opportunity for improvement.

Q16: Have any significant results been achieved through innovation programmes in the following areas? Yes

No

Don’t know 11%

87%

79%

68%

66%

63%

61%

55%

13% 5% 5% 8%

16%

16%

18%

24%

26%

16%

16%

13%

13%

32%

Reduction Increase Cost savings Acquisition Increase in Increased Increase in manual in client from of new revenue launch in customer processes satisfaction technology customers growth speed for new lifetime and rework or retention changes products/new value free sources

42%

26%

29% 63% 29% Increase in profit margins

Reduction in audit expense

Although nearly two thirds (63%) of the survey respondents said that innovation programmes have led to an increase in revenue growth, only 42% said that this had been reflected in an increase in profit margins. The greatest impact has been on the reduction of manual processes and an increase in customer satisfaction or retention. Customer lifetime value is obviously seen as important, as 55% of the respondents said that they’d achieved significant results in this area. A bank reported that it hasn’t had any significant results yet in terms of measurable success or increases in profit margins. However, there have been big reductions in the number of manual processes and there seems to be a potential increase in client satisfaction and retention – although the bank has only just started to measure these. There have also been some cost savings from technology changes.

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In another financial institution, customer lifetime value is measured as clusters rather than looking at individual customers. The bank follows each cluster or segment to see if its business is improving or decreasing over a period of time. Most people still don’t quite understand how customer lifetime value could or should be measured in banking. An approach by one bank involved looking at how much money it will make from a customer and then at how much it spends on each customer. Banks could benefit from knowing how much money they make from a customer and how long they can expect to keep this in the bank. However, this often isn’t very easy to do. Some banks conduct a one-time analysis to get a rough idea - but setting up an operational process that’s constantly updating figures to give a real-time customer lifetime value is more of a challenge. This is another area where Oracle is hoping to help banks. The customer lifetime value is perhaps the most important KPI to drive the justification of any investments. A member of the Steering Committee said that for one innovation programme, he tested the market in two areas, with two different adverts. The advert in the first area attracted twice as many customers to sign up for an investment account as the other. However, the second advert attracted almost all high net worth customers, where the lifetime value of those customers made the programme potentially four times more profitable than the other one. Points to ponder • B anks recognise that small business owners are also retail customers – but should they be served in the same or in different ways? • Although it’s very important to reduce the cost and time of manual tasks, it’s also important to look at ways in which innovation can boost revenues. • Some banks have difficulty understanding the concept of customer lifetime value. They talk about it but have no way of tying their programme into its potential impact.

Some banks have difficulty understanding the concept of customer lifetime value Making innovation pay The need for a new focus on revenue management

For many banks, profit margins are still below pre-crisis levels. The solution lies in the development of innovative, personalised offers combined with other revenue-enhancing initiatives such as relationship pricing. Ultimately, any innovation needs to be both profitable and sustainable. Creativity doesn’t necessarily lead to profitability – so banks need to make innovation pay. Oracle believes that one of the key elements in this whole process is revenue management. It’s a discipline that is often overlooked or practised only half-heartedly by banks. In nearly all industries, there are teams or entire departments that have developed a disciplined approach to revenue management. However, this hasn’t really happened in banking.

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Banks can learn a great deal from other industries. People moving from the retail sector to the financial services sector are often shocked by the lack of discipline and understanding about revenue management shown by most banks. They need to be able to see the revenue flow as an end-to-end process – and ultimately to achieve optimum customer lifetime value. One Committee member who had worked in another industry said that his previous organisation had 20 people working on yield and pricing every day. This type of approach is standard practice in most industries – but not in the financial services sector. Another Committee member said, “The rate of innovation in the banking industry is much slower than anywhere else.”

The rate of innovation in the banking industry is much slower than anywhere else

However, those banks that have a disciplined approach to revenue management with their innovation programmes will typically experience a much higher and more sustainable pay-off.

