Bank Innovation That Heeds The Needs Of The ‘Digital Native’

TS Eliot wrote: “Between the idea/And the reality/Between the motion/And the act/Falls the shadow.”

The same observation might apply to financial services. Depending on where you look, the chasm yawns wide when it comes to innovating with new technologies or features.

In a PYMNTS interview with Karen Webster, Joe DeRosa, EVP of Global Sales at i2c, discussed the findings of the July 2019 Innovation Readiness Playbook, subtitled “Leveling the Playing Field for Different-Sized FIs.” As noted in the study, larger financial institutions outpace smaller brethren when it comes to grabbing market share, largely through the competitive advantage of hefty IT budgets that get new products to market with haste.

That being said, as an industry, the financial services space recognizes the need for innovation, where as many as 68 percent of banks of all sizes plan to make innovation a priority in the years ahead.

DeRosa termed that a surprising figure — but not for the reasons you might think. In his eyes, that’s a pretty muted showing, considering that we’ve been trading and transacting for thousands of years, going all the way back to the bartering system.

“Fast forward to today, and commerce is still a transaction that includes two sides of value, something offered for something gained,” said DeRosa. And noting the 68 percent stat mentioned above, he told Webster that “for the 32 percent of FIs that are not making it a top priority, I wonder what kind of business they’re in … there’s virtually nothing you do in life that does not require a transaction.”

Smaller Is Bolder?

Drilling down a bit, and as detailed in the playbook, the data revealed that as many as 40 percent of smaller banks planned to focus on rolling out new products over the next three years, while only 8 percent of large banks said they were interested in doing the same.

That bifurcation comes, said DeRosa, as demographics shift. As millennials rise through the ranks and within the ranks, we see the rise of what he termed “digital natives.”

In exploration of just who those natives might be, he explained, “These are the kids that actually have been born with a mobile device in their hand. The average age of a first-time phone owner in the U.S. is 10 years old. Think about growing up with a device in your hand watching videos on an iPad at 3 years old on the couch. This group has a relationship with technology that has never been seen before … and when I say technology, I am talking about all components of technology.”

Digital natives, he continued, are highly-comfortable with both hardware and software applications. It’s only natural that they should look eagerly toward the 41,000 applications that are on offer to help them bank, save, invest and transact.

That increasing demographic represents a strong niche that needs to be filled, where banking is done in bits and bytes, said the executive, and where smaller banks are looking to seize on that opportunity. The smaller banks also have an advantage that lies with the fact that they are, relatively speaking, more likely to embrace partnerships or virtual infrastructures to bring new initiatives to market.

DeRosa said digital natives can nimbly be served by smaller banks, as those firms are more capable of making decisions quickly and offer targeted products to attract younger consumers.

As he told Webster, “Smaller banks are not burdened with large infrastructures and legacy systems. They tend to be more willing to seek out technology that provides flexibility to quickly go to market with new services as consumers’ needs change.”

The executives at smaller banks are able to know their current and target customers better, through a myriad of communication channels, and adapt their banking services to attract digital natives — and equally important — keep the digital native customer by quickly and constantly enhancing their programs.

The Fast Follower Middle FIs

It might be the case that as institutions scale larger, caution increases too — at least when it comes to innovation. The study found that only 13.3 percent of mid-sized firms plan to focus on innovation. An increasing number, at more than 18 percent, intend to observe market trends before introducing new products, versus 14.8 percent in the last study.

“The middle guys are trying to protect the ground that they have, and they’re caught in this quandary,” said DeRosa. “And I know that this is a very overused cliché, but they are ‘too small to be big, too big to be small.’ They’re kind of caught in this almost like an identity crisis because the large banks have secured a message that size matters. The small banks have secured a similar message but for different reasons.”

Thus, mid-sized FIs play fast followers (which one could argue is their only option) in tech and new product features. The challenge with that approach lies with technology. Yet, in order to be a fast follower, said DeRosa, FIs still need to have both the technology and infrastructure to follow fast enough.

“That’s problematic for a lot of these institutions that are using legacy-based technologies and infrastructure,” he said.

An Analogy

There is an analogy here that can serve as a template for what’s happening in financial services — one need only look to the digital transformation of the newspaper industry, as Webster and DeRosa discussed. The largest marquee names have survived based on scale, and the smallest players, the community papers, have focused on specialized content geared toward sports and local-interest stories. The middle-tier papers? They have struggled with repackaging content.

Potential New Opportunities

The gig economy (which consists of organizations that contract with independent workers for short-term paid engagements, typically without benefits), is where new use cases are evolving and where individuals want to get paid quickly and often. There are also other opportunities to serve these workers, such as saving for retirement or paying for healthcare.

DeRosa also took note of a major impact shaping the user experience, a seemingly never-ending pool of capital — as much as $112 billion was invested last year by private equity and VC firms in FinTechs and challenger banks — where ostensibly anyone with a new idea is getting funded.

Against that backdrop, said DeRosa, financial firms are getting more comfortable with a “minimum viable product” that may not be at the forefront of innovation but helps establish a foothold from a brand perspective. Gain that foothold, he said, and there’s runway to release version 2.0 and beyond.

The Courage Factor

“You’ve got to have an enormous amount of courage to take in some information on your customer experience and place a bet on it,” said DeRosa of innovative strategy in general and of those firms that scored well on the Innovation Index readings. “It’s not just all the big guys. It really is a mix of financial institutions that have this common denominator of internal culture that inspires and fosters innovation, even if innovation doesn’t always get it right on the first version.”

Blend the curiosity to learn with the courage to act, and a winning innovative mindset takes root, he said. Just think what might have happened had Edison not tried just one more time to perfect the light bulb.

DeRosa made one last comment to Webster, “People look at organizations to see what their innovation appetite and capabilities are based upon how many things they’re willing to try.”