1.
Innovation in
Retail Banking
S e p t e m b e r 2 0 0 9

2.
Contents
04 Executive summary
07 Innovation in the context of retail banking
13 The impact of the crisis on innovation
21 Innovation strategy
33 Strategic versus incremental innovation
41 Innovation and growth
53 Innovation and efficiency
59 How banks can become more innovative
65 The role of IT in innovation
70 Conclusion
71 About the research
72 List of participants
74 About us
75 References

3.
I n n o v a t i o n i n r e t a i l b a n k i n g
Preface
inacle from Infosys and the European Financial Management & Marketing
F Association (Efma) are pleased to present this major report on innovation in
European retail banking.
In this time of crisis, there is a danger that banks will allow other priorities to slow down
their pace of innovation, but this is precisely the time when innovation can lay the
platform for future growth and efficiency. The market environment will remain challenging
for some time and banks need to consider new business models, as well as make
continuous, incremental improvements to their business.
Innovation is a very widely used term which can apply to any aspect of the business.
This report takes a high level and strategic view of the issue and does not focus on one
specific type of innovation, or one area of activity. Innovation in operations is just as
important as innovation in marketing. We look at the issue of strategic versus
incremental innovation, and the importance of innovation for both growth and efficiency.
We also assess the barriers to innovation, what actions banks are taking to increase
their level of innovation, and recommend areas where we feel they could improve.
Information technology has a key role to play in helping banks to drive innovation, as
is clearly illustrated by the feedback from our research. Nevertheless, it can also be
seen as a significant barrier, so we have explored this issue in more detail.
A number of case examples are included in the report in order to illustrate various
aspects of innovation. We believe these cases are good examples of interesting
innovations but we have not run a competition to select the best, and there may be
other banks in Europe not mentioned who are also innovating in similar areas.
As is always the case with Efma reports, one of the key objectives is to share best
practice across Europe. 89 banks from 26 countries contributed to the research either
by completing an online survey or participating in an interview. For the purposes of the
analysis we have divided Europe into 3 regions: Western Europe, Central & Eastern
Europe, and Russia & CIS. There are clear differences between the regions but
also many similarities which show how best practices are diffusing relatively quickly
around Europe.
The respondents included a broad range of senior management in the Retail, Marketing,
Operations, Information Technology, Strategy and Innovation areas of banks. We found
a huge amount of interest in the subject of innovation when talking to banks across
Europe, and we hope that the insights we have been able to draw out of the research
prove useful.
This report was prepared, on behalf of Efma and Finacle from Infosys, by Michael
Pearson of Clarus Investments.
Haragopal M Patrick Desmarès
Global Head - Finacle Secretary General
Infosys Technologies Limited Efma
3

4.
Executive summary
• Innovation continues to be important for banks, even in the current financial crisis
78% of the banks in the survey believed that the importance of innovation was high or very high for both
growth and efficiency. The perceived importance of innovation was high in all 3 regions covered by the
survey, but slightly higher in Central & Eastern Europe and Russia & CIS compared to Western Europe.
• More banks need a clear innovation strategy
37% of banks said that they have an innovation strategy, which is low given the perceived importance of
innovation and the fact that 73% of banks are aiming to be innovation leaders in their domestic market.
We believe more banks need to develop a clear innovation strategy (including objectives, processes and
measures of success), which should be linked to the business strategy.
• Approaches to innovation are determined by a range of factors
Innovation strategy should be determined by a bank’s business strategy, but there are several generic
factors which will have an impact. Market specific factors (stage of development, regulation, culture) and
company specific factors (market share, ownership, resources) provide a framework for understanding
some of the innovation issues which any particular bank will face.
• Strategic innovation is a high priority for many banks but concrete examples are rare
54% of banks said they are working mainly on strategic innovation, or an equal mix of strategic and
incremental innovation. According to some banks, the financial crisis is a catalyst for a new focus on
strategic innovation. However, this view was not supported by evidence yet of radical and innovative
changes to business models.
• The strategic risk from disruptive innovators is low but banks need to plan for change
The banking industry has not been disrupted by new technologies or new entrants. Change tends to take
place relatively slowly compared to some industries, giving followers a chance to keep up without significant
risk. It is nevertheless important to devote some resources to looking at where strategic innovations might
disrupt the existing business, and experiment in these areas if possible.
• Banks in Central & Eastern Europe, particularly Turkey, are leading in growth innovations
54% of banks we surveyed in Central & Eastern Europe believed that their level of innovation in product,
channel and customer relationship activities was high or very high, compared to only 28% in Russia &
CIS, and 48% in Western Europe. Within Central & Eastern Europe, the banks in Turkey perceived
themselves to be the most innovative.
•Customer relationship development activity exceeds product and channel development
Across the 3 regions, 69% of banks said that their customer relationship development activities were
high or very high, which was slightly more than for product or channel development. Some banks told us
they intend to shift even more effort from product to customer relationship development in the future.
4

5.
I n n o v a t i o n i n r e t a i l b a n k i n g
• Innovation in customer relationship development activity could be improved
For example, 70% of the banks in Western Europe rated their level of customer relationship development
activity as high or very high, but only 53% rated the level of innovation in this activity as high or very high.
This perception was supported by our interviews and survey which revealed fewer customer relationship
innovations than either product or channel.
• Innovation efforts targeted at efficiency improvements do not match its importance
90% of banks in Central & Eastern Europe and Russia & CIS said that the importance of innovation for
efficiency improvement was high or very high. However, the level of innovation in the efficiency improvement
efforts we surveyed does not match this perceived importance and we believe there is substantially more
scope for banks to look at innovative ways to become more efficient.
• Information Technology is important for innovation but is also seen as a barrier
Inflexible IT systems and bottlenecks in IT development were the top 2 barriers to innovation in all 3
regions. Banks who have been able to invest in newer systems, either by starting more recently or going
through a major change programme, naturally regard this as less of a problem but it remains a significant
challenge for more mature banks who want to both grow revenues and reduce costs.
• Other views on barriers to innovation were mixed
Investment was not seen as a particularly high barrier in spite of the financial crisis. The lowest barrier
was a lack of innovative ideas – most banks have idea generation processes, at least for employees, but
would probably benefit from more open innovation. Regulation and compliance was seen to be a high
barrier to innovation for banks in Western Europe and Russia & CIS, but less for banks in Central
& Eastern Europe.
• Employee training for innovation and creativity is low and should be increased
Best practice research shows it is crucial to focus on employee-related issues to increase innovation and
creativity – including recruitment, training, performance management and rewards. It was surprising that
less than 25% of banks had increased employee training on innovation. There were some cases of
innovation being included in performance management, but this was not widespread.
• The differences between regions are relatively small indicating good best practice diffusion
While there are some differences between the regions, the similarities in terms of product, channel and
customer relationship development focus, and in terms of approaches to efficiency improvement, highlights
how industry best practices are being diffused across Europe.
5