Revenue management as a business discipline that enables profitable innovation

Organisation

The application of disciplined analytics and operational and systematic controls To predict consumer behaviour at the micro-market level

Line of business - Product Line

To optimise product offer availability and price to maximise profitable revenue growth. The primary aim of Revenue Management is:

Operational segment

Regional - Branch Relationship manager - Customer - Account

• • • • •

selling the right product to the right customer at the right time on the right channel for the right price to achieve optimal customer lifetime value

The essence of this discipline is in understanding customers' perception of product/service value and accurately aligning product prices, placement and availability with each customer segment.

Overall, then, there is a severe lack of discipline and understanding about revenue management within many banks. There’s a desperate need to see the revenue flow as an end-to-end process that is focused on selling the right product to the right customer at the right time and in the right channel for the right price – and ultimately to achieve optimum lifetime value. Banks often don’t have a clear idea of the expected impact of a new programme.

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Oracle’s fundamental hypothesis is that those organisations that have a centralised discipline of revenue management with their innovation programmes typically enjoy a much higher and more sustainable payoff. However, many banks manipulate their customers by putting up fees. They’ve been ignoring the future and have failed to evolve.

Relationship pricing

One of the key aspects of revenue management is the need for a much greater and more holistic emphasis on relationship pricing. Another recent joint survey by Oracle and Efma resulted in a White Paper called, ‘Responding to change – how are banks using information and pricing strategies to boost profitability?’ The survey was conducted amongst a similar cross-section of senior banking executives as the current study, and shows that only 36% of the banks surveyed have adopted true relationship pricing.

Relationship pricing

Does your bank currently use true relationship pricing?

36% Yes

64% No

What are the barriers to achieving this goal?

67%

59% 26%

15%

Business Other operational The near term Customer verticals cost is high problems Status achieves operate in silos this to some extent

The paper comments: “Pricing is a lynchpin in the relationship between a bank and its customers… it can make or break the bank: a poor pricing strategy will lead to a poor customer experience, which in turn will ultimately be reflected in lower profits.” So good pricing – preferably relationship pricing – and innovation should go hand-in hand if the latter is to be truly effective. However, in terms of relationship pricing, the report continues: “There is still a long way to go in this process.” This is confirmed by the white paper, which, looking at the changes facing the industry, concludes: “Banks need to respond to these changes quickly and positively. Two factors that could make a real difference are the more effective use of all types of information and the adoption of more relationship-based pricing strategies. In both of these areas, the use of innovative technology can make a real difference. It can help banks to identify the best data to use; to analyse this data effectively; and to interpret the results so that the banks can then use the information both to enhance the customer experience and to boost their overall profitability.” The Steering Committee looked more closely at this issue. Many banks are trying to move towards relationship pricing, subscription models, discounts and product bundles across their different divisions but this can be a very challenging process.

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Subscription and relationship pricing are similar in many ways. However, subscription pricing involves giving the customer a set of services for a monthly fee. Relationship pricing involves giving a discount on one service because the customer has a products such as a savings account or an insurance programme with the bank. An example of this is when a customer who has an account with the bank might receive a discount on their mortgage rate. The approach taken by different banks varies greatly. Many banks have set up limited relationship pricing for a few of their products. However, as soon as they try to cross the different divisions – for example, trying to cross-sell investment services to a retail customer – the ability to give the customer a relationship price that crosses these divisions becomes difficult. One reason why some of the innovative programmes don’t pay off is because they are designed without paying attention to relationship pricing. The programme is designed for the experience but not for the pricing. So it might involve a good idea but it doesn’t make money because the bank hasn’t identified how to price it effectively. A bank reported that its pricing is managed by the Marketing department. The Innovation team manages the commercial offers that are made to customers and the way in which products are offered to them. For instance, the team might see that a customer is visiting website pages on credit cards or spending money with certain merchants. As a result, it can offer the customer specific products form the bank or its partners. Although the team doesn’t set product costs, the price is specific to each individual customer.

