The State Of FI Innovation: Moving In Reverse

Those who work in and around high tech and innovation are lulled into a narrative about progress being on a march ever forward, rarely slowing, never stopping and certainly never turning around and marching in the wrong direction.

But outside of the realm of epic narratives, the slightly less convenient story is often a little bit less linear and a whole lot more complicated. Sometimes progress runs forward, sometimes it’s lateral or it zigs and then zags — and sometimes things can appear to be doing an about-face.

In fact, according to the second annual PYMNTS/i2c Innovation Readiness Index, running in reverse is exactly the direction that a large number of financial institutions find themselves taking right now, including those who labeled “Top Performers” in last year’s report.

Once one gets outside of the top 25 banks in the U.S., Karen Webster noted in a recent conversation with i2c Executive Vice President Joe DeRosa, the story the numbers tell about innovation readiness is “not good.”

By the Index numbers, FIs are apparently less well positioned to innovate than they were at this time last year. The Index Score across all of the banks in the study — nearly 300 of them — declined by 7 percent; that of the Top Performers dropped by 16 percent.

DeRosa agreed that it is a disturbing trend and certainly not the direction that anyone expected to see, particularly as important as it is for incumbent banks to innovate. But, he told Webster, this seems to reflect the main challenge banks now face in an era where consumer expectations are only going up and the competition has become more intense. Financial institutions are competing in an era, he said, when the pace of change is moving faster, it seems, than they are ready to support.

“There is no shortage of great ideas and concepts,” DeRosa told Webster. “The struggle is about execution — have the FIs clearly identified the problem they are trying to solve and if so, how capable are they to deliver that solution? And, perhaps most importantly, can they measure the results?”

The Soft Middle in Financial Services

The difficulties observed when innovation readiness is being measured, DeRosa explained, emerge from three separate but connected factors.

The first is the rapid and unprecedented emergence of the mobile-centric, omnichannel consumer who now expects that their experiences in physical channels and digital channels will be functionally identical, and that they will be able to switch easily between them at will.

The second factor, he said, is technology — a move from technology that often limits options to one that can quickly deploy solutions that meet more “mission critical” consumer needs. That means, he offered by way of example, being able to move consumers easily through the institution’s offerings — say, credit card balances that can be quickly converted to installment loans

And then finally, there’s the infrastructure piece — the part, he noted, that the Index results show squeezes the middle tier of FIs because it slows them down.

“The middle guys are feeling enormous pressure and that is where the infrastructure problem is most acute. It’s also where the questions arise about what’s needed to stay a market leader and remain in the game,” DeRosa said. “Those FIs are looking for what else they can do, something that can become a competitive advantage that sets them apart.”

And, he noted, unlike the top 25 banks that can invest at will to build bespoke infrastructure to connect those dots, the middle-tier players are forced to live within the limits of what they can build or the resources they are using to power their core bank processing systems.

Infrastructure, as the new Index numbers prove out, is what’s keeping innovations slow to market, Webster added. Nearly 40 percent of all FIs surveyed for this report say that infrastructure is holding their innovation ambitions back.

Even worse, it’s having an impact on how quickly their innovations can get to market. In 2017, 87 percent of FIs reported that they got to market with their innovations on time. This figure has precipitously dropped to just 27 percent in 2018.

DeRosa said that puts more pressure on CTOs and CIOs to make tough decisions between what they want to build in house — and what capacities they want to buy in the form of an acquisition or partnership with a FinTech firm that can provide the technology  necessary to bypass legacy systems and get products more quickly to market.

Because, DeRosa noted, time is of the essence — as banks of all sizes are no longer only competing with other banks.

The FinTech on the Corner

Banks, he said, have been habituated into viewing their competitors as other banks. Maybe not all that surprising since it’s often hard for organizations to see past what they are most familiar with.

“In the past, their competition was defined as the other three banks on the corners facing their branch — in other words, the competitors they could see,” DeRosa said.

That’s not to say that some FIs don’t look at FInTechs as competitors, but they do so only in the context of narrow niche markets — like SMB lending, for example. By the numbers this year, it seems that most aren’t thinking about FinTechs as the up-and-coming competitors that could take all of their market share away.

Only 6.5 percent of FIs studied for the 2019 report cite FinTechs as competitors, with nearly 60 percent of respondents citing other banks and credit unions as key competitors.

“Of course, if you asked Walmart 10 years ago if they thought Amazon was going to be their biggest competitor, they probably wouldn’t have yes, either,” he pointed out.

What’s easy to miss, though, particularly while FInTechs are scaling their own businesses, DeRosa said, is that the first movers in the market — like an Amazon in digital retail — set the pace by which the rest of the market runs, and long before that pace accelerates and becomes the pace in that particular facet of the market. That’s where DeRosa said FIs are today — Amazon as the pace car for not only retail, but every other facet of the consumer’s interactions with brands, particularly financial services and payments.

DeRosa said that even extends to the highly complex B2B payments environment, long viewed as the immovable payments segment, given the complexities of moving from legacy to digital solutions. Today, consumers carry who they are and what they experience in their personal lives into their business lives, and increasingly refuse to sit still if other providers can offer  a more streamlined, digital way to do business.

The same, he said, is simply becoming the case in retail banking as well. Customers know what they want and what they expect — and increasingly show a willingness to think broadly when it comes to where they are willing to get those services.

“Most FinTechs don’t have a brick-and-mortar presence, [but] they are communicating with bank customers whether the banks know it or not. And those banks haven’t quite gotten yet what a risk that is to them,” DeRosa emphasized.

The 2019 FI Innovation Readiness Index Report will be available on March 15, 2019. For an advance copy of the report, please provide  your work email here.

The 2018 FI Innovation Readiness Index and playbook series can be found here.