6.
Innovation
in the context
1 of retail banking
7

7.
Defining innovation
One of the challenges in carrying out research on innovation is that people can have
very different ideas of what constitutes an innovation. We have defined it in the following
terms: “to innovate” means to introduce changes and new ideas, and “an innovation”
is a new idea or method, which creates value for the customer or the company itself.
It should be something that is new to the market, not simply copied from another bank
in the same market.
There is a tendency for all of us to think of innovation in terms of new products and
services, like the iPhone from Apple, particularly ones which are technology related. It
is much harder for us to think about innovation in activities like operations and finance,
especially when no new technology is involved.
Innovations also range in scale from “incremental” to “strategic”. There are no hard
definitions of what these terms mean and we came across a wide range of views as to
what constitutes a strategic innovation. In Section 4 we look at this issue in the context
of retail banking.
Comparing innovations across countries and regions
The economies and banking sectors in countries around Europe are in different stages
of development and an innovation in one country may not constitute an innovation in
another country. The flow is not just one way, however, from more developed to less
developed markets. We found many cases of innovations in less developed markets
which have not been introduced yet into more mature markets.
One development we will explore further in the report was the larger banks with
operations in several European countries transferring systems and practices across
borders – usually from the home country to markets where they have made acquisitions.
In some cases these banks are taking a very different approach to innovation than the
more local banks in a particular market. The fact that there are different innovation
strategies does not mean that one or other is right or wrong, but reflects the specific
circumstances of the banks concerned.
It is also the case that what makes sense as an innovation in one country may not, in
the short term, make sense in another country due to the different customer needs,
competitive dynamics, regulation etc. so we have to be careful not to generalise.
However, in time, innovations do tend to diffuse across all markets and so it is important
for banks to be fully aware of what is happening in other countries.
In Section 3 we explore how country and company specific factors combine to influence
the approach a bank might take to innovation.
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8.
I n n o v a t i o n i n r e t a i l b a n k i n g
The history of innovation in retail banking
Many people do not think that retail banking is an innovative industry. An annual survey
by Business Week and Boston Consulting Group1 ranked Apple, Google and Toyota as
the most innovative companies in 2009. The only banks featuring in the top 50 were
HSBC and JP Morgan Chase and we don’t think this was particularly for their retail
banking activities.
Academic research has typically concluded that retail banking is not very innovative.
According to one study in the Journal of Marketing Management, “weak consumer
demand for unique products and services is a major reason why imitative incremental
innovation is more common than radical innovation in retail banking2”. Of course this
particular observation relates to product innovation, but you could reach the same
conclusion about channel innovation when you consider the current approach to mobile
banking being taken by a lot of Western European banks.
However, we should recognise that there have been many significant innovations over
time which has made the industry unrecognisable from 30 years ago. It takes time for
innovations to become widely adopted, so the impact is perhaps less dramatic than we
see in some industries where a failure to innovate (or innovating in the wrong direction)
can lead to extinction quite quickly.
9

9.
One bank we spoke to described its transition several years ago from
being a product-centric organisation to a customer-centric one –
clearly a major change to the business model and believed to be
innovative at the time, but no longer perceived to be an innovation.
For some banks in the less developed European countries, this
transformation remains a big challenge.
Internet banking is the most significant innovation in the last 15 years.
Many banks launched internet banking in the mid 1990’s, but there
remained some wide discrepancies in adoption as of the end of 2008
(see Figure 1). In Norway, internet banking use (measured over the
previous 3 months) reached 75%, whereas in the UK it was 40%. In
Spain, the usage was just 20%, and in the Czech Republic which is
still catching up, the usage is 14%. The average usage rate for the
5 largest European economies was just 28%, and that is after
15 years of internet banking services being available.
Proportion of individuals over 16 years of age
using internet banking in previous 3 months
Norway UK Spain Czech Republic
80%
70%
60%
50%
40%
30%
20%
10%
Figure 1
0%
2003 2004 2005 2006 2007 2008
Source: Eurostat
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10.
I n n o v a t i o n i n r e t a i l b a n k i n g
One of the features of the industry is that more or less all banks tend
to adopt the same innovations, and there is not generally a lasting
competitive advantage for the first mover. Of course, we have not
examined all the banks that have failed or been taken over in the last
30 years to see if they were less innovative than surviving banks, but
we do not think this would be the case. Banks fail for many reasons
other than not pursuing innovation, and in some cases more
innovative banks are taken over by less innovative banks with greater
financial resources. However, it is clear that banks cannot stand still
and we will discuss the strategic issue of being an innovation leader
or follower later in the report.
Entrepreneurship and innovation
Innovative start-ups have generally made relatively little impact on the
retail banking industry in Western Europe, but there has been
considerably more potential for entrepreneurial activity in the
developing markets of Central & Eastern Europe and Russia & CIS. In
these regions there are several examples of start-up banks in the last
10 years (e.g. Russian Standard Bank in Russia and Alior Bank in
Poland), and also examples of established banks expanding into retail
banking (e.g. Turkish Economy Bank).
These banks have been innovative in the context of their local markets
and have created an entrepreneurial culture which tends to encourage
continuing innovation. Entrepreneurs don’t always need to be
innovative, but typically it helps.
Entrepreneurship and Innovation – Russian Standard Bank
Russian Standard Bank was founded in 1999 by Roustam Tariko, and is now
the leader in the Russian consumer finance market, with more than
25 million loan customers and 25 million credit cards in issue. The bank
was started in the middle of a financial crisis in Russia, which illustrates
how there are opportunities for entrepreneurship and innovation even in
adverse conditions. The bank has over 400 branches and representative
offices, 46,000 POS locations and in addition to consumer finance offers
deposit products and private banking services.
Source: Russian Standard Bank
11

11.
The impact
of the crisis
2 on innovation
13

12.
The financial crisis first took hold in the middle of 2007 and went through
various stages before reaching a critical point in September 2008 with
the bankruptcy of Lehman Brothers. The initial phase was a liquidity crisis
for banks reliant on wholesale funding, and this was followed
by a solvency crisis as banks were required to significantly reduce their
leverage by shedding assets or raising capital. The financial crisis
has led to the worst recession in the real economy since the depression
of the 1930’s, and mounting credit losses are causing more problems
for banks.
The impact is staggering as you can see from Table 1 which shows the
expected writedowns due to the crisis, and the actual support measures
put in place for European banks. The support measures add up to 27%
of European GDP .
Projected Writedowns as of April 2009 (Euro bn)
Loans 424
Securities 143
Support Measures as of June 2009 (Euro bn)
Capital injections 160
Guaranteed bond issuance 544
Other guarantees 237
Table 1
Asset support 612
Source: IMF3, ECB4
Following significant government efforts to stabilize the banking system,
the crisis has moved into a phase which will involve a longer term
profitability challenge. Some research by the Bank of England has shown
that the level of profitability achieved by the banking industry in the last
10 years was based on increasing leverage rather than improvements
in the underlying business5. In the short-term, margins have widened in
some product areas, and competition may have reduced, but funding
costs are expected to rise and banks will need to continue to work very
14

13.
I n n o v a t i o n i n r e t a i l b a n k i n g
hard for revenue growth while at the same time becoming
more efficient.
The impact of the crisis on countries across Europe has been varied
and some of the emerging economies have been quite resilient. The
IMF assesses the risks in these countries by looking at current account
deficits, short-term external financing needs and real credit growth
in the last 5 years3. Countries such as the Baltic states and Ukraine
are in a relatively weak position, whereas Poland and Turkey have so
far been much more robust.
It is also a mixed picture for Western European countries. The UK,
Spain and Ireland have been particularly impacted by falling property
prices. The UK also has a very high level of indebtedness in the
household sector, and its economy is relatively more dependent on
the financial sector in general.
In the UK, the government has taken significant ownership stakes in
2 of the 5 major banks. This was required due to over expansion in
property lending (HBOS) and poorly timed overseas acquisitions (RBS)
among other things. Santander has taken the opportunity
to consolidate its position in the UK market by buying some failed
small banks (see box).
Innovative Expansion during the Crisis – Santander
Santander is pursuing an ambitious growth strategy which is
innovative in the sense that the bank is leading the way in the
global integration of retail banking – an example of business
model innovation to drive efficiency. In the UK, Santander
acquired Abbey in 2004 as a stepping stone and in 2008 this
was followed by the acquisitions of Alliance & Leicester and
Bradford & Bingley. Formerly Building Societies, none of these
banks had been able to build a viable, independent long term
business model. Santander is driving down costs by migrating
all of the acquired banks onto its existing Spanish core banking
system, Partenon. This kind of pan-European integration of IT
and back-office operations has been long talked about but is
now actively underway at some banks such as Santander.
15

14.
BNP Paribas has also used the crisis to pursue acquisition opportunities, notably of
Fortis in Belgium. Banks in the Euro area have to some extent fared better than UK
banks but the Bank for International Settlements believes that their balance sheets
have not fully reflected expected losses and has urged them to make realistic writedowns
and recapitalise6.
Some would argue that innovation has played a major role in causing the crisis.
The UK mortgage lender Northern Rock was one of the first banks to fail – in September
2007 – after aggressively building its business with innovative lending products, like the
125% loan-to-value mortgage, and an innovative wholesale funding structure for a
mainstream lender.
The Financial Services Authority in the UK has even questioned the need for some kinds
of innovation – “given too much choice consumers often prefer not to act at all for fear
of making a wrong choice and too much choice causes confusion. Is there too much
innovation in some markets – such that it is a barrier to consumers engaging
with them effectively?7”
Until now, the banking sector has been remarkably immune to innovative disruption
from new entrants which we discuss in more depth in Section 4. However, the crisis
may provide the opportunity that others have been looking for to exploit both financial
weakness and a loss of consumer confidence in banks.
Are banks now more focused on efficiency?
Not all banks have been affected in the same way by the crisis, but it was clear from
our research that the majority of banks are focused more on efficiency than growth,
and only between 5% and 15% were focused on growth more than efficiency in the
3 regions (see Figure 2).
Proportion of banks focused on growth or efficiency
Growth Growth & Efficiency Efficiency
100%
80%
60%
40%
20%
0%
Figure 2
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
16