Some innovative programmes don’t pay off because they are designed without paying attention to the relationship pricing

One aspect that could make a real difference is the aggregation of accounts: this could bring breakthrough results. If a customer sees that they can aggregate their accounts and can begin to see the total relationship, they will start to trust the bank more with other aspects. This can then lead on to more effective relationship pricing.

Indeed, this is the next step from the aggregation of accounts. If a bank can see all of the accounts and relationships together, it can then decide whether it should give the customer a better price as a reward for their relationship and the range of products they use. This often happens on an occasional basis for high net worth customers but it’s not as prevalent on the mass retail side yet. Overall, banks seem to be moving slowly towards relationship pricing and subscription pricing. They will sometimes choose the strategy that they use according to a specific product or occasion. However, there’s a significant difference in the approaches taken by different banks. Although many banks might have looked at or tried to adopt some type of relationship pricing, this has rarely been applied holistically. For example, few can meet the challenge of giving a small business owner a relationship-based offer that recognises that he/she is both a business owner and a retail customer. Points to ponder • O ne aspect that banks could focus on is innovations that are based around improvements in relationship pricing or that provide relationship benefits. • Many banks are moving away from charging fees for discrete transactions and instead are charging a monthly subscription fee for a collection of services. • Aggregation of accounts is an important step towards an effective relationship pricing strategy.

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Innovation best practices

Discussions about the types of innovation that are happening and how banks are measuring the results are very useful. However, what’s really important is for people to understand some of the best practices that lead to success in these innovation programmes. The survey participants were therefore asked about the importance of different best practices in terms of the effectiveness of their innovation programmes, using a score of 1 to 5 (with 1 being the least important). A list of best practices was provided, based on Oracle’s experience in this area and the results of previous research. These practices are typically ones which have been involved in successful innovation programmes:

Q17: Please rate the importance of the following best practices in making your company’s innovation programmes pay off: 1=low/5=high

4.70

4.35

4.24

4.03

Senior Openness to Design Clear management external thinking definition of trends approach with success leadership (competition, customer objectives and engagement fintechs, experience and success other focus metrics industries)

4.00

3.95

3.92

3.81

3.62

Purpose- Business-led Agile or Addressing Measuring highly designed initiatives operating customer flexible models and readiness for matrix or development business innovative crossapproach functional process products/ team design services structures

For the survey participants, by far the most important best practice (with a mean score of 4.70) was senior management leadership and engagement. It was therefore encouraging to see in the earlier results that 60% of banks claim to have on-going senior management involvement in their innovation programmes. The next best practice (with a score of 4.35) was openness to external trends, such as fintechs, competitors and other industries. The third was a design thinking approach (4.24). However, all of the best practices listed were seen as useful – they all had an average score of over 3.6. One of the surveyed banks is closely in touch with the concept of design thinking. The bank sees technology as the driver but once it decides to proceed, it uses design thinking to adapt the technology to the customer journey and experience. However, the bank doesn’t really have a purpose-designed matrix or a crossfunctional team – it is still very vertically-orientated. It has a lot of silos and barriers, so it always has to return to senior management leadership engagement. The bank still has a culture that needs to be changed.

