The COVID-19 crisis represents an inflection point for the future of retail banking. To win, leaders must first reframe the role of innovation in their firms, and then double-down on opportune bets.
The global humanitarian crisis of COVID-19 is creating existential challenges for leaders in banking, especially those with the executive authority and responsibility to steer their business out of imminent trouble and into an uncertain future. This moment puts unprecedented pressure on diverse aspects of leadership, from discipline and courage, to empathy and ethics, to prescience and sense-making amidst an increasingly chaotic landscape. Wary of adding more noise to the cacophony of “externals” offering up unsolicited advice, we’ll focus here on a single question: how should visionary leaders — especially those on the retail side of large, incumbent firms — be thinking about innovation at a time like this?
The need to revisit and reprioritize initiatives in light of the crisis is real, and in many cases, the hard choices banks need to make will be cutting staff and abandoning ambitions for innovation. However, while the latter may be necessary, the former cannot be overlooked. Effective decision-making and prioritisation for the future will require three key shifts in how leaders view the role of innovation in their firms: 1) Regrounding innovation priorities in a shared and internalised sense of purpose and commitment to serving the needs of society, 2) Treating the maintenance of innovation as a practice, urgent in its own right, especially in uncertain times, and 3) Finding ways to pilot — even amidst the “non-representative” circumstances created by COVID-19.
The Role of Purpose
Faced with these challenges, a clear sense of purpose is crucial to put priorities in perspective. Leaders should revisit statements of purpose that were guiding change agendas planned pre-pandemic, as well as the agendas themselves and underpinning strategies. And for those who find their firm’s principles or transformation strategies to be lacking in ambition or clarity in the present context, now is the time to strengthen them.
To illustrate the power of purpose-led innovation as a means of adaptive survival, we find an unlikely source of inspiration in the UK government. A decade ago, the UK’s digital transformation had lost its way, plagued by a string of embarrassing debacles that brought progress to a halt. Today, in the midst of the ultimate test of resilience, the situation is very different. Unlike most corporate turnaround stories, the UK government’s successful digital transformation can be traced back to a single, external impetus: a baroness and public servant named Martha Lane-Fox.
From 2009 to 2013, Baroness Martha Lane-Fox, founder of online travel retailer Last Minute, served as Digital Champion for the UK — an official appointment made by all EU Member States to promote inclusive digital technology. During this time, she was asked to oversee a strategic review of Directgov, then the British Government’s single point of access for public sector services. Her 11-page report makes a case for the integration of siloed services and governance, calling for such changes as the appointment of a “new CEO for Digital in the Cabinet Office with absolute authority over the user experience across all government online services (websites and APls) and the power to direct all government online spending.” Her case is grounded in a simple, but profound assertion of the purpose of digital services in society:
“There has been a reinvention of the internet and the behaviour of users in the last few years. Digital services are now more agile, open and cheaper. To take advantage of these changes, government needs to move to a ‘service culture’, putting the needs of citizens ahead of those of departments.”
Her recommendations were accepted in full, catalysing what would become GOV.UK — one of the most ambitious digital transformation efforts in history and a model for government transformation to “digital by default.”
A decade later, the UK government’s digital services and infrastructure — the NHS in particular — are being put to the ultimate test by COVID-19. While the fight is far from over, the work of the past decade to transform the government’s approach to service is paying off especially as it has enabled rapid response and iteration, even as new information and needs arise from the crisis. Factors that have contributed to this transformation include: a catalysing event (or series of events), a champion, a purpose to drive change, a vision for the required change, and the latitude and license for an empowered and capable team to realise the changes required.
In some important ways, the COVID-19 crisis has revealed remarkable preparedness on the part of the banking industry. Recency bias has inspired favorable comparison to the 2007/2008 crisis, as well as the frequently echoed conclusion and collective awareness of a few key differences: at least the origin of this problem was not the banking industry itself, at least banks are much better capitalised and with more liquidity than they were a decade ago, and at least there is a theoretical role for banking leaders — within their firms and within society as a whole — to be a part of the solution. Financial firms are taking as much of a hit as any other sector but there is an ethical and strategic high ground to be held.
What some in the banking industry have failed to achieve in the same time period as the UK government’s transformation is even the faintest semblance of a guiding purpose. Without such a clear purpose or moonshot ambition as “digital by default,” tentative banks will almost certainly squander this rare window of opportunity to lead.
