1. New Service Development in
the banking sector
Sequence and Openness of New Service
Development Processes
Dr. Anne-Laure Mention, Head of Research Unit

2. Context
• Exponential increase of financial innovations owing to the
deregulation in US, Europe and Asia
• Market fragmentation and emergence of digital technologies
• Fast nature of changes in ICT-enabled banks to serve their
customers in new ways
• Emergence of crowd-funding business models and the
introduction of payment services by firms originating from
other sectors have contributed to the alteration of the
landscape of financial services industry
->>> All these developments force incumbent financial services
firms to innovate and reconsider the way they do business
nowadays
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3. Context
• As a consequence, it is not surprising that the phenomenon of
innovation in financial services and the way that the innovation
process is organised have been attracting research attention
from both practitioners and scholars
• The latter aspect is rooted into the stream of publications on
new service development (NSD) and is addressed in numerous
academic studies (e.g. Papastathopoulou and Hultink, 2012)
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4. Innovation and its typology (1/2)
• Innovation is “the implementation of a new or significantly
improved product (good or service), or process, a new
marketing method, or a new organisational method in business
practices, workplace organisation or external relations” (OECD,
2005, p. 46)
• This definition implies the delineation among product (good
and service), process, marketing, and organisational
innovations
• In terms of the degree of novelty, innovations are usually
divided between new-to-the-market (radical) and new-to-the-
firm (incremental)
• Innovations can be new not only to a market and a firm but also
to the world, industry, scientific community, and customer
(Garcia and Calantone, 2002)
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5. • In terms of the degree of formality and collaboration pattern,
Toivonen and Tuominen (2009) studied real estate and
construction firms and derived the following types of
innovation projects:
• Internal processes without a specific project (i.e. an unintentional
innovation positioned between innovation and continuous
adaptation)
• Internal innovation projects (i.e. developed without the
involvement of external partners)
• Innovation projects with a pilot customer (i.e. an idea originates
from the innovating firm that seeks for a pilot customer thereafter)
• Innovation projects tailored for a customer (i.e. a project is
initiated by a customer who seeks for a solution to a specific
problem)
• Externally funded innovation projects (i.e. the formal inter-firm
research-oriented project that can benefit the whole cluster)
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Innovation and its typology (2/2)