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The Steering Committee members were asked if there were other best practices that they would consider important. One member mentioned the importance of collaboration with fintechs, universities, institutes or other organisations. One aspect might be collaborating with industry to develop standards. A member observed that the structure of teams is very important. In the last few years, their bank has completely changed the way in which it creates teams that have to deliver new processes. It works closely together with IT from the beginning, as well as with the legal department and the innovation team. The teams work together physically, in open spaces, every day. It’s a new way of working and has saved a lot of time. The bank is now able to deliver new processes in just three or four months. Customers are also an important part of the process, because the bank works with them from the beginning of the process. When it designs a new service or process, customers join in at the start – the bank has interviews with them at every phase of the process. Perhaps one remarkable result of the innovation process is that banks have become more customer-centric than they were and that there has also been a change or evolution in working techniques. The level of engagement of both customers and employees has changed. In some banks, they are completely engaged in the new processes and in the new way of working. Most customers are ready for innovation. However, if they aren’t ready and open to change, then no matter how good the innovation is, it won’t be adopted. This is one of the more significant challenges facing banks. Another important topic that is related to innovation is the risk appetite of the company. The bank has to be ready to accept more risk than normal if it wants to be really successful with innovation, particularly in relation to legal and compliance topics. However, the traditional banking mentality of ‘it’s easier to stay where we are’ is really difficult to change. One way of thinking about best practices, which isn’t very helpful, is that the innovators check to see if the firm is open to change or ready to take risks – if so, then they will move, but if not, they won’t. But perhaps the best practice is not just to see if the bank is ready but to move its attitudes so that it becomes ready. It’s a question of helping the risk appetite of the organisation to evolve. This requires a powerful commitment from the most senior executives of the bank, otherwise it’s difficult to change the risk appetite based on innovation. Then there needs to be a good idea with a clear strategy of how this could change the company and help the customer. It’s about the sponsor allowing innovators to take decisions that will change the risk appetite - so the best strategy is based on good internal relationships and trust. There also needs to be a visionary in the top management who will allow the innovators to get on with the work relatively unhindered. So the priority is for senior executives to be actively pushing for the acceptance of the risks, because they understand that the only way to achieve success in these programmes is through building in this acceptance. Points to ponder • A project that is successful in terms of the number of customers who take up a new product isn’t necessarily successful in terms of profitability. • It’s easy for banks to talk about best practices, but in practice things often fail from an execution standpoint. • Banks need to look at the new journey to see if there’s an aspect that isn’t efficient for the customer: for example, are there important bugs? And then they have to stop and modify and correct what is wrong.

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PART FOUR

Examples of best practices Four interviewees described innovation projects embarked upon by their banks:

A new type of bank An Innovation team created a new type of bank – the first digital bank for elderly customers. This involved very simplified Internet banking and was very successful. The interviewee comments, “We took a lot of risks - this is the secret of innovation.” The team involved elderly people from all around the country helping with the design of this super-simplified interface for Internet banking users. The project started from a study to see which sort of innovation model could work in the parent bank. One of the key aspects was the development of a ‘Gladiator Room’, involving 10 to 15 people with different talents (e.g. security, marketing, business) brought together in the room. Everything needed to produce a full end-to-end change is provided and the group is given a budget, and left to work undisturbed for 6 to 12 months. By the end of this time, the team must create something new that is ready for industrialisation. They therefore have to consider aspects such as compliance, regulations, and marketing. Another, longer-term approach is the Innovation Virus. After working in the Gladiator Room, the people involved become ‘contaminated’ with innovation. This is because the experience is a high-risk one and they make many decisions about everyday processes, learn many new things, and face many different problems. After two or three years, when they’ve moved to new positions in the bank, this injects a ‘virus’ into other functions for innovation. The Gladiator Room approach led to the development of a new type of bank that will open soon and is totally separate from the parent bank. It will have a new approach totally based on innovation, in which it tests new products and services and new methods of communication, including social media. This means that potential innovations for the parent bank can be tested first in the new bank. It’s effectively like an Innovation Lab for the company. The main reason for this new bank is to help with the acquisition of new customers and the retention of existing ones. In particular, the younger generation are ready to change banks very quickly. They will change every year if there’s something more effective that will attract them. So the new bank will continue to push on innovation, to maintain a really active customer base and to involve customers as much as possible in the co-design of the bank. Indeed, the first 5,000 customers will be co-founders of the bank.