A guiding purpose is only meaningful in context, and insofar as it provides a relevant role to play in a changing world. To this end, COVID-19 is undeniably changing the world of banking, primarily by massively accelerating secular trends that were present pre-crisis ranging from consumer digital behaviours, preferences, and expectations, to the funding environment for fintech, to geopolitical and regulatory developments that impact domestic and global flows of capital.
The Acceleration of Macrotrends: Threat or Opportunity?
“What typically happens after you get a crisis like this is people talk about new eras and how the post-pandemic world will be different,” said Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management. “This time I think the trends that were already in motion before this pandemic will be accelerated.”
To illustrate the butterfly effect of COVID-19, consider how behaviour change plays out across a complex and interconnected financial landscape: restricted mobility and branch closures has made accessing banking services via digital channels the only option for most, while fear of contagion has driven the use of contactless payment. Good news for digital transformation, right?
However, gains resulting from these shifts are unevenly distributed, privileging firms with recurring, long-term revenue models over those with transaction-based models. Meanwhile, private investment in fintech has fallen off a cliff, with as much as $76 billion wiped off the market. For incumbent firms, this will likely translate to a culled but strengthened set of challengers to contend with post-crisis. As of January, PE and VC firms had a record $1.5 trillion of cash (or “dry powder”), which will likely flow toward the growth survivors: Monzo, for example, might have more room to maneuver if Starling and Revolut are absent from a post-COVID-19 landscape.
But firms like Monzo were already in the midst of figuring out their fate in a post-Brexit world. What will be the fate of firms like Monzo now, with the confluence of two crises that test its core value proposition? Even before the COVID-19 crisis, German-based N26 quit the UK in February, citing Brexit. What happens once COVID-19 settles remains to be seen: Will post-crisis banks have a more important role to play in enabling cross-border banking? Or will the exact opposite be true — that most banks will operate within domestic borders, serving the needs of customers increasingly inclined to stay close to home?
In turbulent times, it is especially important for firms to cultivate innovation as a practice in order to adapt quickly to new needs and competitive developments. The 2007/2008 global financial crisis created a confluence of circumstances that catalysed the growth of the new fintech sector, catching many traditional financial firms off guard. It wasn’t until 2015 that Jamie Dimon expressed his concern in his annual letter to JP Morgan shareholders: “Silicon Valley is coming: There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking […] They are very good at reducing the “pain points” in that they can make loans in minutes, which might take banks weeks.” By this time, global investment in fintech has accelerated from $930 million in 2008 to over $12 billion by the beginning of 2015, and many of the technologies that would come to define the era — automated investing, mobile payment, P2P transfer, crowdfunding, cryptocurrency, to name a few — had grown from too small to care to too big to ignore.
By the time COVID-19 hit, FinTechs were putting immense pressure on legacy institutions, driving advantage in price and consumer experience. However, COVID-19 has challenged FinTech’s ability to seamlessly operate in this new landscape. For example, Robinhood, a popular trading app, crashed on two of the most volatile trading days during the crisis. This lack of reliability has created speculation that traditional banking institutions could become preferred during these uncertain times, gaining new credibility and relevance for the future.
Innovation as Disruption Insurance
Amidst these cataclysmic changes and with the future more uncertain than ever, the attendant work and challenges of innovation and transformation — of anticipating and envisioning new models, of enabling teams to work in more agile ways, and of executing new services to serve existing and new customers — all take on more relevance and urgency, not less.
And yet, barriers to innovation are mounting. Teams built to work quickly and iteratively are feeling the impact of work-from-home requirements. In conversations with a source at a large global investment bank, it was clear that speed of process was suffering the most with COVID-19. Low adoption of tools that enable video conferencing, screen sharing or collaboration have made it uniquely hard to voice opinions or iterate on ideas.
As banking institutions assume the role of primary conduit for government stimulus packages to business borrowers, depleted bandwidth will be dedicated to troubleshooting and alleviating customer pressures. In the category of small business lending alone, there will be new demands on the teams responsible for products, services, and business models, as well as those responsible for marketing and repositioning them, creating and testing guidelines to account for new requirements of flexibility and leniency, and so on. The backlog will extend, the throughput will diminish, and as a result, the collective focus will shift from the next horizon to the immediate here and now.
In many cases, firms will have to combat defensive retrenchment: not only cost cutting and downsizing staff but also redeployment of human and capital resources. A source at a major global financial firm described how her team was recently deployed from a net new, growth-oriented digital transformation project to an urgent initiative to streamline the collections process, in anticipation of increasing defaults.
The hard reality is that the vast majority of innovation leaders will be challenged to do more with less: more competing priorities, stalled progress, fewer resources. Heads of innovation in the banking sector are recommending leaders “do something with nothing” during this crisis.