6. Typologies of innovation in financial
services (1/2)
• Frame and White (2004) posit that financial innovations are
represented by:
• “new products” (e.g. a possibility to adjust mortgage rates)
• “new services” (e.g. online banking)
• “new production processes” (credit-scoring systems)
• “new organisational forms” (novel approaches to electronic exchange)
• Tufano (2003) alludes to the following types of financial
innovations:
• the ones designed for “inherently incomplete markets”
• innovations to address the principal-agent problem and the asymmetry of
information
• innovations to decrease transactions, search, and marketing costs
• regulation and taxes-induced innovations
• innovations stimulated by globalisation, volatility, and risk
• innovations fostered by technological progress
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7. Typologies of innovation in financial
services (2/2)
• Admitting the influence of economic forces on innovation
process, Llewellyn (1992) identified four types of financial
innovation:
• “Defensive”, introduced in response to regulatory policy
• “Aggressive”, brought to market with explicit profitability intentions
• “Responsive”, developed to meet customer needs
• “Protective”, designed for overcoming existing portfolio constraints
• In terms of the degree of novelty, Avlonitis et al. (2001) unveiled
six types of innovation in financial services:
• “new to the market services”
• “new to the company services”
• “new delivery processes”
• “service modifications”
• “service line extensions”
• “service repositionings”
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8. Innovation process
• Earliest glimpses into the process of financial innovation and
the importance of its respective stages were addressed in the
domain of literature on new service development
• NSD process is usually composed of several stages such as:
• idea generation and screening,
• business analysis,
• technical development,
• testing, and
• market launch (Avlonitis et al., 2001)
• and refers to the development of services which are novel
to the focal firm (Johne and Storey, 1998)
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9. Sequence of NSD process in financial
services (1/3)
• Publications that categorised innovation development
processes in terms of composition and sequence of its
respective stages are scarce
• Toivonen and Tuominen (2009) analysed nine innovation
projects in Finnish (KIBS) firms and derived the following types
of innovation processes in terms of sequence of its three core
stages:
• “the R&D model” (emergence of an idea – development of the idea – market
applications)
• “the model of rapid application” (emergence of an idea – market
applications – further development)
• “the practice-driven model” (a change in the service practice – finding the
idea – further development)
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10. Sequence of NSD process in financial
services (2/3)
• Empirical evidence of the innovation process in financial
services remains contradictory
• One group of scholars argue that NSD in financial services is
mainly informal and takes a form of ad hoc initiatives (Menor
and Roth, 2008; Vermeulen et al., 2007)
• Other researchers point out a higher degree of complexity of
NSD process (Akamavi, 2005; Cooper and Edgett, 1996; Johne
and Harborne, 2003)
• Some scholars suggest that the innovation process in financial
services consists of a relatively small number of stages
(Athanassopoulou and Johne, 2004)
• Other researchers observed more sophisticated and complex
NSD processes, which may contain up to 15 steps (Alam and
Perry, 2002)
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11. Sequence of NSD process in financial
services (3/3)
• Apart from these disputes, empirical findings show that
financial institutions, in fact, have both formal and informal
NSD processes (Kelly and Storey, 2000; Vermeulen and
Dankbaar, 2002)
• Van de Ven (1995), as cited by Vermeulen (2004), argues that
financial institutions in fact have no simple linear sequence of
innovation process
• In summary, the unveiled contradictory empirical evidence of
the composition and sequence of NSD processes in financial
services represents a research issue of a promising academic
and practitioner value. More precisely:
• RQ1 - Are there any patterns of new service development
process in financial services?
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12. Openness of NSD process in financial
services (1/3)
• The literature on innovation processes in financial services can
be divided into two groups:
• the first one considers NSD process as a purely internal initiative with
minimum interactions with external business environment (e.g. De
Brentani, 1993)
• While the second group points out contributions to innovation process
from other entities, for example, customers, suppliers, competitors, and
consultants (e.g. Athanassopoulou and Johne 2004; Fasnacht, 2009; Menor
and Roth, 2008)
• The latter perspective has attracted attention from both
scholars and practitioners, especially, after the emergence of
so called open innovation concept more than a decade ago
• Open innovation is defined as “the use of purposive inflows
and outflows of knowledge to accelerate internal innovation,
and to expand the markets for external use of innovation,
respectively” (Chesbrough et al., 2006, p. 1)
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13. Openness of NSD process in financial
services (2/3)
• Except a limited number of cases relevant to outbound open
innovation, most of the research evidence available in existing
literature revolves around the fact that financial institutions
tend to rely on the inflow rather than the outflow of knowledge
• Financial services firms can benefit from customers
contributing to the following NSD stages (Cheng and
Krumwiede, 2012; Lievens et al., 1999; Menor and Roth, 2008):
“concept development”, “service design and testing”,
“marketing program design and testing”, “service testing and
pilot run”, and “test marketing”
• In addition to clients, financial institutions can take advantage
of the inputs coming from their competitors (Cheng and
Krumwiede, 2012; Lievens et al., 1999)
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14. Openness of NSD process in financial
services (3/3)
• Few studies shed light on the role of other sources of external
contributors to the NSD in financial services such as
consultants, suppliers, and universities (e.g. Lerner, 2006;
Vermeulen and Dankbaar, 2002)
• In summary, the openness aspect of NSD process remains
fragmented and underexplored in the existing literature. The
openness nature of entire NSD process in financial services
has not been duly addressed. Specifically:
• RQ2 - What stages of the NSD process in financial services are
the most/least opened to the inputs coming from external
partners?
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15. 03/06/14 15
Research design (1/2)
• Method of data collection:
• Dedicated survey with a questionnaire on composition,
sequence, and openness of innovation process composed of
7 generic stages:
• Definition of problems (collection and understanding of
problems)
• Idea generation (collection/generation of ideas/requirements)
• Idea screening (evaluation, selection of viable ideas)
• Development of service concept (development of marketing and
technical details)
• Testing (test a service in typical usage situations)
• Business analysis (estimation of price, sales volume and
profitability)
• Introduction to a market (launch a service, advertisement,
distribution)
• Profile of the sample:
• Banks located in Luxembourg
• Banks which are the ABBL members (103 banks)