Company-wide open innovation A financial institution has developed an open innovation programme that connects it with fintech and insurance companies. This project has been running for three years and has involved working with 28 small companies. The bank ran some prototypes and pilots, some of which worked well, while others didn’t. This first programme was designed for start-ups. Last year, the bank launched a follow-on project for venture capital funds. The bank also developed an internal programme that mobilised all of its 100,000 employees to offer suggestions and ideas for innovation and also to improve the bank’s efficiency. As a result, it received over 10,000 suggestions. Various committees analysed the suggestions and then the best ones were included in the bank’s portfolio and implemented. Twice a year, the employees with the best ideas are invited to the bank’s headquarters for lunch and they meet the CEO and Chairman, who give a speech about innovation.

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Finally, the bank is implementing an Innovation Lab that will connect the main IT global suppliers directly with the bank’s IT development personnel with the aim of speeding up internal innovation.

A focus on SMEs A bank has been focusing on making innovation pay within the SME sector. One of the main challenges is that the SME entrepreneur is often also a customer on the retail side. The bank has therefore decided to try and give the entrepreneur an aggregated view and a good customer experience for his life both with the company and as a retail customer. This involves trying to integrate two worlds that are completely separate. The bank’s Innovation department is trying to solve this by the way in which the customer interacts and makes payments to the bank. This is a good way to retain the customer if the bank can provide the same continuous experience throughout. There’s a fundamental challenge within most banks when a retail customer also has an SME or corporate account. The ability to traverse these different segments and create a cross-matrix experience is very challenging, because the underlying customer identification system is very limited. The business account might be used not only by the entrepreneur but also by other people in the company. So ultimately the bank has to try and build a system where there are different levels of operations and transactions etc.

Aggregated accounts and alerts Another bank has launched a new way of aggregating accounts. The bank decided to only offer this service to clients that have joined its loyalty programme – which in turn brought more value to this programme. Another project that it developed involved producing alerts or notifications if, for example, a customer’s account balance becomes negative. Although this wasn’t perhaps strongly innovative, it has had a huge impact and is seen as a really good customer service. The bank has developed notifications for several of its products. However, the interviewee noted that there’s always a need to pay attention to the customer experience: “Even if we deliver a good feature, we need to promote it to the customer at the right moment, otherwise we have a good feature but no-one will use it.” The bank’s latest project started with a design thinking approach. The team spent several days interviewing customers so that they could gain a complete understanding of their needs. They then had a period of brainstorming, using a mixture of customers and employees from various department. This produced new ideas and new opportunities and then the team interacted again with the customers to build a new customer journey for the new service. Indeed, it works with its customers to explore and test ideas at all stages.

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PART FIVE

Conclusions and recommendations This joint study has highlighted the current approach to innovation in the financial services sector. Banks often talk about innovation and improving customer value but in the wider world, it appears that they haven’t actually been doing much about it. They still use antique legacy systems that are fundamentally the same – and these systems have embedded business rules that tend to block any innovation. Whether being a first mover or being dragged into its adoption, every bank will have to put innovation at its very core and will have to move to next-generation systems sooner or later. So, despite new technologies and innovative ideas, banks often fail to make innovation profitable. This is borne out by the survey results, which suggest that even in those banks with innovation programmes, well under half don’t see any real increase in their profit margins. As a result, they are now facing increasing competition from fintechs and other new entrants. However, banks aren’t responding in an agile way – they are still moving incredibly slowly. And as millennials come of age, the danger is that they will be attracted towards fintech products, as fintechs are usually much more creative than banks – they are devising competitive solutions in order to survive. Banks therefore need to adapt if they are going to survive and grow – they can’t just keep on doing what they’ve been doing over the past few years. They need to make innovation pay. At the moment, most have a rather haphazard approach to both achieving and measuring profitability as a result of innovation programmes.

Banks need to evolve and try a different approach, focused on revenue management and sustainable innovation

In conclusion, doing nothing isn’t a real option. To move forward, a fundamentally different approach is required. Banks need to devise a strategy of how to leverage innovation to achieve their bigger goals – which include being customer-centric, driving sales, cutting costs, streamlining operations and maximising revenue.

