Some of them, anyway.

You just won’t read that on their tombstones.

John Authers recently wrote an article in the Financial Times entitled “Disruptive technology will not kill banks” that was commented on by two people whose analysis and opinion I respect (Chris Skinner and Jeff Marsico). The subheading that read “Banking is too heavily regulated to be threatened by newcomers”

Marsico’s take in his own blog post on the topic is that bankers are doing just fine killing banks on their own. I often speak about how innovators inside (and outside of) banks need to fight through the Business Prevention Department to create new products and new ways of doing things. I also talk a lot about how banking is one of the last businesses still trying to compete through a gatekeeper model, while the world is growing increasingly open-sourced, crowd-sourced, social and collaborative.

I asked a group of participants at a recent workshop I was facilitating if they could think of any other industries with gatekeeper models that have been disrupted by new entrants. A newspaper journalist in attendance chuckled sardonically and said “Yeah, mine”.

The Business Prevention Department in newspapers must be very proud that they are now embracing fancy digital technology to make sure that no one can sneak past the gates to be exposed to their ideas, or even, you know, their ads, without first paying the price of admission. Even the newspaper’s website from my childhood home of Canton, Ohio (2010 population 73,007, down 9.7% from 2000) warns me with pop-ups that I’m nearing the end of my five free articles this month before I’ll have to pay for a subscription. I think I can live within those limits.

Banks or Banking?

But back to banking… The FT’s subheading, “Banking is too heavily regulated to be threatened by newcomers”, is far different than the headline, “Disruptive technology will not kill banks”. Chris Skinner wrote from last week’s Sibos conference in Boston that “We’re not being disrupted, just rearchitected”, and his view is that the reconfiguration of business models and structures from within are making more profound, if incremental, changes than those coming from the outside.

Fair enough, but those internal changes would not be happening at all if it were not for the disruptive external stimuli forcing that internal response.

False hope

I cannot foresee any time during the next half-century,at least, where banks fail to exist, some form of regulated intermediary between depositors, borrowers and remitters. Some day some form of digital cash or crypto-currencies might change that, but I cannot foresee any time during the existence of humankind that banking will fail to exist. Some form of value exchange will always take place, but we may not always need all of the current financial infrastructure to make that happen.

I worry that this distinction is lost on far too many bankers, and that too many of them scoff that rumors of their death have been greatly exaggerated as they read articles like that in the Financial Times’ in the walnut-paneled libraries of their local private club.

Small island in a vast sea

I spent the better part of the last five weeks on the road, meeting with bankers, entrepreneurs, investors, analysts and journalists in financial services and FinTech. From intimate Bank Innovators workshops with banks ranging from $330 million community banks to $2.2 trillion global banks, to FinTech demos at Finovate to the massive global banking conference that is Sibos, complete their own embedded rebel camp, Innotribe.

I met some new people from all over the globe, but I also saw a lot of old friends, and I remarked to several on the good news/bad news of that. The good news is how so many of us who seek and instigate change in financial services tend to know one another, and it’s a group I always enjoy being around. Many are fellow ‘recovering bankers’ who are finding it easier to change the industry from its edges. They are unfailingly smart, insightful, energetic, proactive, kind and helpful.

The bad news is that it’s a relatively small island in the vast sea of hidebound bureaucrats that are far too heavily invested in maintaining the status quo to notice the disruption happening all around them.

Unattributed cause of death

None of the thousands of cool FinTech doodads and thingamajigs that we are currently tracking are likely to single-handedly topple the entrenched mega-bank infrastructure, and as Chris Skinner puts it, ” There is no next big thing… get over it“. But these external changes are killing banks. At least some of them. It  just won’t be written on their tombstones.

Every year we continue to have fewer and fewer banks and credit unions. The number has been cut in half over the past twenty years, and it will likely take only five years to cut the number in half again. Bank M&A is heating up again, and market share in loans and deposits continue to accrue to the larger banks, and increasingly, to non-bank competitors.

No one will cite “lack of innovation” or “lack of technology” as a reason for selling their bank, but as they fail to meet consumers’ (and businesses’) rising expectations, their stagnant growth will lead to more sales to more capable hands. There are a lot of reasons why banks sell out to acquirers, but in the final analysis, the sellers’ board and shareholders vote that another management team could likely do a better job.

An increasing number of today’s consumers carry a powerful super-computer in their pocket, order merchandise seamlessly with one click and have a world of entertainment choices at the swipe of their finger. They aren’t willing to take a trip down memory lane just to complete a banking transaction that was designed in an era of paper and mainframes (if not ledger books and quill pens).

