Part 2: Most Innovation that Impacts Banks Comes from Outside Banking

My previous post suggested that much of what passes for “B2B banking innovation” is actually IT innovation applied to banking. Now let me postulate a corollary concept: the vast majority of the innovation that has changed the B2B banking industry did not come from within.

Take a closer look at what has really changed banking lately. Certainly the arrival of online banks has had a major impact, and continues to do so. But the Internet itself is an outside disruption. And while banks have explored the possibilities of the Internet, for the most part they simply used the Internet as yet another channel for the same old processes and products.

Likewise the web was conceived and developed outside the B2B banking industry, then applied within it. And the web, despite its massive influence on virtually every business, is no longer truly a disruptive force for business. We all use Amazon. We all use a Web branch of our bank. But there is still a big difference between the way banks use the web (replicating existing products and processes), and the way innovators in financial services use it to bring true innovation to the marketplace.

Today, the Internet continues to change the world and open new opportunities, and other business are finding ways to exploit those opportunities. Amazon keeps growing. eBay and Google keep extending new tentacles into new markets. Global B2C e-commerce sales will exceed $1.25 trillion by 2013,[1] and the major retailers have all made their move to online selling.

The rise of PayPal provides just one instructive example. We all know how quickly PayPal capitalized on a market opportunity and established itself as a leader in B2C payments. What amazes me is that PayPal has become a dominant player in the payments business not through its advanced technology but through innovative marketing. After all, electronic payment has been around since long before the Internet. PayPal’s innovations exploit a gap in product coverage (U.S.-wide credit transfers), and an innovative business model (using eBay’s market power to establish itself as a leading global payment provider).

Looking at the same opportunity that PayPal exploited, banks not only failed to innovate, but even failed to react appropriately to the innovations of others. There’s a chasm between the numerous reports and studies bankers have been writing, paying for, and filing on the one hand, and the actual implementation of a business strategy. Apple learned the trick: the company built an ecosystem around its products and now manages to charge a 30% transaction fee for the payments it helps to execute (and for providing a fully automated marketplace)! You think that is unfair? Well, yes, it’s a one-of-a-kind miracle, and there are millions of other stories with different endings, but it shows what innovative thinking applied to the true challenges can mean.

So, netting it out, the banking industry is undergoing radical change, but very little of the change is due to innovation from within the banking community. Innovation enters the banking industry either through outside changes, or through the innovation of non-banks and near-banks, and even the reaction of banks to such change tends to be – well, non-innovative.

What has been celebrated as innovation in banks over at least the past decade either has had no impact, or has merely served to meet the demands of customers.

[1] Source: “B2C Global e-Commerce Overview 2012,” by Interactive Media in Retail Group (IMRG).

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