Any bank that’s thinking about innovation should also have a strategy based around the four ‘Ps’ – Product, Process, Place and Price. Product innovation can fuel differentiation, where the core product set is heavily commoditised to help banks to lure customers away from their existing banks. They must have a strategy to move away from a ‘one-size-fits-all’ approach and become more customer-centric by offering unique, innovative and customised products. Banks also need to adopt process innovations and redesign their core processes from a customer point of view. They must keep innovating their customer experience to provide their clients with a ‘wow’ factor at all times. Pricing is one of the biggest missed opportunities in banking. Banks need to have a comprehensive relationship pricing strategy that aligns with their overall innovation strategy. Today, it’s more critical than ever for banks to focus on revenue management; and to use pricing innovation as a tool for increased profitability and competitive differentiation.

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Moving towards effective revenue management So what are the opportunities that are available to banks? How can they start to enable innovation in revenue management? These are the elements that need to be developed in banking that will lead to innovation that pays: 1. Customer centricity needs to be an operating model, not a marketing programme. Banks talk about it but now need to look at how to put it into practice. 2. Designing from the customer – financial institutions need to think about how to help the customer to succeed by starting with the customer experience and seeing how the customer wants to interact and how they want to see information etc. 3. Leveraging behavioural economics with gamification. Most people act irrationally, especially when financial decisions are involved. People in banks are trained to think rationally - but they are the ones designing the customer experience. The decision point is whether the customer trusts the bank (pricing is irrelevant at this point). Gamification is about recognising how and why people interact and engage. 4. Leveraging easily changed, scalable, dynamic pricing capabilities. Banks have developed a productbased pricing view – they don’t have customer-based relationship pricing abilities. It’s very difficult for them to scale and control offers. It’s the same with cross-selling. e.g. if someone is buying a house, they’ll probably want insurance as well as a mortgage – so why not combine these upfront and streamline the customer experience? 5. Driving cross-selling with relevant, customer-led, relationship-based offers and personalised deals. 6. Empowering managers and staff to rapidly see, optimise and control top-line and bottom-line metrics – involving systematic transparency in revenue control. 7. Embedding, testing, learning and evolving the system in all of the critical areas. Innovation that pays only works if a bank can learn from its experiments. Most banks don’t even experiment and test what they are going to do. They have a lot of useful information (e.g. data that could greatly reduce the time it takes a customer to calculate their taxes). This is real innovation in banking – creating products and services that people will see as value-added solutions. It’s also about thinking endto-end about how to price and present the solution. Pricing innovation is one area where small changes can set a bank apart from its competitors. A large number of banks still don’t understand the untapped opportunity that effective and efficient revenue management represents. That’s why Oracle has been developing solutions that focus increasingly in the area of revenue management, providing banks with an opportunity to alter their pricing strategies and to get the price right.. It’s an area that banks must address more seriously if they really want to find and develop innovation that pays.

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About us

A global non-profit organisation, established in 1971 by banks and insurance companies, Efma facilitates networking between decision-makers. It provides quality insights to help banks and insurance companies make the right decisions to foster innovation and drive their transformation. Over 3,300 brands in 130 countries are Efma members. Headquarters in Paris. Offices in London, Brussels, Barcelona, Stockholm, Bratislava, Dubai, Mumbai and Singapore. www.efma.com

Oracle provides the highest level of performance, business intelligence, flexibility, security, and scalability, all at the lowest cost of ownership. With Oracle Banking Digital Experience, banks can effectively execute their digital transformation through launch of new digital brands, digitize processes, modernize digital experience and launch new digital capabilities.

Contact us

To learn about Oracle Banking Digital Experience, visit oracle.com/banking, call +1.800.ORACLE1 to speak to an Oracle representative, or e-mail [email protected]. For more information: www.oracle.com Connect with us • blogs.oracle.com/financialservices • www.facebook.com/OracleFS • www.oracle.com/finan • www.linkedin.com/company/oraclefs/

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Making innovation pay October 2017

www.efma.com

In collaboration with: