Management of banks has traditionally based most investment decisions for innovations on business cases that were presented to them by business, innovation or IT departments. Most business cases have had the same structure for decades already. The challenge with these traditional structures is the lack of relevant dimensions. This may result in suboptimal decision making and a lack of innovation.
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How it has always been: the main methodology
Most business cases have always been structured around the following templates categories:
Problem definition
- Alternative solutions with quantified benefits (e.g, more products sold and/or new clients)
- Preferred solution
- Implementation plan
- Investment appraisal
- Risk assessment
Next to these drivers, the writers of such business cases normally have to provide a market analysis with different scenarios or options and highlight the dominant characteristic:
- Revenue generating or cost saving?
- Operational or strategic?
- Quantity (e.g. revenues) or quantity (value for clients)?
- Buy or build?
The consequences of everybody doing the same
Banks have always been a rather conservative sector and maybe for the good as they should protect our money and lend wisely. The challenge of having ambitious front office staff identifying opportunities when talking to their clients and subsequently being confronted with a difficult mission of convincing MT members using a mathematical approach of why they should invest in such ideas has led to a certain passivism on the online client side. In order to get a business case on the MT agenda it usually requires upfront support or even sign off from many departments like Finance, Risk & Compliance, IT, a Project Office etc. These departments will often ask for some iterations in order to make them feel more comfortable. Most of the time, the plan has turned rather grey by then already and people may have become less motivated. Quite often internal politics start to prevail towards the approval stages. At some point the client – with which it all began – is getting further away in the approval process.
Management usually challenges such proposals in the MT on the basis of net present value calculations, the associated risks and the implementation impact. Plans with a negative net present value rarely stand a chance. Managers at banks have to be and tend to be rather risk averse. The combination of a lack of incentives to initiate new business proposals, the subsequent difficult approval processes and long time-to-market processes have compromised innovation at banks. The system has created a high level of inertia whereas the markets nowadays require more speed attractive propositions. Banks need to stand out as more competitors have entered their market.
If Elon Musk would have tried to convince himself with a full fledged business case for going to the moon he would probably not have started. Big innovative ideas usually only flourish in either small and/or innovation oriented environments that thrive on vision, quick decision making, experimenting, failing and recovering. That might be the reason for banks to increasingly partner with fintechs in order to remain relevant for their clients.
How to innovate more and better as a bank?
At TreasurUp we have spoken to >100 banks around the world and frequently discussed the internal business approval processes.
There are a couple of things that we would like to share which might contribute to banks becoming more innovative:
- Experiment more. Don’t make projects of everything. Allocate a much smaller budget and fewer people and run frequent experiments. Try to make prototypes in order to show to clients and relevant staff for detailed feedback.
- Don’t lose sight of the client. Any proposal, whether it would be a business case or experiment approval form should clearly outline the benefits for the clients. Client validations upfront should be a default and important item in any proposal.
- Assess the holistic impact for the bank. Most business proposals are assessed within an individual business line. What might be a good and cost effective solution for one business line could at the same time be a suboptimal choice for the bank as a whole if it is for example difficult to integrate with the bank’s core platforms or if it hardly allows for flexibility in future innovation.
- Never underestimate the difficult-to-measure criteria. Even though most managers may challenge the breakdown of the top line revenues expectations, the real value of a new solution might be that the bank’s clients are professionalizing which could improve their credit rating or it could substantially improve their satisfaction which the CFO will keep in mind with the next loan restructuring round.
- Have a vision. If the emphasis of the innovation process leans towards risk management, the impact of the proposed solutions can turn out to be too limited. Putting a dot on the horizon with something that has a lot of positive client impact and cross-business line impact would help the bank to get as close to that dot as possible. Create impactful solutions and start small. Reward people that have proven to be capable of thinking and acting in this way.
- Start with the world out there. At some point the proposal might be too much focused on internal decision criteria. However, the real answers can mainly be found outside. What is the market moving towards, what are the game changers in your sector working on, which most innovative clients are starting to adopt such groundbreaking new solutions already and how should your bank anticipate that? All relevant questions to ask as management.
- Think ecosystem. Today’s world requires people to be connected. The same counts for banks. Pick the partners that are excellent and fast at certain things and smartly integrate them with the bank and other partners. Managing ecosystems has therefore become a common role within certain large banks.
Items to measure: for consideration
Besides the usual business case KPIs around top line upside potential, costs savings and related investments, the following criteria might be good to add to the equation. These items are not always easy to measure but frequent assessments with sample research might provide a better coloring:
- Credit rating/level of professionality. Most medium-sized companies get a credit rating from a bank but the lower end of the company pyramid with small companies usually does not have these scores. Instead, banks could have a checklist with professionality criteria:
- Does the company client have immediate insights into its current overall cash position per entity and per currency, if needed?
- Does the company client have a repetitive forecasting process and have the latest forecasts proven to be accurate?
- Does the company client have a risk management/treasury policy and does it adhere to it?
- Does the company client have segregation of duties (e.g. 4-eyes principle)?
- Helping clients save valuable time: what is it worth to the bank if 20% of a treasurer’s time is saved which she/he can use for increasingly more important tasks such as liquidity allocation or risk management?
- Client satisfaction: even though it is difficult to measure the financial or business impact of happy clients, their satisfaction with the bank(‘s services) is relatively easy to measure. Related to that is the churn rate: by assessing the reasons for clients to leave the online service, banks can identify why clients move to brokers for example. We learned that companies sometimes leave online services from banks for pricing but also because of poor processes or products not being available online (I spoke with a EUR 200m annual turnover company a few years ago that left the FX services of the bank because the bank did not offer online FX limit orders). Those client signals should be brought to the management table, especially if bankers see a pattern in client behavior.
- Increasing share of wallet/cross sell: making predictions on revenue increase on clients or client groups within your business or product line is one thing; being accurate on cross sell potential and getting commitments for that from other business lines and relationship managers is a lot more complex. This already happens with account planning, but catering for that with new concepts in business plans is a completely different exercise.
- Innovation rate: almost impossible to measure properly but quite important. A lot of company clients of banks rank their banks on level of innovation and agility. Banks can help companies grow and therefore companies want to know what these large institutions with so many peers as clients have to offer for them. The number of innovation awards in relevant areas might also be an important KPI for the bank.
Nobody has the perfect methodology or the glass bowl in their hands regarding how to innovate fast in large organizations. TreasurUp only aims to contribute by sheerly sharing its observations and learnings for the benefit of its bank partners.
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