In order to justify the cost of innovation teams in thin times, firms will need to rethink the value of innovation as a defensive hedge against disruption. As a practice, innovation helps make firms more flexible and resilient in the face of black swan events like COVID-19. Moreover, a piloting capability will help firms determine what increases efficiency in non-obvious ways. For example, an agile innovation team might help design a pilot to test more cost-effective ways of distributing the government stimulus, using fewer resources by developing human-centric digital solutions that are easy for users to navigate, freeing up resources that can then be re-dedicated to improving competitive advantage.
In order to position themselves to take advantage of opportunities to meet unmet customer needs that may emerge in the wake of COVID-19 — whether due to net new needs or competitor attrition — firms must maintain their ability to identify opportunities and move quickly to pilot new products and services.
Actionable Recommendations
Start with Purpose. Unlike the 2007/2008 financial crisis, the financial crisis precipitated by COVID-19 presents a clear opportunity for financial firms to be authors of a solution and in doing so, realise a clear and valued role in society. Just as it did for the NHS, a unifying purpose will drive the transformation of banking as an urgent matter of public good.
Foster Innovation as a Practice. With resources strained on competing priorities, think critically about what you can achieve with even a small team focused on innovation efforts. Accelerate a few especially promising initiatives, especially any that stand to benefit from trends of the present moment such as increased reliance on digital channels. Create a runway for your team. Listen and swiftly respond to the hurdles your teams are facing in the new normal of remote work. Lean on each other. All leaders will be facing tough decisions during this time. Collaborate with each other rather than view peers as competitors. Join forces around a shared purpose to optimize the few available resources focused on growth. A focus on speed to pilot versus speed to market will set the course for future traction. A minor investment in headcount translates to hard costs, as well: drastic austerity is not the answer — now is the time to invest in growth.
An experimental mindset should not be the limited purview of a firm’s digital innovation lab or any single department. From human resource employees, to customer service representatives, to backend developers, everyone should be empowered and equipped to diagnose new issues that have emerged as a result of COVID-19 and to run their own experiments to find viable solutions, with the primary requirement being a definitive answer to the question, “If we run this experiment and it fails, will we be better off for having learned something?”
Keep Piloting. To correct for stress-induced myopia, leaders in banking must act quickly to implement purpose-driven strategies to inspire innovation and bias their organisations toward continued and accelerated experimentation. The key to success will be providing decision-makers with the tools they need to de-risk innovation, as well as the incentive and license to do so. It may not be necessary to bring net new ideas to the table but rather spec’ing, unblocking, and prioritising the most promising already on an innovation roadmap. By staying the course on innovation, banks can actually gain an advantage on their competitors, who by and large will be pulling back from these efforts.
Under pressure, urgency will trump importance. Banking leaders must maintain perspective amidst this necessary recalibration of resources. As the organisational body enters self-preservation mode, leaders — strapped for resources, encumbered by remote working realities, facing increased scrutiny to deliver immediate results — will need to remain diligent when balancing priorities against transformative purpose. By staying the course and giving their organisations the purpose, motivation, and tools to do the same, they can emerge from the crisis in a better position than they entered it.
Originally published at Fintech Magazine.
Authors: Peter Pawlick, Director, Business Transformation, R/GA EMEA, leads a diverse team of problem solvers to help companies grow by enabling them to change. In his 15 years in the innovation space and 8 years at R/GA, he’s helped build new businesses, brands, customer experiences, and capabilities for a wide range of clients in financial services.
Christy Randall, Director, Business Transformation. With 10 years of focus in decision sciences, Christy brings deep expertise in utilizing data-driven methods to transform business models and solve strategic and operational challenges. Christy has led Corporate Strategy teams at prominent financial institutions, focusing on short and long-term strategic and financial planning, in addition to operationalizing strategic bets, including implementing complex transformation initiatives.
Business Transformation is R/GA’s consulting practice, designed to help the C-suite innovate. We answer clients’ most pressing innovation challenges by creating transformation imperatives which fuse human-centered problem solving with business rigor to identify new opportunities and bring them to market — fast.
For more information, please contact David Toma, Executive Director EMEA, Business Transformation, R/GA.
Vision & Analysis Article
We hone in on specific sector problems, identifying the key themes and business imperatives shaping companies — and track the ways in which the fluctuating global economy feeds through to that community. With commentary from our subject matter experts, we surface high impact ideas and human-centered innovations that can lead to network effects for the industry-at-large.