15.
I n n o v a t i o n i n r e t a i l b a n k i n g
However, we should also note that between 20% and 40% of banks in each of the
regions are equally focused on growth and efficiency. One major bank which has
performed well during the crisis told us that “the crisis has reinforced our strategy
to pursue a balance of growth and efficiency – it is not a viable long term strategy
to be focused only on efficiency and banks who have done this in the past have not
been successful”.
Several banks we spoke to from the developing markets who had until recently been
almost exclusively focused on growth are now adopting more balanced strategies and
emphasising the need for profitable growth.
Also, not surprisingly, the vast majority of banks in all regions have either decreased
the level of investment in innovation this year or have made no change (see Figure 3).
Very few have increased the level of investment, although the proportion doing this was
higher in Central & Eastern Europe at 29%. The international banks operating in that
region however were much more likely to have reduced innovation investment.
One bank pointed out that it was hard to separate what represents investment in
innovation from general ongoing business projects and we would agree with that, so
the survey can only really be an indication of perceptions rather than a precise answer.
But it does raise the question about how good banks are at defining and measuring
their level of investment in innovation.
Change in investment in innovation this year
Increase No change Decrease
100%
80%
60%
40%
20%
0%
Figure 3
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
17

16.
We tend to think of innovation in terms of new products like the Apple iPhone or
Nintendo Wii, and innovation is certainly very important for growth according to the
banks we surveyed. As you can see in Figure 4, between 71% and 77% of banks in
each region rated its importance as either high or very high on a 5 point scale. The
results for Central & Eastern Europe were impacted by the response from banks in
Turkey – excluding these banks, the level dropped to 61%.
Banks rating the importance of innovation
for growth as either high or very high
100%
80%
60%
40%
20%
0%
Figure 4
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
We were surprised to find that banks in Central & Eastern Europe and Russia & CIS rated
the importance of innovation for efficiency improvements even higher – approximately
90% in each region scored it as high or very high (see Figure 5). In contrast, only 66% of
banks in Western Europe felt that the importance of innovation for efficiency was either
high or very high. Again, Central & Eastern European banks excluding Turkey rated the
importance lower, but still quite a lot higher than Western Europe.
Banks rating the importance of innovation
for efficiency as either high or very high
100%
80%
60%
40%
20%
0%
Figure 5
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
18

17.
I n n o v a t i o n i n r e t a i l b a n k i n g
Some banks talked about how innovation in products and channels,
such as instant loans in Turkey, were also driving significant efficiency
improvements by eliminating unnecessary processes. Other banks in
Central & Eastern Europe and Russia & CIS saw a lot of potential still in
adopting practices like centralisation of operations or process
reengineering which in their context were seen to be relatively innovative
actions to take. We explore the issues underlying these views in the
relevant sections on growth and efficiency.
19

18.
Innovation
3 strategy

19.
How common is it to have an innovation strategy?
Several of the questions in our research focused on the issue of innovation strategy. When
asked if their bank had an innovation strategy we found that slightly more than one third
of banks in each region said they had an innovation strategy as shown in Figure 6. The
result was remarkably similar across the regions.
Proportion of banks with an innovation strategy
50%
40%
30%
20%
10%
0% Figure 6
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
Actually we think these figures slightly overstate the real picture because our interview
experience suggests that if we were to apply a rigorous definition of what constitutes
an innovation strategy – including for example objectives, processes and measures of
success – the proportion would be lower.
The question also needs to be considered in the light of how many banks were aiming to
be innovation leaders in their domestic market. This percentage was very high in all regions,
and particularly in Central & Eastern Europe due to the ambitions of the banks in Turkey.
Proportion of banks seeking to be innovation leaders
100%
80%
60%
40%
20%
0%
Figure 7
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
22

20.
I n n o v a t i o n i n r e t a i l b a n k i n g
In fact, almost 80% of the Turkish banks responding to the survey were
also aiming to be innovation leaders using an international benchmark,
not just in their domestic market. These banks are very ambitious and
are keeping up-to-date with global developments in retail banking. More
than one Western European bank we interviewed believed their
operations in either Turkey or Poland were more innovative than the
operations of the parent company in the home market.
There is not necessarily a problem with so many banks aiming to be
innovation leaders so long as it is a focused strategy which supports the
value proposition. The concept of value propositions was introduced in
“The Discipline of Market Leaders” by Treacy & Wiersama: “companies
that have taken leadership positions in their industries typically have
done so by narrowing their business focus. They have focused on
delivering superior customer value in line with 1 of 3 value disciplines –
operational excellence, customer intimacy or product leadership.8”
In other words, banks should be clear about which areas they want
to be innovation leaders in, how they are going to achieve that objective,
and how they are going to measure success.
There may be a rationale for being at the forefront of product and service
innovation if this helps to create an “image” for the bank which supports
customer acquisition activity or other objectives. In this case, innovation
investment can be seen partly as a marketing investment, and individual
innovations may not all need to be justified on their own business cases.
For example, a bank may aim to be the first to market with a new iPhone
mobile banking application, or a new contactless payment card, in order
to support its brand image, even if the specific investments are difficult
to justify financially. A few banks, like BBVA and BNP Paribas, have set
up innovation showcases which have a practical value but can also help
to create a strong innovation image.
Factors which explain different approaches to innovation
If business strategy is the main driver of innovation strategy, it is difficult
to be prescriptive about what the innovation strategy of any particular
bank should be. However, there are some generic factors which will
determine some of the differences in approach:
• Market related factors
Stage of market development
Regulation
Culture (including how this affects consumer attitudes)
23

21.
•Company specific factors
Market share
Ownership
Resources (related to financial strength in view of the crisis)
The matrix in Figure 8 depicts these different factors with examples of
banks from Poland and Spain, which are markets at very different stages
of development.
COMPANY SPECIFIC
Other factors to overlay: Ownership, Resources
Market share of the bank
Smaller Larger
Other factors to overlay: Regulation, Culture
Earlier
Stage of market development
Alior Bank PKO
MARKET RELATED
Later
Bankinter Caja Madrid
Figure 8
To illustrate how these factors might combine in determining the
approach to innovation:
• A large bank in a market which is at an earlier stage of development,
such as PKO in Poland, has opportunity for improvement by adopting
best practices to become more efficient, extend its product range
and channels, and focus on its existing customer relationships.
To be successful, it would not necessarily need to be the most
innovative bank in the market, though it could still chose to make
that an objective.
24

22.
I n n o v a t i o n i n r e t a i l b a n k i n g
• A smaller bank in the same market, such as Alior
Bank (a recent start-up), will typically need to be
more innovative to attract customers – either
customers new to banking, or customers from
more established rivals. As a start-up, this bank
has some advantages in being able to begin
operations with a clean sheet of paper and adopt
the latest operating processes and technology
innovations, but on the other hand it does not
have economies of scale.
• For a large bank in a more mature market, such
as Caja Madrid in Spain, customer loyalty and
cross-sell rates are already quite high, and the
bank is already relatively efficient. The challenge
is to embed a culture of continuous and mainly
incremental innovation, while at the same time
looking out for opportunities for strategic
innovation or risks of market disruption.
• In the same market, a smaller bank such as
Bankinter is at a scale disadvantage and there
are fewer new to banking customers to target.
Arguably, such a bank needs to be innovative to
prosper and may therefore have to consider more
radical innovations than one of the larger banks.
The other market related factors come into play
because, for example, regulation and culture is not
the same even for countries within the same region.
Hence when we compare say Poland and Turkey,
they have very different characteristics and a bank’s
innovation strategy needs to reflect that.
The other company specific factors come into play
because banks that are part of larger pan-European
groups (“ownership”) will have different options to
consider on how to focus their innovation efforts,
and banks with stronger financial resources will also
have more innovation strategy options.
Taking these and other factors into account you
would not expect all banks to have the same
innovation strategy even if, superficially, there are
some similarities.
25