Yes, banking will survive. But will your bank?

While banks are on a quest to improve efficiency ratios, I’ve noticed a recent increase in the use of the word “innovation” in more and more bank job descriptions and even in bank job titles. I view this as both good news and bad news.

Good news because at least it seems that banks may be recognizing the need to create new products and services, and new ways of doing things. Bad news because in too many cases I fear it represents a narrow solution to a much broader issue.

The Good News

I’m a believer in innovation teams, and I applaud any efforts to empower and support a team of divergent thinkers and risk takers. I also like that many banks are looking outside the industry, seeking people who haven’t spent their careers marinating in a culture steeped in risk avoidance.

Capital One made headlines for bringing in Dan Makoski from Google to be their first Vice President of Design, and I would argue that most of the most successful financial innovations of the last decade have come from outside of banks. A fresh perspective is welcome and much needed.

In essence, many banks are effectively setting up “skunkworks projects”, special teams charged with generating new ideas. This approach has certainly produced it’s share of successes, from the idea’s original namesake at Lockheed, to IBM’s famous break from mainframes into the PC world, to Google X, Google’s research lab and self-described “factory for moonshots”. Google’s Richard DeVaul was quoted in Businessweek as saying “Google X is very consciously looking at things that Google in its right mind wouldn’t do. They built the rocket pad far away from the widget factory so if the rocket blows up, it’s hopefully not disrupting the core business.”

This approach is appealing, and appropriate, for banks. Banks seek efficiency, predictability and consistency, not to mention that predilection for measuring, quantifying and managing risk. In this post-crisis recovery cycle, banks are now especially turning their focus to improving efficiency ratios, and those charged with breaking new ground need some amount of insulation from that stultifying environment.

The Bad News

Taken alone, the skunkworks projects are likely to be slow to generate real results, and consequently, many will be shut down within a few years.

A group of smart people in a creative environment sheltered from the daily pressures of business will probably generate a lot of good ideas. But good ideas that get executed poorly, or worse– don’t get executed at all, are worthless. Not only do the designated innovators oftentimes lack the real-life context of whether their ideas solve problems that customers (and executives) care about, there is also quite often a lack of connection to others in the broader organization who could make the difference between a neat idea and business success.

A team of researchers at MIT published a study in 2011 called Creating Employee Networks that Deliver Open Innovation, and in it they describe how two kinds of employees are needed for a successful innovation initiative. The first are “Idea Scouts”. These are the kinds of people who tend to be selected to populate innovation teams, but they also exist naturally. These are the people who are always reading, attending conferences and workshops and trying new things on their own.

But to really make Idea Scouts effective, they must be complemented by “Idea Connectors”. Idea Connectors possess the organizational context to align ideas with priorities, resources and budgets. The problem is that Idea Scouts and Idea Connectors don’t show up on organization charts, so it takes some work to find the right people and create the right linkages.

Innovation Versus Efficiency

I recently joked in a talk I gave at Next Bank Asia in Singapore that it is apparently a new regulation that anyone talking about innovation in banking has to regularly cite Clayton Christensen’s 1997 book The Innovator’s Dilemma— and that I could attest to being in full compliance. The dilemma is whether you should take resources away from the things that have made you successful to invest in new, unproven ideas.

One of the underpinnings of Christensen’s work comes from one of his predecessors at Harvard, William Abernathy. Abernathy introduced the idea of the “productivity dilemma”, the notion that a company gains efficiency by improving the things that made them successful in the past; and that a company’s focus on productivity gains inhibits its ability to learn new information and to innovate. He used it to describe the challenges in the U.S. auto industry in the 1970’s, and how their focus on short-term profits undermined their long-term competitiveness.

Banks currently seeking to improve efficiency ratios need to heed these lessons. Blind pursuit of immediate and tangible productivity gains will lead to banks learning how to do all of the wrong activities very efficiently, while more nimble competitors continue to take market share with more relevant offerings. Efficiency is very important, but it should be pursued over the long-run, not the short-run.

Toyota’s contradictions exemplify the balanced approach that is needed. Recognized as both a relentless innovator and as a relentless pursuer of quality and efficiency, Toyota is uniquely characterized as “ambidextrous”. Innovating new ways to increase revenues and reduce expenses will require some amount of short-term investment one way or the other, the challenge is investing in the things that will drive long-term value.

As Jim Collins, author of Great by Choice, would put it; to thrive in this era, banks need a blend of discipline and creativity “So the discipline amplifies it instead of destroys it.”