One of the themes we write about in Daily Fintech is that innovation can come from anywhere – from a startup or a bank or a firm coming into Fintech from another market.

We cover the innovation coming from Fintech startups. We also write about the theory of how banks can innovate in Fintech. We now move to the next level by investigating how banks are innovating in practice, to find out what is working or not working.

To kick this off, I interviewed Haydn Shaughnessy, co-founder of the consultancy The Disruption House, whose new book Shift, A User’s Guide to the New Economy is a look at systemic innovation. Haydn has also authored the Swift White Paper on key innovation capabilities for banks.

Q. Please give me some examples of digital transformation in banks.

“In wholesale you see banks like BNY Mellon that really get it.  They talk the right language.  But they are limited in what they can do if their client banks don’t change.

In retail Barclays have been smart with Pingit, because you can see a lot of service opportunities growing from that.

But in general the system threatening innovation is coming from outside the industry, from China tech companies, which have quite different balance sheet constraints, and as ever the open source community.”

Q. What is the biggest conceptual level mistake that banks are making?

“Banks don’t understand system innovation. They think in terms of product. Compare this to what the Chinese technology platforms are doing.  I think western banks will be swamped by system level innovation soon and FinTech investments won’t provide an answer to that. The change is not just about digital and the start ups we see right now are just not scaling fast enough. The change is about new skills, new processes, new services and new business models. Digital is the wrong war cry and the start-up is not a big enough axe.”

Q. What are the Biggest challenges facing chief innovation officers.

“Most know very little about innovation.  They don’t have a background in it. They don’t necessarily have the personal skills for it.  And in most organisations, chief innovation officers are disempowered, first by a hierarchy that doesn’t resource them and by colleagues who do not want innovation.  These are problems everywhere not just in banks.  There is a large body of documented experience in how to deal with those issues.  The questions for banks is do their chief innovation officers want to learn and do they have time? In most cases that I’ve studied you only really get system level success when the CEO takes personal responsibility. Still, the lessons are out there to be learned.”

Haydn went on with some thoughts aligned to what we have been writing about – how banks should learn from how technology companies handle disruptive change and how this needs to be led from the top:

“Banks need to think outside the banking paradigm, and they need to think on a new scale. That requires CEOs with vision and execution minded transformation people. Digital is a small part of that – in investment terms not even 10% of it.  Ask Uber.

Most chief innovation officers are marginalized.  I’ve noticed in banking they’ve opted to manage funds rather than do innovation.  That’s a smart career move but it isn’t very helpful to the bank.”