23.
Do you need an innovation department?
Not surprisingly, banks that had created a department responsible for
co-ordinating and driving innovation were more likely to have an
innovation strategy. As you can see from Figure 9, the creation of an
innovation department was most common in Central & Eastern Europe
and least common in Russia & CIS.
Proportion of banks with a department
responsible for co-ordinating innovation
30%
25%
20%
15%
10%
5%
0%
Figure 9
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
Examples of banks we spoke to in Western Europe with innovation
departments were BBVA and Caja Madrid. In the case of Caja Madrid,
the desire to focus on making the bank more innovative led to the
creation of the department and the development of an innovation
strategy in 2007.
Examples of banks we spoke to in Central & Eastern Europe with
innovation departments were Garanti Bank and Turkish Economy Bank
(partially owned by BNP Paribas). One of the roles of these
departments is to provide a focal point to monitor innovation
developments from around the world, in banking and in other
industries that might impact banking.
The need for an innovation department is not seen to be universal.
One quite innovative bank in Poland felt that this would distract from
each department and employee being innovative, and this was quite
a common view. However, for some of the Western European banks
who had struggled with becoming more innovative, it was seen as a
catalyst for change.
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24.
I n n o v a t i o n i n r e t a i l b a n k i n g
Innovation Strategy – Turkish Economy Bank
In 2005, Turkish Economy Bank was a small bank focused on
corporate and private banking. It has since then developed a
retail banking business with more than 1m customers and over
300 branches across Turkey. Key to the bank’s successful
development has been a clear innovation strategy, co-ordinated
by the innovation department but involving all areas of the bank.
This includes the following components:
• Innovation leadership from senior management
• Innovation strategy, aligned to the business strategy
• Idea generation and screening – including the Spark
innovation portal
• Change management processes and innovation competency
development
• Evaluation, measurement and rewards, creating innovation
champions
• Internal and external communication to generate interest
and ideas
Source: Turkish Economy Bank, Presentation at the Efma CRM Conference in June 2009
A disciplined innovation process
Even without an innovation department, it is clear from our interviews
and from best practice research more generally, that there are real
benefits from having a disciplined approach to innovation based
around a number of key stages. These stages could apply to any type
of innovation, but particularly where a significant investment
is required:
• Idea generation
• Idea screening
• Business case preparation and review
• Concept development
• Prototyping
• Implementation
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25.
As we will see later in the report, banks do not see idea generation as
a barrier to innovation although we think they would benefit from more
“open innovation” (see below). However, we believe the idea screening
process is also critical and needs the proper attention. Even banks
without an innovation department might have some sort of Innovation
Committee to review ideas but these can become politicised and
dysfunctional if not carefully managed.
The speed of implementation is a key factor for some types of innovation
project. Both Turkish Economy Bank and LCL described how they had
been able to develop and introduce significant product and channel
innovations in just 6 months. Such an approach means being pragmatic
and accepting that not everything will be perfect on launch, but can
provide a number of competitive advantages.
Measuring success is another key management issue which most
companies struggle with. In a report on this subject, Boston Consulting
Group recommended the use of multiple measures such as revenue
realized from launches in the past 3 years, projected versus actual
performance, and the total investment in growth projects9. Of course,
this depends on being able to identify what is an innovation investment,
and how to allocate costs to it.
The potential for open innovation
There has been growing interest in the concept of “open innovation” as
pursued by companies like Procter & Gamble (see box). This recognises
that a company’s own employees are not able to generate or pursue all
of the most innovative ideas, so it makes sense to work with external
partners to maximise the opportunities. For an R&D focused company
like Procter & Gamble, this might involve drawing on external scientific
resources, but it can also involve working with smaller, innovative
companies who are able to explore more radical innovations. Another
development along these lines is “co-creating” where companies engage
their customers in the product development process.
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26.
I n n o v a t i o n i n r e t a i l b a n k i n g
Open Innovation – Procter & Gamble
Procter & Gamble has for a long time been one
of the world’s leading consumer products
companies with a strong reputation for product
development and management. However,
according to the CEO, AG Lafley, “by 2000, it was
clear to us that our invent-it-ourselves model was
not capable of sustaining high levels of top-line
growth.” The company realized there were many
scientists, engineers and small and mid-size
entrepreneurial companies globally working on
the innovations that P&G was interested in, so
they developed an approach called “Connect and
Develop” to exploit these external sources of
innovation. Open innovation now plays a part in
35% of P&G’s innovations, accounting for billions
of dollars in revenues10.
In our research, we asked how banks saw the potential
for partnerships and collaborations with other
companies to drive more innovation. Not surprisingly,
partnering with competitors was seen as the least likely
approach for banks in all regions. In most cases
this was either due to regulation against anti-
competitive behaviour, or for the larger banks, being
happy to work alone.
29

27.
In fact, it was the smaller banks who rated this approach to innovation most highly, for
example Bankinter which has worked in partnership with other banks to develop the
HalCash remittance product. Of course, there are some payments related innovation
activities which require collaboration between competitors and so this is still important
for all banks.
Importance of partnerships for future innovation
(scale 1-5, where 5 is very high)
Western Europe Central & Eastern Europe Russia & CIS
5
4
3
2
1
With competitors With companies With companies With major With small,
Figure 10
from other industries from other industries suppliers innovative companies
for distribution for combining
partnerships capabilities and
technologies
Source: Infosys - Efma Innovation Survey Results
Banks in Central & Eastern Europe saw a much higher potential for distribution
partnerships to drive innovation compared to Western European banks. In general,
Western European banks have found these relationships to be disappointing and new
opportunities are in any case relatively limited. For the Central & Eastern European
banks there are still many distribution partnerships to go for and there is some potential
for innovation. Examples include Garanti Bank’s “Money Card” in partnership with Migros
in Turkey which combines the benefits of a retailer’s co-branded card with a multi-loyalty
card, and includes a number of innovative product features.
Working with other companies to combine capabilities and technologies was seen to
have good potential by banks in all 3 regions. However, we were provided with few
examples of how this was working in practice and most of the comments related to
partnerships with mobile telcos.
Perceived as slightly less important were partnerships with major suppliers. There are
challenges for suppliers getting too close to individual customers but there are examples
including the recent technology partnership agreement between Caixanova, IBM and
INSA to create a technology innovation centre in Spain.
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28.
I n n o v a t i o n i n r e t a i l b a n k i n g
There is also a difference in attitude to working with smaller, innovative companies, with Central & Eastern
European banks the most likely to think of this as an important driver of innovation. Such a partnership can
go beyond a normal supplier relationship if the bank takes an equity stake in the company, or develops a
deeper and closer relationship, perhaps with exclusivity for a period of time over some key technology.
Examples include Credit Mutuel Arkea’s small investment in UpandNet the online giftcard company.
A Review of Innovation Management Best Practices
We have reviewed a wide range of sources on best practice covering all elements of the innovation
process, some of which are described below. The four common themes to highlight from all of this
expert opinion are:
• Start with a clarity of objectives, and link these to strategic objectives
• Give support to innovation from the highest level and integrate it into the management process
• Focus on the people and cultural issues at least as much as the process
• Ensure rigorous measurement of innovation and accountability for results
In a Strategy & Business article, “P&G’s Innovation Culture”11 , Chairman & CEO AG Lafley describes
how P&G built a world-class organic growth engine by investing in people. In 2000, P&G’s success
rate with new products was 15-20%. It is now 50-60%. According to Lafley: the consumer must be
central to the process, innovation should be integrated in everyone’s job and must be scalable,
employees should be recruited and developed emphasizing flexibility and agility, and there needs to
be integrated thinking across the company.
The Harvard Business Review article, “Reverse Engineering Google’s Innovation Machine”12 , describes
the 6 major components of Google’s approach to innovation. Google allocates time in employee job
descriptions for innovation, actively cultivates an environment of experimentation and rapid failure,
and uses rigorous analysis and objective decision making to assess ideas. Google is also particularly
good at leveraging innovation partnerships while keeping control of the core architecture.
AT Kearney research with 250 companies worldwide, “Innovation Management – Strategies For
Success and Leadership”13 , identified the traits of successful innovators and found that leaders
clearly focus more time on the early stages of the process: innovation strategy, idea generation and
idea screening. Best practice for innovation strategy requires creating an explicit and well articulated
strategy. Best practice for idea generation means involving a wide array of partners and embracing
open innovation. Leading companies review more ideas and use well-defined screening criteria; they
also take bigger bets initially but are more rigorous at pruning ideas.
McKinsey & Co, in the article “Leadership and Innovation”14 proposed that companies should focus
on 3 areas: integrate innovation into the strategic management agenda; make better use of existing
talent for innovation and allow innovation networks to flourish; foster an innovation culture based
on trust among employees where ideas are valued. The main motivators of behavior to promote
innovation are strong leaders who encourage and protect it, and senior executives who actively
manage and drive it. Companies need to define the type of innovation that drives growth and meets
the strategic objectives, add innovation to the formal management agenda, and set performance
metrics and targets.
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29.
Strategic versus
incremental
4 innovation
33