16. Research design (2/2)
• Interviewees:
• CEOs, their deputies, executives responsible for
innovation, business development, new service
development, marketing, organisation and quality
• Time frame of data collection:
• July-November 2012
• Response rate:
• 24.3%
• Method of data analysis:
• Explorative statistics
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17. Findings
• Examples of innovations developed and introduced by the
surveyed banks in Luxembourg vary and represent different
types of innovation:
• mobile banking
• gesture recognition suites for information corners in bank branches
• remote financial advices provided via modern communication channels by
a dedicated financial expert
• an online appointment tool to book a meeting slot directly into the agenda
of branch employee
• a collaborative idea management system that guarantees review of
innovative ideas by a group of relevant experts
• a multichannel professional lending process that uses a new credit scoring
system and guarantees a decision within 48 hours
• a proactive contract-based portfolio advice service based on client’s
investor profile
• dedicated education and engagement programs aimed at young clients
• and other example of innovations in core, facilitating and enhancing
banking services as well as in the modes of their delivery
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18. Degree of complexity of new financial service
development process
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19. Stages of new financial service development
process: frequency of non-usage
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20. Cooperation with external partners during new
financial service development process
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21. Frequency distribution of stages on which
financial institutions cooperate with external
organisations for new service development
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22. Four main patterns of new financial
service development process (1/4)
1. Problem-driven pattern: Innovation process is triggered by
some concerns; it starts from the definition of problems (9
cases): two sub-patterns
• Frugal problem-driven sub-pattern: the business analysis stage appears in
the middle of innovation process (6 cases)
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• Consecutive problem-driven sub-pattern: the business analysis stage
appears in the second part of innovation process (3 cases)

23. Four main patterns of new financial
service development process (2/4)
2. Proactivity-driven pattern: Innovation process is initiated
internally without an explicit reason and starts from the idea
generation stage (5 cases)
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3. Market-driven pattern: Innovation process is led by profit and
market rationales; it starts from the business analysis stage (2
cases)

24. Four main patterns of new financial
service development process (3/4)
4. Strategy-driven pattern: The front end of innovation process
appears to be framed by the scope of bank strategy; the idea
generation stage starts after a service concept is defined (1
case)
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25. Four main patterns of new financial
service development process (4/4)
• Unveiling the patterns of NSD processes in financial innovation :
contribution to literature on the types of innovation in financial
services
• We used the term “driver” in order to delineate four main patterns of
NSD processes. In this sense, our approach is similar to one adopted
by Llewellyn (1992) and Tufano (2003)
• Meanwhile, our study is a step forward as it drills down to the way
innovation process is designed by financial services firms
• “The R&D model” process (Toivonen and Tuominen, 2009) appears to
be similar to the “proactivity-driven” pattern of NSD processes as it
also starts with the emergence of ideas and proceeds further to its
development and market application
• Contrary to earlier studies (Thomke, 2003) in financial services, we
have not found the support to “the model of rapid application” and
“the practice-driven model” (Toivonen and Tuominen, 2009)
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26. Summary (1/2)
• The literature review has suggested mixed evidence of
the sequence of NSD processes in financial services
• The analysis of NSD process sequences has revealed
the following four patterns of innovation process in
financial services:
• problem-driven (composed of the frugal problem-driven and
consecutive problem-driven sub-patterns),
• proactivity-driven,
• market-driven, and
• strategy-driven patterns
• We have found that banks tend to have rather complex
NSD processes characterised with a relatively large
number of stages
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27. Summary (2/2)
• NSD process appears to be rather open to inputs from
external partners
• A relatively higher propensity to cooperation is observed on
the stage of “service concept development”, while
“introduction to market” is usually run in a more closed
manner
• Majority of banks tend to have four stages of NSD process
open to inputs originating from external partners
• Only a limited number of financial services firms opts for
rather ‘closed’ (1 stage open to external inputs) or entirely
‘opened’ innovation process (7 stages).
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28. Thank you for your attention!
Anne-laure.mention@tudor.lu
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