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Innovation vs. Risk & Compliance in Financial Services

Innovation and investment in FinTech is seemingly all around us in financial services. Hundreds of articles in the press, and dozens of financial services conferences on digital currencies, automated investment advice, investment in innovation labs by banks, the future Internet of Things and more, lead us to believe that innovation is thriving in banking and financial services. But is it really?
I recently attended a digital innovation conference with over 300 leaders from throughout the North American financial services marketplace. Large banks, small banks, insurance companies, and brokerages were all well represented. Typical titles included "Head of Digital", "SVP Digital Commerce", "VP of Digital Engagement" and similar titles. In fact, of the 300 people attending, nearly 50 had the word "digital" in their title, and nearly 20 had the word "mobile".

With such an audience I expected to hear cutting edge examples of digital transformation and innovation in financial services. Unfortunately, I found myself very disappointed in what I heard.

In many panel sessions, and in the roundtables in which I took part, the burning question was "what are the latest innovations that you company is working on?" But rather than talk about the latest innovation, many people told tales of the battles with their risk, compliance, and legal teams. "We want to innovate, but are hamstrung by legal and compliance."

Why is innovation so hard in financial services?

Before joining Akamai I worked in an innovation and research center at one of the large financials. I experienced first hand the thrill of introducing innovative ideas into the firm, and the agony of dealing with risk, compliance, legal, and the most challenging of all - infosec. As I would tell my peers: "Innovation is easy. There are hundreds of ideas all around us. Just trying getting one of them into production."

For those of you in this type of situation you know the drill. Sitting around a conference table with 10-15 colleagues from risk, compliance, and other groups, you pitch your innovation. You review the business case, provide the competitive landscape, and show the results of your proof-of-concept. Then your colleagues have their chance to respond, formally, in front of the organization. Many of course, know all about your project and have met privately with others at the table.

And then it happens. All it takes is one person at that table to object, and the innovation is killed. There is no debate, little discussion, and no way forward. How can there be? After all, when you legal says "no", no one from another group can debate that. If infosec say "no", IT can't override that decision.

This is why innovation is so hard in financial services. The lowest common denominator effect kills innovation. And the above scenario is not limited to financial services - internal barriers to innovation exist everywhere.

How to break through the barriers to innovation 

Let's go through some ideas:

1) Get executive sponsorship. Not just anyone, but someone with the stature in the organization which allows you to proceed. Even with all the internal roadblocks, it is in many cases possible to find a business executive to support your idea. Execs are under increasing pressure to innovate, and understand that internal competition can be healthy if handled correctly.

2) Build it. Build a proof of concept as close to the actual production implementation as possible. Impose upon the vendor you are dealing with help build it. For those who object, take the following tact: "Even if we all agree that this will never be allowed into production, we must built it and learn about this innovative technology to incorporate what we can in to our products or services."

3) Bust myths. Build it with the aim of busting the myths, the misinformation, and the false conclusions that you will face when sitting around that decision table.

4) Wait for an event. Most innovation does not occur on it's own. It's event driven. I'm sorry to say, but even with all your hard work it will likely take an outside force to move your innovation forward. Here are some examples that I personally experienced:
  • Market conditions: At the peak of the financial crisis in October of 2008, financial services web site experienced record numbers of visitors to their web sites. This broke the capacity models for brokerages and financial institutions throughout the industry and forced innovation.
  • Executive reaction: A top executive sees that your competitor just released a new iPhone app. After months of trying to convince your company to build one, suddenly it all hands on deck to get something out the door.
  • A security incident: Since your company has never experienced a DDoS attack or breach of any type, you believe that you are not a target and do not invest in security technology. Suddenly you are attacked and your site is offline for hours. You now have a PR nightmare, and perhaps some nasty meetings ahead with your regulators. Now it's an emergency to invest it new security products.
5) Buy it. Since it's too hard to build it, wait for a FinTech company to build it and then buy that firm. This is now becoming common in the financial services industry. Examples include BBVA's acquisition of Simple and Spring Studio, Fidelity Investments buying Emoney Advisor, and Capital One's purchase of Level Money
And lastly:

6) Leave. Your initial curiosity about an innovation has blossomed into a full-grown obsession, and that obsession now develops into a passion. You have become somewhat of an expert, and you can't believe that your company is going to pass on it. Maybe it's now time to leave and either strike out on your own, or jump to the vendor and put your talents to work. FinTech is hotter than ever in the industry, and there may be no better time.

Whatever your situation, I encourage you to keep at it. Feel free to reach out an connect with me for a conversation.