30.
We have defined strategic innovation as innovation which is more
significant for the business model of the bank, or part of the bank, and
which creates real competitive advantage.
Strategic innovation is not exactly the same as “disruptive” innovation,
a term that was adopted by Clayton Christensen and Joseph Bower to
describe situations when new competitors enter a market at the “low
end” and then from this position disrupt the market for the established
competitors, or expand the size of the market by drawing in previously
un-served customers. Examples of disruptive innovators are low-cost
airlines such as Ryanair15 .
More recently, in the Harvard Business Review article “Reinvent Your
Business Model”, Christensen and his colleagues have written about
business model innovation, using several examples including the iPod
and iTunes which 3 years after launch was a $10bn business accounting
for 50% of Apple’s revenues . Business model innovations of this type
can reshape or even destroy whole industries but are rare.
Examples of strategic innovation in banking are also relatively rare. We
have already mentioned some previous innovations which in our view
are strategic – like the diversification of banks into the selling of
insurance products – but they tend to be adopted by most banks and
take time to become established. Unlike the Apple iPod/iTunes case
there is not usually a significant first mover advantage and no “winner-
takes-all” outcome.
One banker in Western Europe we spoke to said that he would only
expect to see one or two strategic innovations in his lifetime. Another
banker in Central & Eastern Europe said that the crisis has provided the
impetus for his bank to take a fresh look at all aspects of its business
model, but they were still at an early stage of reviewing this.
A particularly useful insight from one of our interviewees was that they
see a cycle of strategic innovation followed by implementation, and then
a continuous refinement of the business model. Where you are in the
cycle will determine where your innovation focus and resources are
targeted.
Between 5% and 20% of the banks in our survey said they were working
mainly on strategic innovation. 57% of respondents in Western Europe
and 79% in Central & Eastern Europe said they were working either
mainly on strategic innovation or on an equal mix of strategic
and incremental.
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31.
I n n o v a t i o n i n r e t a i l b a n k i n g
What kind of innovation are banks mainly working on?
Mainly Strategic Strategic & Incremental Mainly Incremental
100%
80%
60%
40%
20%
0%
Figure 11
Western Central & Eastern Russia & CIS
Europe Europe
Source: Infosys - Efma Innovation Survey Results
A few of the banks who said they were working mainly on strategic
innovation were relatively small, start-up banks, or banks with a recent
entrepreneurial history. Other examples included banks operating in
countries still at a very early stage of market development, for example
in Romania.
Two of the best examples of potential strategic or business model
innovation we identified from the interviews and the survey were:
• Setting up a Mobile Virtual Network Operator (see box)
• Expanding in a new market through franchising (see box)
We think that banks setting up as Mobile Virtual Network Operators is a
good example of what may prove to be a strategic innovation as it takes
them into a new business and allows them to control more of the value
chain in mobile banking. It may also be a good defensive move if mobile
telcos start to set up their own banking operations. There are several
examples of this strategy such as Rabobank (Netherlands), PosteMobile
(Italy) and Bankinter (Spain) (see box).
Franchising is also a business model innovation, though it has been used
in some markets for many years, such as Belgium, and may not be
applicable to all markets. ING Romania and Volksbank International have
successfully introduced a version of the concept into Romania in the last
few years. At the end of 2007, ING had 170 agent offices,
and Volksbank had 95 agent offices supporting 135 traditional branches
(see box).
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32.
Other suggestions from our interviews included Web 2.0 strategies and Mobile Banking strategies. These
are relatively speaking leading edge for some of the banks involved, but it remains to be seen how the
business model of the bank will fundamentally change as a result.
Also mentioned were back-office optimisation and increased co-sourcing/outsourcing, but in both these
cases it was recognised that the changes being pursued would not necessarily be viewed as innovative
in an international context. It might be more appropriate to describe these as major change initiatives.
Strategic Innovation – Rabo Mobiel and PosteMobile
With Rabo Mobiel, Rabobank offers its customers a multichannel bank that is open 24/7 making
it possible to consult and manage bank accounts via internet or mobile phone. As a MVNO on the
Orange network, Rabobank also offers its customers a “low cost” telephone offer to encourage
them to use mobile internet. The logical continuation from this positioning is the use of the mobile
as a virtual purse and a secure medium for payment cards.
PosteMobile, the Italian postal company MVNO, was launched in November 2007 and more than
200,000 BancoPosta customers used these services in the first six months. PosteMobile decided
to give a further boost to its innovation strategy by launching mobile payment and shopping
services. The Gemalto MVNO portal management solution allows PosteMobile subscribers to pay
their bills with their mobile phone, send a telegram or a fax, manage their account and transfer
funds from their BancoPosta account and their BancoPosta PostePay prepaid credit card.
Source: Banks and Mobile Telephones (Efma, Capgemini, Microsoft, Crédit Agricole, Novamétrie, May 2009)
Strategic Innovation – ING Romania
In 2004, ING started a new greenfield operation in Romania by combining its “Self’Bank” business
with a franchise formula imported from ING Belgium. Exclusively tied entrepreneurs work as “ING
Partners” in “ING Offices”, promoting financial, banking and insurance products and services,
including loans, savings products, credit cards, etc., as well as post-acquisition services.
In a separate “Self’Bank” section owned and maintained by ING, clients can perform payments
and cash transactions as well as exchange money, etc., without any involvement of the agent or
his/her staff. The agents have a mandate from ING to represent them, while ING is responsible
for everything they do.
ING has 170 offices operating under this scheme in Romania. With an annual network growth of
40%-50%, the bank has attracted over 540,000 clients since the launch of the concept. Due to
its automated operations, ING Offices reach a high productivity, employing half the staff of a
traditional branch, between 3 and 10 people on average.
Source: Entrepreneurial Banking in Europe (Efma, ZEB, Centea, November 2008)
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33.
I n n o v a t i o n i n r e t a i l b a n k i n g
Iceland
Sweden
Finland
Norway
Russia
Estonia
Latvia
Denmark
Lithuania
Netherlands
Ireland Belarus
UK Poland
Germany
Belgium
Czech Rep.
Slovakia Ukraine
Switzerland Austria Moldova
Hungary
France Slovenia Romania
Croatia
Italy Bosnia
& Herz. Serbia
Bulgaria
Montenegro
Albania
Portugal Spain
Entrepreneurial banking models...
Greece
already exist
seem feasible
are possibly feasible
are not possible
n/k
Source: Entrepreneurial Banking in Europe (Efma, ZEB, Centea, November 2008)
One of the characteristics of the banking industry is that the timescales are quite long
for strategic innovation to make a difference. It would probably not make sense for
banks to devote significant resources working on strategic innovation at the expense of
incremental innovation, but there is a case for investing in exploring strategic innovation
possibilities in order to be ready to move on these when necessary. The example of ABN
Amro Netherlands “Dialogues Incubator” shows how this can be done using a corporate
venturing approach which is common in other industries (see box).
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34.
Incubator Strategy – ABN Amro
ABN Amro’s Dialogues Incubator was set up to develop ventures
which made use of ABN Amro’s intellectual capital and
contributed more widely to society. The incubator has strong
support from senior management and has set up several
ventures including:
• Mkbnext: a service to help small businesses with mergers and
acquisitions
• Brightbox: to provide ABN Amro’s HR expertise to other
businesses
• Associates: an employment service for independent
knowledge workers
The incubator is a catalyst for innovation in the bank more
widely, and is able to explore new business models without
some of the constraints of the core banking business. As an
example it has experimented with “agile” IT development
approaches which are of interest to the bank.
Source: ABN Amro
Start-up companies have had very limited success so far in disrupting
the retail banking industry, even though many observers see it as ripe
for change. Comparison services, such as moneysupermarket.com in
the UK, have become well established and are a useful channel for
distribution of bank products. Online payment services like Paypal
have also had some success but have posed a limited threat to the
banking industry.
More recently, peer-to-peer lending services have been launched in
several countries, for example Prosper in the United States and Zopa
in the UK and Italy (although Zopa has recently had its license
suspended in Italy). At present these are very small businesses which
have had minimal impact on established banks, but they have
potential to grow. In the box we have highlighted some other recent
financial services start-ups from the United States that are worth
keeping an eye on.
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35.
I n n o v a t i o n i n r e t a i l b a n k i n g
Examples of Recent Innovative Start-Ups in Financial Services
There is a steady stream of financial services start-ups, particularly in the United
States, many of whom are focused on the payments space. These companies can
be disruptive to the banking industry, but in some cases they also partner with
banks. We have selected 4 examples here which illustrate the type of innovation
being developed by start-ups.
Obopay is a service that lets consumers and businesses purchase, pay, and trans-
fer money through any mobile phone using Obopay’s mobile application, text mes-
sage, mobile Web, or Obopay.com. As the first mobile payment service created
exclusively for the mobile phone, only Obopay works on any phone and any carrier
to empower consumers and businesses with the convenience of mobile payments.
Obopay partnered with MasterCard in June 2008 to provide mobile P2P payment
services in the U.S., and received an investment of $35m from Nokia in March
2009.
Bill Me Later enables online retailers to offer transactional credit to consumers at
the point of sale using sophisticated underwriting techniques and credit decision
models. In the small business sector, Bill Me Later is pioneering payments with the
Bill Me Later® Business service tailored specifically for the small business buyer.
The Bill Me Later network includes hundreds of top-tier retailers including Apple,
Borders, and Walmart. The company was acquired by eBay in October 2008
for $945m.
SmartyPig allows customers to open goal-based savings accounts and invite friends
and family to contribute to their goals. Goals range from saving for a child’s college
education, to planning for a new baby or wedding. It is based on proprietary,
patent-pending technology and the latest security standards. According to an
investor in the company “SmartyPig is a safe, proven platform providing unique
opportunities for consumers to maximize their savings. It has been successful
inside and outside the U.S. and I believe that within 5 years it will be recognized
as a global leader in the consumer banking space.”
SimpliFi is a free online financial planning and advice service that lets anyone plan
for their financial future. It was created to give middle and lower income consumers
access to the kind of professional financial planning and advice usually available
only to those in higher income brackets who work with financial planners. SimpliFi’s
Virtual Financial Advisor is Sophie, and she guides the user through the online
planning process covering long-term savings, debt management, insurance and
investments. The company won the Best of Show award at FinnovateStartup 2009.
Source: Company websites
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36.
Innovation
5 and growth
41

