What kind of innovation do you do at your bank?

That was the very straight-forward, but not very easy to answer question posed yesterday by James Gardner on his Bankervision blog. He is right to ask the question.

As James pointed out, big, sweeping innovation is not the order of the day in banking:

Considering the news of the hour, the fact of the matter is that even successful programmes have to deliver more with way, way less if they want to keep breathing. I know that my own team and I have been cutting back as much as possible to ensure we have enough runway to get through the current situation.

He is not alone. The cutbacks to “back-to-basics banking” have been pervasive, not just in the U.S., but globally. So much for all the progress made over the last 15 years.

Instead, of long-term transformational innovation, James suggests innovation in smaller bites. Here’s how he describes it:

The third kind of innovation strategy that’s possible [is] play not to lose. Play not to lose accepts that maintaining parity with competitors is the primary reason to have an innovation function. You may not get the market windfalls that accompany a big breakthrough in the future, but you do get some kind of return in the short term. The innovators doing this strategy have the ability to balance their costs right now with returns right now.

Essentially, he is right, with one caveat: innovation efforts, in particular, should never be pigeon-holed. After all, some broad innovative gestures — what James calls “Play to Win” innovation — have turned into duds, while the most modest of changes to a bank’s functions have yielded dramatic, long-term benefits. Along these lines, I thought this was the most penetrating of the comments to James’s post; it is by Taylor Davidson, who blogs at UnstructuredVentures.com:

Whether you’re driving incremental or breakthrough change, they are both innovation. Honestly if it’s delivering value (short-term financial, long-term strategic positioning, etc.) it doesn’t matter what it’s called.

The bigger problem is when we mislabel our efforts to try to position incremental innovation as breakthrough “Play to Win” innovation; the two types of innovation (although I admit it’s more of a continuum) require different operational, financial and strategic commitments. We’ve got to be honest about what bets we’re making and how we’re playing them, or we run the risk of tremendous intra-organizational resource misallocation.

What bets should we, in fact, make? This is perhaps the most complex of all questions today. We are in an era, at least here in the U.S., where the regulators control much more than just the stamp of solvency of a bank. They are now in the position to determine compensatory worth, operational risk, and credit policy. All this means, we can debate the merits of this innovative strategy or that innovative idea, but the regulators are controlling not just innovation, but banking — full stop. You want to innovate? Sadly, check with your regulator first.

MORE IDEAS

* Click here for an article on innovation written by Goldman Sachs’s head of innovation.
* Click here for the Wikipedia on Absorptive Capacity, which essentially argues for more innovation research, not less, by corporations.