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Volcker Was Wrong. Banks Have Innovated Beyond The ATM

By Bruce Upbin

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Full article from Forbes — Three years ago Paul Volcker insulted the entire banking industry with his remark: “the biggest innovation in the banking industry over the past 20 years had been the cash machine.” Tall Paul’s retort resonated with a nation’s enmity toward banks in the wake of the credit collapse.

The former Fed chairman was wrong. The financial industry has the worst customer service scores but let’s give it a hand for giving us instant, global, mobile access to our money, stocks and bonds. The first time you deposit a check via smartphone, there’s something magical about that. A golf course and ski resort can buy rainfall and snow insurance to hedge against bad-weather losses. Visa’s network only takes milliseconds to run its suite of fraud detection analysis against a card swipe. High-frequency trading, ETFs of everything you can think of, roving insurance adjusters paying out claims at disaster sites. Buried in there somewhere is real progress in increasing value and lowering the cost of doing business.

A month ago Forbes and Cognizant Technology hosted a discussion on the state of innovation in financial services. (See complete video of the conversation below.) Volcker is right in that evidence of R&D spending by banks is hard to find. The SEC doesn’t ask banks to break it out. It has Campbell’s Soup reporting dollars spent on new minestrone ideas:

Campbell's Soup 2012 Annual Report

… but the money Citigroup spent to develop a mobile app that lets commercial customers pay vendors by phone? It disappears into thin air (see below). Bank of America’s 2011 annual report reports nothing about R&D among its non-interest expenses (see p.27). This lack of data is the reason we exclude financial services firms from Forbes’ list of the World’s Most Innovative Companies. So where is the innovation?


My co-host in the discussion about financial innovation was Prasad Chintamaneni, the head of global markets, banking and financial services at Cognizant. We were joined by Raj Dhinsa, a managing principal at Verizon’s financial services practice, Marti Subrahmanyam, the Charles E. Merrill professor of finance at Stern School of Business at New York University and Steven Liles, a senior vice president of enterprise automation and innovation at BB&T Corp. in Winston-Salem, N.C.

In a free-wheeling conversation we talked about IT automation, data and analytics, mobile and online banking, the breakthrough ideas in emerging markets and how to bust cultural barriers to making big moves forward. With so many new players barging into the space (Wal-Mart, Google, Amazon, Apple, Square) this is a time of big disruption in the industry. “The whole definition of financial services is changing,” says Chintamaneni.

Dhinsa speaks with a lot of big banks and he gives the industry a B in innovation overall, saying that most of the visible changes are on the commercial and investment side, but they’re fragmented and spread around among the bigger banks. There is no single, big example like Apple with its iPhone to inspire people.

Prof. Subrahmanyam took issue with the Volcker remark, calling it a sound bite that doesn’t hold up under scrutiny, especially when at a global view. He’s seen countries such as Bangladesh and Kenya transformed by financial innovations such as Grameen Bank and M-Pesa. Derivatives may get a bad rap but sophisticated tools for hedging are the lifeblood of companies. “You cannot run any company of any reasonable size without access to hedging instruments, whether it’s interest rate risk or foreign exchange risk or some other kind of commodities,” he says. “This is one of the most innovative industries.”

The one banker on the panel was Steven Liles, a senior vice president of enterprise automation and innovation at BB&T Bank in Raleigh-Durham, N.C. He agrees that a lot of innovation is invisible stuff like making back-office tasks more efficient with automation and less paperwork. BB&T has streamlined its retail lending, brokerage and dispute management processes and made customer onboarding faster. Mobile is a big push, too. Loan administrators that inspect construction sites before releasing new funds now carry iPads to take pictures and ‘check-in’ to a location with GPS. Liles joked that this avoids the risk of agents holing up in a motel room instead. “Simple things like that are turbocharging the way the bank is run,” he says. He admits, though, that banks have ceded some of the more visible innovations like mobile payment and mobile wallets to players such as Square, Google and Stripe.

Bureaucracy is what often stymies innovation inside banks. Liles got frustrated enough dealing with silos that he took the “radical” step of campaigning to unite under his umbrella a seemingly odd group of IT functions such as mobile app development, service-oriented architectures, business process management, and public-facing Web apps. This assured that any new online banking and mobile apps BB&T developed could reach into the bank’s core systems and provide meaningful services directly to employees. An Ipad app for treasury salespeople allows them to look up, verify, and choose the right customer account that’s getting ACH or wire-to features, and go through all the set-up steps such as rendering the contracts with an e-signature via the tablet. The contract then gets entered into the bank’s content management system, all in one visit.

Banks have a big opportunity, says Chintamaneni, in using technology to get a holistic view of customers. It’s time to use technology once and for all to end the need to make customers re-enter all their personal and financial information in applying for a new product such as a loan or line of credit at a bank that already has their checking or savings account. Banks need to create a single on-boarding process and think less about transactions and more about seeing the overall relationship.

Overall, the experts were optimistic. Chintamaneni says finding new sources of revenue is great but finding relevance in a rapidly changing marketplace is even better. Banks need to decide which businesses are core and invest in those. Verizon’s Dhinsa says banks have to look to the cloud for more shared processing and computer services to push out fixed costs, while keeping their eyes open to the security risks. Prof. Subrahmanyam warned that if banks can’t hang on to their best talent they’ll never be good at innovation. There is too much coming and going among young people. BB&T’s Liles finished by reminding the audience that doing mobile right means tying the apps back to the main systems banks already run. If it’s an afterthought app, it won’t be successful. Enjoy the full video.