37.
Innovation for growth is typically the type of innovation most people can relate to because
it covers new products and services, often using new technology such as mobile banking.
In exploring the issue of innovation and growth, we started by asking banks about their
level of development activity in the areas of product, channel and customer relationship.
We recognise this is a simplification because in some ways these activities
are interconnected, but in general the respondents did not have a problem making
a clear distinction.
The differences overall were quite small. On average across all the regions, there was a
slightly greater focus on Customer Relationship developments than on Product or Channel.
Banks in Russia & CIS rated their Channel development activities lowest of the 3 types,
whereas banks in Western Europe rated Product development as their area of least focus.
There were some very mixed views underlying these results. For example, we spoke to one
bank in Central & Eastern Europe which was mainly focused on Product development, and
another bank in the same country which was mainly focused on Customer Relationship
development. The two banks were of a same size and had other similarities such as foreign
parents, but they were pursuing opposite development priorities.
It was also the case that a number of the banks we interviewed scored Product
development activity as the highest to reflect their current focus, but at the same time
they were planning to shift more towards Customer Relationship developments. We would
therefore expect to see Customer Relationship development activity becoming more clearly
the most important area of focus.
We also asked banks to score their current level of innovation in the areas of Product,
Channel and Customer Relationship. First of all, looking at the average scores across the
banks in each region, you can see from Figure 12 that the perceived level of innovation
was highest in Central & Eastern Europe, but this was driven by the responses of the banks
in Turkey. Otherwise, the highest level of innovation was in Western Europe, and the level
of innovation in Russia & CIS was quite low.
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38.
I n n o v a t i o n i n r e t a i l b a n k i n g
Banks rating their level of innovation in Products,
Channels and Customer Relationship
as either high or very high
60%
40%
20%
0%
Western Central & Eastern Central & Eastern Russia & CIS
Europe Europe Europe Figure 12
(excl. Turkey)
Source: Infosys - Efma Innovation Survey Results
The typical reasons put forward by some of the banks we spoke to in Turkey for their focus
on innovation were:
• The relatively young population with an interest in trying new technologies like mobile
• The focus on customer acquisition in markets where banking penetration is still increasing
• The desire to increase geographic coverage rapidly but at the lowest possible cost
The first of these points about having a young population may well be unique to Turkey as
you can see from Table 2 which illustrates the differences between some of the markets
we studied on a range of dimensions. Turkey clearly does have a much younger population
but Poland, Russia and Ukraine are more or less the same as Western Europe on this
dimension. However, mobile phone penetration is actually higher in Poland, Russia and
Ukraine than it is in France or Turkey. In terms of other technology use, Internet penetration
is more consistent in declining from West to East.
The second and third of these points about the focus on customer acquisition and
increasing geographic coverage could apply equally to many of the other developing
markets in Central & Eastern Europe and Russia & CIS, and so are not unique to Turkey.
France Spain Turkey Poland Russia Ukraine
GDP per capita (PPP US$) 34,045 31,955 13,920 17,625 16,139 7,271
Population < 25 yrs old 31% 26% 44% 31% 29% 28%
Internet penetration 51% 59% 33% 44% 21% 23%
Table 2
Mobile phone penetration 93% 112% 89% 109% 133% 121%
Source: World Bank, Eurostat, International Telecommunications Union (all data for 2008)
43

