Innovation in Financial Services - Beyond the Red Castle
By Bjorn Cumps (Post-Doctoral Research Associate; Vlerick Centre for Financial Services) and Walter Van Dyck (Professor of Innovation)
“If you always do what you always did, you will always get what you always got.” - Albert Einstein
Mobile banking apps, prepaid cards, QR-code based peer-to-peer payments, digital advisors, gamified savings accounts, social media analytics tools, combined debit/credit & loyalty cards, location-based services, technology-driven branches, … just to name a few of the banking innovations we have witnessed the last couple of years. And yet I dare to say that banks and insurance companies are not the most innovative organisations around! Change has definitely come to the financial services sector. The awareness of the importance of innovation is there. They finally start playing the innovation game yet still have a long road ahead of them. Contrary to f.e. technology and healthcare, the financial services sector still has a steep learning curve to climb when it comes to innovation. The main learning point: Move innovation beyond the castle, into the sandbox!
Financial innovator Kosta Peric (Innotribe) learned us that the core business of a well-established organisation can be seen as a fortified castle with high, strong walls: everything is set in place to defend the existing business model and sources of income. It can stand a hit and is built for resilience. And today, most banks believe they are innovating by changing the looks of their castles: the shape of their towers and the location of their loopholes. They are optimising, not innovating. Moving simple transactions or even complex advise from a physical channel to a digital channel is plain and simple optimisation. The castle is important and needs to be safeguarded. Let’s be clear about that. But it is not the best place for innovation as heavy procedures, planning and governance lure around every corner of the castle. True innovation and creativity blossoms in a very different environment. One where creatively playing around, experimenting and failing are part of the game and do not affect the castle: that place is called “the sandbox”. Only when organisations create a culture, environment and systems for their people to experiment with new ideas, away from the existing business, will true innovation emerge. Where the castle is built for resilience, the sandbox is characterised by agility, flexibility and openness. Both castle and sandbox are important and both are needed. Yet many financial services organisations still live in the castle age.
Based on a screening of hundreds of financial services innovation projects in Belgium and Luxemburg (2010-2013), we categorized projects as being either scientific discoveries, creative combinations or asset optimisations. The majority of the projects we screened can be classified as asset optimisations: refurbishing the castle. Over the years we do see a small shift towards more creative combinations yet asset optimisation projects still dominate financial services innovation projects. Shifting transactions (payments, consulting your accounts, …) from the branch to online or mobile channels is an asset optimisation. You make it more efficient and the client likes, even demands, this. And yes, banks need to do this. Yet, the competition can and will copy this very quickly. They have very similar castles and will defend them. In their seminal book “Blue Ocean Strategy”, Kim and Mauborgne call this competing in a Red Ocean: an existing market space where the well-known players compete fiercely (hence, red as in bloody) putting profits and possible growth under heavy pressure. Banks, especially in Belgium, operate in an overcrowded, fierce Red Ocean industry. But asset optimisation will not help them to remedy this. Blue Oceans are what they call uncontested, newly created markets where you don’t have this cutthroat competition. Well, shifting transactions to mobile is what we call defending the castle in a Red Ocean environment. It will always be important for banks to defend the red castle, yet they should also move beyond this.
When the Australian Commonwealth bank uses augmented reality in their property app this is not an asset optimisation but a creative combination. They build a financial ecosystem by teaming up with the real estate sector and offer clients fast and easy access to real-estate data when they are in front of the house (price of the house, sales history, auction data, suburb profile, demographics of the environment, …) enriched with their own client data (can you afford this house, number of repayments, interest rate they can offer, …). The reason they do this is because they understand very well that buying a house is an emotional decision. Either you fall in love with it or you don’t. And when you do, the bank is there, at the moment of truth, to help make that dream come true. Much like car dealers are able to offer car loans at that emotional moment when a client decides to buy a car. Commenwealth bank tries to change the customer journey, reducing the number of “mortgage shoppers”; trying to lock-out competition by keeping the client close to the bank. This fits with ecosystem-thinking as they team up with the real estate sector to do this i.e. seeing a bank no longer as a product factory + sales channel but as a platform or financial hub. Much like Google is dominating the “search” ecosystem, Facebook the “sharing” ecosystem, Amazon the “buy” ecosystem or the Telco’s the “connect me” ecosystem, banks should strive to be at the core of the “financial choices” ecosystem. To do this they will need to spend more time in the sandbox, experimenting with creative combinations, looking for Blue Oceans.
In conclusion, there is still some work for bank before we can call them truly innovative organisations. Their journey towards innovation has clearly started. They are slowly starting to move up the innovation learning curve. Going from an innovation portfolio mainly consisting of asset optimisation projects to one more dominated by creative combinations. Moving from innovation focussed on protecting the castle in a Red Ocean environment to innovation focussed on exploring the sandbox to create a Blue Ocean market space. This will be their journey: from the Red Castle to the Blue Sandbox. Because to move to the centre of the “financial choices” ecosystem bank will have to move beyond pure technology innovation to value innovation: where technology innovation is aligned with utility, price and cost. Or put differently, where they use technology to enrich their own corporate DNA to bring true value to the customer.
 Peric, C. (2012). The Castle and the Sandbox – Transforming Companies in Established Industries using Open Innovation. Searching Finance.
 Kim, W.C. & Mauborgne, R. (2005). Blue Ocean Strategy – How to create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business Review Press.