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BANK INNOVATION Stumbling blocks to innovating alone
Deutsche Bank’s Matthaeus Sielecki shines a spotlight on why it is difficult for banks and disruptors to innovate in a digital age, and why they need to stop regarding one another as rivals
Author Matthaeus Sielecki, Head of Working Capital Advisory – Financial Technology, Deutsche Bank
ince the turn of the millennium, banks have been feeling a cold wind of change sweep through what was once a reasonably-comfortable business environment. Technological innovation and nimble new players have challenged the incumbents’ traditional ease. But these were just the first ripples of a tidal wave of structural digital change to come and for all players to address this challenge, banks and FinTechs must join forces.
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The most significant factor blocking innovation in banks is regulation, as it saps monetary and internal resources for innovation; for example, via the funds and effort needed to meet a continuous stream of obligatory compliance updates, be it for reporting, anti- money laundering, anti-fraud or know-your-customer requirements. In addition, new capital adequacy requirements and the lower margins and increasing costs of doing business in a post-crisis financial landscape all add to this pressure. The result is less – of everything – to spend on innovation.
However, regulation is not the sole hindrance. Other major inhibitory factors are cultural – banks’ institutional mindsets – and infrastructural. Banks are inherently cautious; understandably so, as their primary role is to safeguard customer money, but low appetite for
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risk makes innovation a struggle where a fail-friendly culture is crucial. Alongside this, banks continue to have long product development and time-to-market cycles, whereas software companies exhibit a leaner, start-up “design thinking” approach.
Additionally, many banks are still encumbered by legacy infrastructures with siloed functions, making it hard to break down barriers and think “out of the box”. They are faced by the classic ‘innovator’s dilemma’; torn between competing by investing to meet customer’s current needs (the safer ROI) and the ‘disruptive’ technology that will meet their future needs. Add to this that some banks simply lag behind in the general skills and language of the internet age, and it becomes clear that most banks could do with a little help on innovation.
On the other hand, the industry disruptors – whether FinTech startups or established “digital ecosystems” like Amazon and Facebook – also have their work cut out if they wish to succeed in what was traditionally bank territory. If banks’ greatest burden is regulation, it is an equally heavy burden for new entrants who lack the relevant expertise and infrastructure to navigate the complex strictures of financial services, turning banks’ knowledge in this area into an asset for FinTechs that choose to leverage it through a partnership.
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