39.
We should recognise there are also big variances within countries – the main cities in
Turkey or Russia are not comparable with their less developed regions. A number of banks
stated that there are customer segments in these countries which need to be targeted
with different types of product and channel propositions than the more affluent or younger,
urban consumers.
Several Western European banks we spoke to said that customer inertia was a rationale
for not having to invest in the latest channel technologies, and so their focus was much
more on finding innovative ways to deepen customer relationships.
Product innovation
We asked an additional question on product innovation, which was about the importance
of 4 different factors – technology, bundling or packaging, personalisation and pricing (see
Figure 13).
For the Central & Eastern European banks and for the Western European banks, product
personalisation was seen to be the most important factor, followed by bundling or
packaging. However, many of the Western European banks we spoke to were concerned
that regulation would make it more and more difficult to bundle products, and hence they
were less inclined to focus on this. Product technology was the least important factor for
the Western European and Central & Eastern European banks, but the most important for
banks from Russia & CIS.
Importance of different factors
in Product innovation
(scale 1-5, where 5 is very high)
Western Europe Central & Eastern Europe Russia & CIS
5
4
3
Figure 13
2
1
Technology Bundling or Personalisation Pricing
packaging
Source: Infosys - Efma Innovation Survey Results
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40.
I n n o v a t i o n i n r e t a i l b a n k i n g
In-spite of the fact that Product innovation was the area of least focus
for the banks in our survey (although there is increasing interest in the
development of new deposit products), there are a wide range of product
innovations apparent in the market. We have selected a few of the more
interesting ones here to illustrate some of the main developments.
Deposits. Caja Madrid has won awards for the Barrilete Cosmico savings
product which enables customers to earn more interest if they have more
products with the bank. This is a good example of pricing innovation
linked to the goal of increasing customer loyalty. LCL has developed a
unique current account product for the French market called “a la Carte”,
which improves on traditional package accounts by offering more
flexibility for personalisation, and a simulation capability when making
choices (see box). In the Russian market, AlfaBank was the first to
develop a single contract to enable customers to more easily open
different accounts with the bank without having to go through the same
process each time.
Payments. Bankinter developed the HalCash remittance product which
enables users to send money by SMS, and the receiver to pick up the
money from an ATM without having a card. Bankinter has also partnered
with banks in other countries to increase the scale of this business. There
are other examples of this type of product, for example from Garanti
Bank in Turkey. Other P2P payments by SMS services have recently been
launched, such as the Pay2you service from Credit Mutuel Arkea.
Cards. Garanti Bank’s FlexiCard is a good example of personalisation,
where the user can select 10 different parameters when taking out the
card (see box). Other banks we spoke to also offer the opportunity for
customers to select a photo to put onto their card, including AlfaBank
in Russia with the MyAlfa card. Contactless cards are a major area of
development with many examples now across Europe, one of the latest
being People’s Bank of Georgia which is launching a Visa payWave
contactless card. Banco Sabadell offers its customers the option at the
point-of-sale of selecting an installment payment plan when making a
purchase with a credit card – this is done by sending an SMS as the
payment is being approved. Prepaid cards on an open platform such as
Visa are also a big growth area with potential for banks to be innovative
in developing customer propositions. Banks in Italy are currently leading
these developments in Europe with Poste Italiane being the largest issuer.
The Visa CodeSure card is an example of a card innovation from Visa.
This card has a battery, keypad and LED screen built in which
enables the user to generate one-time use codes for secure
e-commerce transactions.
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41.
Personal Loans. Several banks in Turkey offer “instant” loans by SMS or from an
ATM/Kiosk, where a customer can get immediate approval and receive the money from a
branch after providing supporting documentation, or in the case of the kiosk from Akbank
without having to go into a branch at all. This is both extremely convenient for the customer,
but also drives down costs for the bank by simplifying the process and removing paper. Of
course, there are regulatory barriers to this type of product in many countries and in the
current environment, personal lending is not the area in which banks want to take any
additional risk.
Mortgages. In the current crisis, we can observe that mortgages are not the focus of
banks for innovation. Some banks have even suspended new mortgage lending for the
time being and several product innovations from the last few years will probably be
discontinued. One notable innovation was identified by Millennium bcp in Portugal which
is offering price discounts based on the cross-sales of other products – this is similar to
the loyalty-based deposit products mentioned above.
Product Innovation – LCL à la Carte and Garanti Bank Flexicard
"LCL à la Carte" is a new concept based on interactivity and simplicity. A new
customer composes a day-to-day banking cart, by the user-friendly simulation on
the Internet or with his bank adviser in a branch, and benefits from permanent
discounts on the standard rate of each product. These discounts increase according
to the number of products and paying services subscribed and can represent up to
a 20% saving on their total cost. If the customer domiciles his income at LCL, he
will benefit from a further 10% discount. As his cart progressively grows, the
customer discovers in real time, thanks to the simulator, the cumulated cost of the
services he selected. This new approach is aligned with the LCL development
strategy based on customer knowledge, the quality of customer advice and the
price transparency that is now expected by all customers.
***
Garanti Bank FlexiCard allows customers to choose the interest rate, reward rate,
card fee, campaigns, redemption type, and card design. During the application
process, applicants can manipulate over 10 parameters to create their preferred
combination. Customers who want a simple approach can choose to select one of
the 4 ready made packages. They can determine not only their reward ratio and
type, but also choose from where they prefer to get additional Bonus points
(whether it be a merchant category such as restaurants, or a retail store). From a
redemption point of view, cardholders can use their Bonus points as cash, or they
use their points to buy air tickets. The customised design also allows the option of
having a 'vertical card', where the text and card number appears on the card in
portrait rather than landscape layout.
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I n n o v a t i o n i n r e t a i l b a n k i n g
Channel innovation
The level of development activity and level of innovation in Channels was
the highest in Turkey, and significantly higher than the rest of Central &
Eastern Europe as you can see from Figure 14. Most of this activity in
Turkey was focused on alternative distribution channels, but there are also
some branch innovations taking place.
Banks rating their level of development activity
and innovation as either high or very high
Channel Channel
Development Activity Innovation
100%
80%
60%
40%
20%
Figure 14
0%
Turkey Other CEE Turkey Other CEE
Source: Infosys - Efma Innovation Survey Results
As was the case for Product innovation, there are many examples of Channel innovation
around Europe as banks experiment with new channels and also the re-alignment of
branches to meet current needs. Banks in different parts of Europe face different
challenges and opportunities as we have already mentioned. The rate of deployment of
new ATMs is much lower in Western Europe than elsewhere for example, which means
that there is less opportunity for innovation. Western European banks are also opening
fewer branches. Having said that, there is no reason why Western European banks should
not be at the forefront of innovation in Internet or mobile banking services.
Branches. Deutsche Bank’s Q110 is an example of a showcase branch being used to
experiment with new concepts and technologies, as is one of Barclays’ branches in London.
Several banks are developing low-cost branches, for example ING Belgium’s branches
without cashiers, or Turkish Economy Bank’s “lite branches”. One of the most dramatic
new branch designs is from CheBanca! which launched in Italy in 2008. However, it’s
worth noting that in the United States, Washington Mutual’s radical branch design has
been dropped following the bank’s acquisition by JP Morgan Chase in favour of a more
traditional design.
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ATMs and Self-Service Kiosks. Banks are significantly expanding the
range of services that can be delivered from ATMs in many markets, and
also experimenting with more targeted marketing to ATM users. Bill
payment, cash deposits, contactless card operations, and multiple
operations without having an ATM card are all examples. Several of the
Turkish banks are leading in this respect, with for example Akbank’s loan
kiosks which won a technology innovation award from The Banker in
2008.
Internet. Internet banking functionality is improving all the time but
mainly in an incremental fashion. The focus and interest now seems to
be on how to use the Internet as a sales channel, not just a service
channel, improving user interfaces, and exploiting Web 2.0 opportunities.
Examples of innovators in this channel are Yapi Kredi of Turkey who
recently won the 2009 award from Global Finance for Best Consumer
& Corporate Internet Bank in Europe.
Call centre. The main innovation here is the growing use of voice over
internet protocol and collaboration software to enable customers to
speak to an adviser interactively, either from their own PC, or from a
branch terminal. This innovation has the potential to significantly change
the way that service and advice are provided to customers. It is not just
a “call centre” innovation but more broadly a customer service
innovation. Bankinter was one of the first banks to implement this service
(see box).
Mobile. There are a large number of mobile banking projects underway
across Europe so picking one or two is difficult. DnB NOR’s SMS based
banking service is a notable success – it was launched in November
2007, and within 12 months around 25% of the bank’s retail banking
customers were using the service which has some unique features. There
are several examples from Turkey, but Garanti Bank was one of the first
with a browser based service called Cep Subesi. It is linked directly to
internet banking using the same PIN and password, and 12 months after
launch in September 2007, the service had over 100,000 users. The
use of the mobile handset itself as a payment device, using contactless
