How financial services can improve their innovation

An ex-banker recently told me that an investment bank is, in reality, a high performance software innovator. Its staff and leaders just don’t see it that way. Does that mean a bank must compete with Google? In fact, banks channel loans through Google’s Lending, so often they are collaborators.

Banks would benefit from being seen as more innovative, and if they publicly redefined themselves the way my source described, they could better manage that reputation. But conventional innovation metrics don’t help them to understand why they do innovation poorly, where they do it well, and why their market cap lags that of tech companies. To understand that you need better innovation input metrics, measures of how capable a company is of innovating, as I described in a previous post.

The table below shows the results of a multi-sector innovation capability survey.  Financial companies scored relatively poorly compared with other industries. But the table doesn’t tell the whole story.

We surveyed over 5,000 listed companies across 7 stock markets, from the US to Korea and could only find five banks worthy of inclusion. That means only 5 were of sufficient innovation reputation to make our top 100. We had no problems finding 10 in each other sector. Overall, American Express, at Number 16, was the top ranking financial services company on our scoreboard, and Bank of America showed up at Number 47. (Nike tops the list, but tech and manufacturing companies round out the Top 10.)

A comparison of innovation capability across six sectors


What the table also tells you is that banks are better than most at social media innovations. Until recently they lagged in this area but they have caught up quickly. They are also strong in platform and data – the combination on top of which companies build ecosystems of customers and partners. But that does not make up for their inadequacies in business process innovation – externalizing key skills or IP to create new services rapidly – or overall innovation strategy.

They also scored very badly in leadership where they were bottom of the class. We used metrics like “do any senior executives have a background in start-ups” to judge this capability. Having leaders who know the start-up scene at least gives you a senior level champion with experience of agility.

How can financial institutions address their innovation deficits?

The first thing is to realize that output metrics won’t help. But they are not completely useless – having a strong patenting record will help banks as patent-rich, tech companies continue to invade their space. Patenting was one of our metrics.

The second thing is perception – they must build on and promote their strengths in platform and data.

But the third thing is tougher. Innovation has changed dramatically recently. Here’s how innovation technique is proliferating:


The table shows innovation gradually evolving away from productivity and quality issues towards strategy but then towards adaptability. Here, social, computational and design skills rule. Banks do have a lot to catch up on. The good news is that these skills are not so hard to find. If the main deficit is in leadership, however, then the problem is a special one. Banks need more startup entrepreneurs at the top. But telling themselves that is a taboo.