Change is Good: The Future of Innovation in Capital Markets

Innovation used to be something that just happened in financial services. Now it’s a corporate department, a job title, a reason for conferences.

Banks and financial institutions are certainly investing heavily in innovation. In a competitive marketplace, incumbents have been forced to get creative in their approach to sourcing innovation. This has led to a glut of incubators (FFWD), accelerators (Accenture Fintech Innovation Lab), venture capital arms (Santander Innoventures), industry venture funds (Illuminate Financial), JVs (Blackrock + Youvestor) and speculation regarding an imminent wave of acquisitions.

Accelerators in particular are set to play an important role in attracting talent, ideas and investment long into the future. Barclays have been at the forefront of this movement, and their long standing partnership with Techstars serves as a blueprint for other forward-thinking financial institutions.

Indeed, just this week Barclays opened the “biggest fintech centre in Europe’, locating in-house banking and technology teams alongside more than 40 fintech startups as part of its Rise programme, already present in New York, Mumbai, Cape Town, Manchester, Tel Aviv and Vilnius.

This is just one indication of a wider trend towards identifying opportunities and   building intellectual property with the help of bright young things from all over the world. At the same time, in-house teams benefit from exposure to idea generation, experimentation and problem solving. Tedious morning meetings and conference calls are out. Workshops, hackathons, demo days and networking events are in.

Away from startup buzzwords and fußball tables, this trend towards meaningful investment in innovation will transform financial services. And yet, incumbents face significant challenges in the race to reimagine and reform their offerings.

For large institutions to succeed in improving the way financial services are offered to customers – and boost shareholder value – they must resist the temptation to replicate what others are doing and adopt an open mind when assessing ideas and technologies brought forward by external innovators.

To do this, they must do two things.

Firstly, banks, issuers and regulators need to reduce the price of failure by allowing teams to generate ideas and test them in a spirit of genuine experimentation and adventure. Championing innovation means accepting failure – the two cultures are symbiotic.

Secondly, the industry needs to increase the rewards for success, both on an individual level and at the institutional level, too. In our world there is an understandable focus on P&L, but this can limit long-term thinking and investment in transformative ideas. If bankers had performance assessed according to their strategic acumen in addition to their personal numbers, we’d see more innovation.

These observations are not limited to the financial sector. The wider corporate world needs to become more open minded and experimental and less short-termist in its approach to business.

If this change in mind-set and corporate strategy comes from the very top of the organisation, it will filter down to departments, teams and individuals at the grass-roots level. That’s why it’s so encouraging to hear Jes Staley, CEO of Barclays, talking about experimentation.

In many ways, we’ve been here before.

From the Big Bang up to the global financial crisis of 2007/8, investment banks were incredibly innovative. In fact, they might have been too innovative. The culture of experimentation overwhelmed management and regulators and led to a global crisis that saw household names go up in smoke.

The fall of Lehman and others began a retrenchment, a violent retreat from innovation towards compliance, risk management and regulatory scrutiny. These things are all important, but they must exist in balance with competition, innovation and adaptation.

In the years since 2008, the industry has slowly rebuilt its reputation, treading carefully in a political and economic climate in which mistakes are seized upon by the popular press, regulators, and even the police.

At this point, regulators need to step up. It’s not enough to be nominally supportive of startups with industry consultations and sandboxes. Financial authorities all over Europe need to provide comfort that if incumbents try things that don’t work, they won’t be punished with hefty fines, prison time and the moral indignation of policy makers. These risks loom large over the fintech industry, stifling innovation that leads to the development of new technologies and the mass adoption that follows.

After all, adoption is what matters. The financial services industry exists to provide a service to customers. And if people aren’t using the products and services being built for them, all this talk of innovation will be for nothing.