technology, is set to take off in the not too distant future with several
experiments underway across Europe, such as the joint pilot by 6 French
banks and Visa in Caen and Strasbourg.
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I n n o v a t i o n i n r e t a i l b a n k i n g
Channel Innovation – Bankinter
Bankinter customers using the Internet can click on a button
and connect directly to the call-centre If they have a query or
need help completing a transaction online. Since introducing
the video call service, Bankinter’s customer satisfaction ratings
increased and its online product sales improved by 25 percent
according to Dialcom Spontania.
Using the video call and collaboration technology, Bankinter’s
sales force now has the ability to see when a customer is on-
line allowing them to interact and close a deal with customers
immediately rather than over the phone or in-person. “Our
customers tell us that data, voice and video collaboration
perfectly balances the convenience of online banking with the
personal service of an in-bank teller,” said Jorge Andreo, proj-
ect manager of video and VoIP for Bankinter.
Source: Bankinter, Dialcom Spontania
Customer relationship innovation
This was the activity that was receiving the most development focus by banks in Western Europe, and
also had a high degree of focus for banks in the other regions.
However, in Central & Eastern Europe, the level of innovation in Customer Relationship was not particularly
high, and was very low in Russia & CIS. One bank pointed out that you don’t need to be particularly
innovative when you are trying to drive the customer’s product holding from an average of around
2 to around 4. In many cases, banks with foreign parents are bringing their home country customer
relationship management strategies to these new markets – this can be innovative locally, but not in a
European context.
In Western Europe on the other hand, the level of innovation in Customer Relationship was perceived to
be slightly higher than for Products and Channels. Customers of banks in this region often hold an average
of 5 products and driving this average higher in a mature market will require more significant innovation.
From the interviews and surveys, it was clear that there are fewer examples of Customer Relationship
innovation than Product or Channel innovation, even though many banks are implementing a variety of
CRM systems, improving their data mining and analytical capabilities, and developing better systems for
lead management.
Banco Sabadell is using multi-channel, real time marketing campaigns at the level of one, and others
are working on similar approaches such as DnB NOR with event based marketing. A few banks talked
about the need for innovation to improve the efficiency of sales staff, or provide better support to
relationship managers.
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In terms of more radical innovations however, probably the most significant is BBVA’s
“tú cuentas” personal financial management service (see box) which is similar to a
number of the services now taking off in the United States. ING is testing a similar
service. These are based on the “aggregation” concept which has been in development
since the Internet bubble 10 years ago but is finally getting some traction.
Customer Relationship Innovation – BBVA
BBVA launched the “tú cuentas” service in 2008 and has achieved a strong take-
up since then. Based on the Strands tool which was developed in the United
States, it aggregates all types of information that are relevant to the customer
which includes financial information, not just from BBVA, and also non-financial
information such as electricity and phone bills.
The program catalogs the information into predefined categories and allows cus-
tomers to re-categorise if necessary. “tú cuentas” then presents customers’ in-
formation more visually, providing them with an instant snapshot of all their
finances to better understand what they are spending their money on. The serv-
ice permits users to compare anonymously their finances with a group of their
choice, allowing them to make a comparison of different expense categories
with the chosen group.
“tú cuentas” then offers the user personalised advice based on knowledge of
their tastes and preferences. This can include more sophisticated options which
use artificial intelligence to help find opportunities tailored to the customer’s
preferences and needs. The user can also evaluate the utility of these sugges-
tions, in such a way that the platform learns their tastes and preferences in order
to make recommendations that are more adapted to their profile.
Source: BBVA
It is important to mention social media even though the impact of this is still relatively
small in banking. At a recent Efma conference on social media, banks such as ABN
Amro and Banco Sabadell described their activities, which include experimenting with
virtual worlds, and setting up on Facebook and YouTube. Rabobank has also been
actively working on social media ideas and some banks in the United States are now
“tweeting” on Twitter. A small start-up bank in Germany, Fidor Community Banking, is
experimenting with social media concepts, creating a community of customers who
share ideas, help to design new products and vote on various issues. We expect large
banks to gradually embrace these approaches but as we have noted for other
innovations, customer inertia will most likely prevent mass desertion.
We also surveyed the importance of technology, staff capability and process design
when innovating customer relationship management and found that technology was
the least important factor. In all 3 regions, staff capabilities were seen to be the most
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I n n o v a t i o n i n r e t a i l b a n k i n g
important factor, emphasising the need to focus on staff related issues, and not just
technology or process. One bank told us that they had implemented advanced CRM
systems a while ago, but the biggest challenge had been to get staff to use them in the
most effective way, which required better training and different incentives.
Importance of different factors
in Customer Relationship innovation
(scale 1-5, where 5 is very high)
Western Europe Central & Eastern Europe Russia & CIS
5
4
3
2
Figure 15
1
Technology Staff capabilities Process design
Source: Infosys - Efma Innovation Survey Results
SME Banking
Our research also covered SME banking and this business line deserves a separate
mention.
Many of the channel innovations already described, such as in Internet and mobile
banking, also apply to SMEs. Other innovations more specific to SMEs that were
identified during our research were:
• Tailored packages for very specific SME segments, such as those from Turkish
Economy Bank, Raiffeisen International and OTP Bank.
• Stream-lining of loan application processes down to 1-2 days in Russia by Société
Générale (an innovation for the Russian market).
• Better local servicing and decision making through “integrated financial solutions
centres” at National Australia Bank’s Clydesdale and Yorkshire banks in the UK.
• Additional, non-financial services such as eConta (accountancy and tax) and Virtualdoc
(document management) from BBVA.
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47.
Innovation
6 and efficiency
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48.
Cost management has been a top priority for banks in the more developed European
markets for many years, as revenue growth rates have barely exceeded the rate of
inflation (see Figure 16). It was until recently less of a focus for banks in Central &
Eastern Europe and Russia & CIS who were experiencing very rapid market growth, and
their priorities were acquiring new customers and managing the growth.
As we explained earlier in the report, banks from Central & Eastern European and Russia
& CIS now regard innovation to be more important for improving efficiency than it is for
growth. This may well reflect the sudden need to focus on efficiency in these markets.
Annual revenue growth by region
for retail banks, 2002-2006
70%
60%
50%
40%
30%
20%
10%
Figure 16
0%
Western Europe Central & Eastern Europe Russia & CIS
Source: Retail banking in Europe, Efma/Roland Berger/Nordea, April 2008
In a 2008 report, Arthur D Little ranked European banks by their cost/income ratios in
the period 2004 to 200616 . What is striking from this research is that of the 10 most
efficient banks in Europe, 5 have failed or been bailed out by their governments. Of
course there are many reasons for this, but clearly efficiency alone will not guarantee
long term success.
However, Banco Popular and Svenska Handelsbanken were both in the top 3 of this
survey, and illustrate how a differentiated business model and focus can lead to higher
levels of efficiency. Not all banks can or should copy the strategies and business models
of these banks, but they can learn something from them.
One banker in Western Europe said that efficiency improvement needs discipline more
than innovation. However, another bank said that efficiency innovation was very difficult
to copy, unlike for example a mobile banking application, so it could be used to create
real competitive advantage. There are many different possible approaches to efficiency
improvement. Some banks are able to pursue acquisitions and benefit from economies
of scale within countries or increasingly across borders. Generally, this would not be
described as “innovation” but to some extent it is an innovative strategy for banks in
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I n n o v a t i o n i n r e t a i l b a n k i n g
Europe. Another efficiency improvement approach is to encourage customers to use
direct channels in order to reduce costs and most banks are doing this so as a strategy
this is no longer viewed as being particularly innovative. Banks also have the challenge
of managing channel migration without damaging their ability to build customer
relationships and make cross-sales.
It is also the case that product and channel innovation can simplify processes and
reduce costs, such as instant loans in Turkey. Video-calling to relationship managers
based in central locations should also help to drive lower costs.
We asked our survey respondents what their focus was on 4 types of activity to
improve efficiency:
• General cost reduction exercises
• Operational process redesign and simplification
• Core technology and systems redesign or replacement
• Outsourcing
There are some differences between the regions (see Figure 17) with general cost
reduction and outsourcing being relatively more important in Western Europe.
Outsourcing was a much less common activity than general cost reduction and process
redesign in all regions, and was particularly irrelevant for banks in Russia & CIS.
Core technology & systems redesign or replacement as an efficiency improvement
activity was more important in Western Europe than in the other regions. We don’t think
this means that banks outside Western Europe are investing less in IT, but rather that
they do not see the investment as an efficiency improvement exercise.
Importance of different efficiency
improvement activities
(scale 1-5, where 5 is very high)
Western Europe Central & Eastern Europe Russia & CIS
5
4
3
2
Figure 17
1
General cost Operational Core technology & Outsourcing of
reduction exercices process redesign systems redesign activities
and simplification or replacement
Source: Infosys - Efma Innovation Survey Results
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