The latest EFMA-Infosys Finacle study reveals that — thanks to their accelerated digital transformation during the pandemic — incumbent banks are showing greater innovation maturity today than they did a year ago.

Incumbent banks have been seriously disrupted by big tech and fintechs in recent years. While banks acknowledge these rivals as the innovation leaders of the future, this year’s study hints banks are trying to fight back. And they are doing it by emulating the very players they want to beat by offering frictionless experience, innovating product delivery and ramping up innovation investments.

Post-pandemic innovation

In recent editions of the annual Innovation in Retail Banking study, including this latest one, respondents repeatedly have said new entrants — big tech companies, ecommerce players and fintechs — would lead banking innovation in the future. This was not only in the context of next-generation services, such as digital delivery and payments, but even in core areas, such as lending, and checking and current accounts.

Yet this year’s findings, which factored in the full impact of the pandemic but also hopes of recovery, marked a distinct change in the way incumbent institutions perceived themselves from an innovation standpoint: a solid 49% of respondents said they were somewhat more successful at innovation during the pandemic than prior to it, while 15% claimed they were substantially so. Our estimate is that the last cohort already was well on its way to digital transformation, hence could capitalize on the sudden spurt in demand for digital products and services in the wake of the pandemic. But for the 49% group, it was more likely the forced acceleration of transformation plans, rather than any organic innovation agenda, that contributed to their success. In ordinary circumstances, these banks and credit unions would have defined a three- to five-year horizon for reimagining their distribution networks, customer journeys and business models.

Investing in digital delivery

When asked in which areas they showed greater innovation maturity, respondents voted clearly in favor of digital delivery: 15% said they were pioneers — a recognized leader in the industry — and 41% claimed they were fast followers who innovated quickly based on competitive trends. The pioneers had obviously taken a leaf out of the big tech book to make their customer experiences as frictionless (or nearly) as those of Amazon, Google, Whatsapp and the like. And the fast followers were in the process of getting there. Respondents also claimed pioneer or fast-follower status in payments and cards at 42%, lending services at 41%, and checking and current accounts at 39%, but as one can see, the figures are significantly lower than in digital delivery.

Was investment also a factor in making banks better innovators? Forty-four percent of respondents had increased innovation in digital delivery by 10% or more, and another 40% had increased investment to a lesser degree. Lending services saw the second biggest rise in investment: 26% increased by more than 10%, 36% between 0 and 10%, followed by payments at 24% and cards at 4%. It was no coincidence these were the top three areas of increasing innovation maturity; clearly, increasing investment had helped incumbent banks become innovation leaders — pioneers and fast followers — and compete with big tech and fintech in those spaces.

Consistent with the focus on digital delivery, 53% of banks predicted that product delivery by channel — basically, customer touchpoints for delivering financial offerings — would see the most innovation over the next five years. Note that this is the key area of strength of big tech and fintechs, the archrivals of incumbent institutions when it comes to innovation.

Companies like Amazon and Google, and countless fintechs, are extremely efficient in providing paperless, contactless and frictionless delivery. Products came a distant second to product delivery, with only 20% of respondents saying they would undergo the most innovation in the next five years.

When you link these findings to the areas considered most important to the business in the coming three to five years, namely, mobile channel user experience at 90% and data and advanced analytics at 86%, it is clear incumbent financial institutions are modeling their future selves not on other banks, but on big tech and fintech players.

Reimagining workplace skills

However, for a complete makeover, banks and credit unions will also need to change their approach toward workforce skills. Big tech and fintechs have always believed in keeping their workforce skills up to date by investing in continuous training and hiring the best talent, wherever it is to be found in the world.

But many incumbent institutions are missing out. The absence of a multinational presence prevents them from leveraging a talented, diverse, distributed workforce. Banks need to address this issue because as they go further in their digital transformation journeys, they will also need to transform their workforces, workplaces and work cultures for cloud computing, co-working with intelligent machines, and being data-driven in everything they do. To compete effectively against big tech and fintech, banks will need to match skill for skill, which calls for reimagining and upgrading their existing capabilities.

Incumbent banks are also lagging in adopting open banking models. The most successful big tech companies in the world, such as Alphabet, Microsoft, Apple, Amazon and Meta, are all platform businesses, as are most fintechs. But barring the odd success — think DBS Bank — the banking industry has a long way to go in leveraging the benefits of networks, platforms and ecosystems. Banks must give importance to technologies such as application programming interfaces (APIs), internet of things (IoT), and blockchain in order to succeed in the open economy.

Fight for the future

When asked who would lead innovation in the future in different product segments, incumbents said they themselves would, but only in deposits and wealth management. Otherwise, it was the competition all the way — lending services and digital delivery like fintech startups; payments and cards (big tech); checking and current accounts, and small business services such as challenger banks. While this is a cause for concern, the innovation maturity developed after the pandemic is enabling incumbents to fight back strongly.

Rajashekara Maiya is vice president and global head for business consulting at Infosys Finacle and serves on the expert panel of the McKinsey Quarterly, a member of the XBRL Abstract Modelling Task Force (AMTF) Group.